Like many states, South Carolina is considering proposals to reform its state income tax following the passage of the federal Tax Cuts and Jobs Act. Without changes to South Carolina’s tax code, the federal changes could create an inadvertent increase in taxes for South Carolinians. This issue emerged due to South Carolina’s policy of conformity with federal tax guidelines; the state is one of 18 that conforms its state taxes to the Internal Revenue Code on a “static” basis. This means South Carolina must rewrite its tax code each year to make sure state laws align with changes to federal law.
Lawmakers in South Carolina’s legislature are now calling for the state to adopt a “rolling” conformity model, in which the state would move to adopt federal tax changes in real time, which is the standard practice in 20 states. Conforming South Carolina’s tax code to the federal code means filing tax returns would be easier for taxpayers and simpler for the state’s Department of Revenue to process, creating a reduction in state administrative costs.
Ellen E. Weaver, president of the Palmetto Promise Institute, argues the conformity issue and the potential for an increased tax burden on South Carolina taxpayers has reignited the wider tax reform debate in the state and has catalyzed legislative leaders to call for systemic reforms, including the flat tax. “At a bare minimum, state lawmakers should fix this unintended tax increase … In doing so, they can also move our state closer towards the fundamental tax reform our unfair, failing system so desperately needs,” Weaver told Statehouse Report.
A special South Carolina House Tax Policy Review Committee recommended replacing the state’s five income tax brackets, which has rates ranging from 3 percent to 7 percent, with a single, flat income tax rate of 4.85 percent. Flat taxes are beneficial for several reasons. They avoid penalizing the citizens who produce the majority of jobs and economic activity with higher tax rates. Flat taxes simplify the tax code by eliminating credits, exemptions, and deductions, taxpayers will no longer need to hire expensive tax accountants or use expensive computer programs to file their state taxes. Combined with rolling federal conformity, this would greatly simplify the filing process for South Carolinians.
Moving away from a progressive tax system would make budgeting easier for South Carolina legislators. Tax revenues are much less predictable under progressive tax systems compared to flat tax models, making budgeting more difficult. Relying on a small percentage of higher-income taxpayers for a larger percentage of revenues generates revenue windfalls and spending free-for-alls during economic booms, followed by massive budget gaps during economic recessions.
While main critics of flat taxes argue they represent a tax cut for the rich, even under a flat tax, those who earn higher incomes pay more in taxes, achieving the “social justice” progressive tax proponents claim to seek.
Providing a tax environment that encourages relocation, investment, and economic growth is essential for keeping South Carolina competitive with its neighboring states. South Carolina is ranked 37th in the Tax Foundation’s 2018 State Business Tax Climate Index, a study that compares states across multiple areas of taxation that impact businesses. South Carolina’s ranking is lower than many of its neighboring states, including Florida (4th), North Carolina (11th), Tennessee (14th), and Virginia (31st).
The proposed flat tax would be a clear step toward simplifying the state’s tax code and keeping the state competitive with its neighbors.
The following documents examine the flat tax and income taxes in greater detail.
A Brief Guide to the Flat Tax
https://heartland.org/publications-resources/publications/a-brief-guide-to-the-flat-tax-1?source=policybot
Everything you wanted to know about the flat tax is provided in this PolicyFaxby Dan Mitchell of The Heritage Foundation. Mitchell says the flat tax eliminates special-interest favoritism and prevents taxpayers from finding tax loopholes by hiring an army of lawyers, accountants, and lobbyists.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy?source=policybot
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
What Are Flat Taxes?
http://taxfoundation.org/blog/what-are-flat-taxes
Kyle Pomerleau of the Tax Foundation examines flat taxes and explains how different flat tax proposals work.
State Individual Income Tax Rates and Brackets for 2016
http://taxfoundation.org/article/state-individual-income-tax-rates-and-brackets-2016
Nicole Kaeding of the Tax Foundation analyzes the most up-to-date data available on state individual income tax rates, brackets, standard deductions, and personal exemptions for both single and joint filers.
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The ninth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”
The Effect of Progressive Tax Codes
https://heartland.org/publications-resources/publications/the-effect-of-progressive-tax-codes?source=policybot
Bill Ahern of the Tax Foundation discusses the effects of different kinds of progressive taxes on taxpayers and the economy.
State Budget Reform Toolkit
https://heartland.org/publications-resources/publications/state-budget-reform-toolkit?source=policybot
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lindsey Stroud, Heartland’s government relations manager, at [email protected] or 757/354-8170.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
