Thousands of low-income working S.C. taxpayers will see their tax bill shrink because of the new law increasing the state’s gas tax.
Those savings could be more than $40 million for almost 150,000 S.C. taxpayers.
S.C. lawmakers created a new earned-income tax credit as part of the law increasing the state’s gas tax, passed last week. The credit is intended to offset the impact of the higher gas tax on those who can least afford to pay more.
The proposal signals a shift in the Republican-controlled General Assembly, previously focused on cutting the state’s top income-tax bracket, a move that disproportionately would have benefited the wealthy.
“When it comes to providing credits, we’re stimulating the economy among the majority of South Carolinians that earn middle to low income,” said state Sen. Marlon Kimpson, D-Charleston.
Average $286 tax credit
When the new law takes effect July 1, South Carolina will become the 27th state to adopt a state version of the federal earned-income tax credit.
The tax credit will cost the state almost $43 million a year, when fully phased-in by 2023, according to estimates.
Under the plan, 149,234 working S.C. taxpayers will get an average $286 tax credit in tax year 2023.
About 122,000 S.C. taxpayers, who owe the state up to $500 in income taxes, would get a credit of $208. Another 26,000 S.C. taxpayers, who owe state income taxes of between $501 and $1000, would get a credit of $637.
Those low-income taxpayers could use the money to pay rent or buy groceries, said state Sen. Vincent Sheheen, D-Kershaw, who co-chaired the House-Senate panel that recommended the final gas-tax plan.
They also could use the added money to offset the new law’s higher gas taxes — about $72 a year for a driver who travels 15,000 miles a year in a vehicle getting 25 miles a gallon.
The idea of an earned-income tax credit was born in the state Senate.
Unlike the federal earned-income tax credit, the state tax credit is not refundable. A refundable tax credit can result in a refund even if a taxpayer did not owe any taxes. But that was a nonstarter for some Republicans.
“They didn’t want anybody getting back more than they owed,” Democrat Sheheen said.
Senate GOP Leader Shane Massey, R-Edgefield, voted against the gas-tax hike, saying it “was too much of a tax hit without enough overall relief for South Carolinians.” But Massey supports the earned-income tax credit.
“It has been one of the most successful tools to help lift people out of poverty and it does that by requiring that people work,” he said. “It is an earned-income tax credit, so you have to have earned income to receive it.”
Benefiting low income instead of wealthy
The tax credit is popular with Democrats, many of whose constituents are lower income. It also met the demand of some GOP senators that the Legislature tie a tax cut to higher gas taxes.
In 2015, then-Gov. Nikki Haley demanded any gas-tax increase be offset by a far larger income tax cut, cutting the state’s top income-tax rate — 7 percent — by 2 percentage points.
Under Haley’s plan, the average S.C. taxpayer would have saved about $689 on their state income taxes. However, the wealthiest 379 S.C. taxpayers would have saved $145,784 each, according to estimates.
Haley’s plan went no where, in part because critics said it eventually would have cost the state $1.8 billion, stripping money from schools, Mental Health and public safety.
Instead, lawmakers created the earned-income tax credit and other credits including:
▪ A tax rebate to offset the higher gas tax. However, S.C. drivers would have to save their gas receipts and vehicle maintenance records to claim the rebate, something legislators doubt many drivers will do
▪ Increasing the tax credit for families with two incomes to $50,000, up from $30,000
▪ Increasing tuition tax credits to 50 percent of tuition, capped at $1,500
▪ Reducing tax rates on manufacturing property to 9 percent, down from 10.5 percent
Eventually push for refundable?
Supporters of the new state earned-income tax hope to expand it or make it refundable.
A refundable credit “makes sense because it also rewards work, and I’m big on trying to promote work,” Sheheen said.
However, making the tax credit nonrefundable initially gives policy makers a chance to see how it works and how much it benefits S.C. residents, Sheheen added.
The new tax credit will benefit working families, said Sue Williams, chief executive officer of Children’s Trust of South Carolina.
The tax credit “will help ensure that the state’s investment in infrastructure will not disproportionately burden lower-income working families,” she said. “We do caution, though, that the credit will not benefit those families who already owe little to no income tax.”
S.C. earned-income tax credit
When the state’s earned-income tax credit is fully phased in, low- income S.C. taxpayers will get a financial benefit.
S.C. taxpayers will see a lower tax bill
Annual tax savings by low-income taxpayers
Average tax credit
SOURCE: S.C. Revenue and Fiscal Affairs Office estimates