By Lindsay Street, Statehouse correspondent | South Carolina lawmakers are mum about whether much-ballyhooed federal tax cuts will cause something they didn’t expect: an unintended rise in state taxes. One way or another, experts predict they’ll grapple with the issue soon because if nothing is done, taxes may go up — a scenario few politicians want in an election year.
The amount of any increases and how many could be affected are questions yet to be answered, but a state report expected next week will give clues. Experts say the changes could raise taxes on nearly every taxpayer in the state beginning in 2019 unless there is legislative action. With state income tax cuts being a major part of Gov. Henry McMaster’s executive budget for the coming year, the issue will likely be tackled in a state shy of doing anything that looks a tax hike.
As in other states, South Carolina income taxpayers calculate the amount in taxes they pay on adjusted income derived from federal income tax computations. But because the federal and state systems are tied together, any changes to the federal tax code may have a big impact on the way state taxes are computed, according to Ken Newhouse, chair the governmental affairs committee for the South Carolina Association of Certified Public Accountants.
Every year, as federal tax rules change, the state passes conformity legislation to keep step. This means a simpler tax-filing process — once you’re done with the federal form, it’s easy to file the state form. Newhouse called it “piggybacking off the fed.” But now with the new major federal tax overhaul that will begin affecting tax bills in 2019, state legislators need to decide soon on how to react to potential cuts in state revenue because of federal reform.
“Regardless of a major overhaul or if just one law changes, every year there’s a push for conformity and that’s based on how our state tax laws are structured,” Newhouse told Statehouse Report. “We want it to be easier for people to compute their taxes … It not only helps taxpayers but it also helps the (state) Department of Revenue.”
With deductions and other tax breaks removed in the recent overhaul, that means federal taxable income will rise. To account for the rise in taxable income, Congress adjusted tax brackets to keep taxes from rising, too. That means if South Carolina conforms to the new federal taxable income, the legislature would have to adjust the state’s tax brackets to avoid a tax increase on many of its citizens.
“Since the state taxable income number goes up, the starting point for the state has gone up and there’s not the same tax bracket and income shift on the state level yet,” Newhouse said. “The state is wrestling with the state taxpayers not having an additional burden … That’s what this major overhaul means to South Carolina right now.”
The decision to conform is playing out across the country as legislatures get to work on budgets. In New York, individuals could see an $840 million overall tax increase, according to an article by The Wall Street Journal. In Maryland, the potential tax sticker shock is similar.
In South Carolina, the state’s Revenue and Fiscal Affairs Office (RFA) is wrapping up a report on how the federal tax overhaul will affect the state and how conformity will affect its taxpayers. Agency Executive Director Frank Rainwater said his staff has worked over the last month to compute how the overhaul will playout.
“This is a big deal year,” he said. “It’s very complicated and they made substantial changes,” Rainwater said. “The only thing we can do is to, is what our office is doing, is understand how those changes affect the current tax rates … (The legislature) will have to determine what kind of rate adjustments there will be. As always the devil is in the details and that’s what we’re struggling with.”
But the very people who will decide South Carolina’s income tax future appear skittish to talk about conformity and the state’s plan moving forward without the RFA’s report. Requests for comment from the House Speaker Jay Lucas, House Ways and Means Chair Brian White, R-Florence, and several Senate Finance Committee members were either ignored or declined this week. A Department of Revenue spokesman referred all comments to RFA, and Rainwater said he hopes the information will be finalized and released next week.
Newhouse said there is a chance the legislature may only tackle some of the federal tax changes this year — especially those related to disaster relief —- and wait until next session to address the rest.
“They’ve talked about not conforming this year and spending more time to figure it out,” he said. “Then you have some extra time to deal with this major overhaul to see how you want to conform.”
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