by Paige Terryberry
Senior Analyst for Fiscal Policy, John Locke Foundation
Patrick Gleason of Americans for Tax Reform highlights what could be South Carolina’s forthcoming tax advantage.
Our neighboring state of South Carolina has proposed a plan that would replace the state’s current graduated income tax (7% at the top bracket) with an uncomplicated, flat income tax of 3.5%. This change would simplify the onerous tax code and give more money back to South Carolinians. If the change is enacted, South Carolina would undercut North Carolina’s current rate of 5.25%.
Additionally, the proposed South Carolina plan extinguishes the state’s corporate income tax entirely. North Carolina’s Senate budget plan presented a phase-out of our corporate income tax. The North Carolina House budget plan would lower the corporate income tax to 1.99% over time.
North and South Carolina are not the only states considering tax cuts this year. In fact, lawmakers in 12 states passed income tax cuts.
To remain competitive with our southern neighbor, North Carolina must cut taxes. See below from Gleason:
If Senator Kimbrell’s proposal were to become law, South Carolina would go from having the highest income tax rate in the region to levying a lower rate than North Carolina and Georgia. Halving the state’s top income tax rate would certainly make South Carolina a more attractive option for workers who have discovered over the past year they can work remotely and don’t necessarily need to be in New York, Chicago, or other major cities. Having no state income tax has helped draw many people and employers to Florida and Texas, but many remote workers might prefer to pay a 3.5% state income tax instead of zero if it means they get to live in a state like South Carolina that has four seasons.
Senator Kimbrell’s plan also eliminates the state corporate tax and seeks to zero out state income tax for small businesses that file as pass-through entities under the individual income tax system. According to IRS data, more than 380,000 South Carolina sole proprietors file under the individual income tax system, as do more 121,000 partnership and S-corp owners.
“There is no longer a corporate income tax in South Carolina under this bill,” Kimbrell said of his proposal, which is also facilitated through an expansion of the sales tax base. “This is extended to include an exemption from the income tax for pass-through business entities – an exemption from entity-level taxation.”