By Holley Ulbrich, special to Statehouse Report | In general, having the state income tax conform to the federal income tax definition of taxable income is a pretty good idea. It makes it a lot easier to calculate your state income tax after finishing your federal return.
Surprisingly, only four states start with federal taxable income. Then they go on to various adjustments to fit their particular needs. So I would urge the state legislature to pass conformity — with at least one proviso.
Of all the changes in the federal tax that I find questionable, the one that disturbs me most is the loss of the personal exemption. That was the one provision that adjusted your tax liability not just for the size of your income, but for the number of people that income was supporting.
When I was a graduate student and getting ready to get married, one of my professors told me that it was not true that two could live as cheaply as one. Actually, he said, two can live as cheaply as 1.7. When that family grows to three — or four or five — that income has to stretch over more people.
For families with incomes under $60,000, the average cost of raising a child from birth to age 17 is about $10,000 a year. Obviously, the expectations rise with incomes. One recent estimate for middle-income families was more like $17,000 per child per year. Maybe if the kids share a bedroom, two of them can also live as cheaply as 1.7, but that’s about the only saving involved in having more than one.
Most other developed nations have a children’s allowance, which is taxable income, so it helps those at the bottom of the income scale with the cost of raising their children. We don’t. What we have had, until last December, was a personal exemption for each and every household member. Now we just have a credit for children under age 6. Because it’s a credit, it doesn’t affect taxable income and therefore doesn’t carry over to our South Carolina income tax.
The General Assembly is concerned that conforming the federal code will create a revenue windfall. It is discussing ways of changing the tax code so we citizens won’t experience a tax increase next year. (By the way, the expected revenue increase or windfall for the state of South Carolina is about $200 million, which may or may not materialize. In any case, that comes to $40 or $50 a year — less than a dollar week — for the average South Carolina resident.)
So if state legislators want to make one change to the S.C. tax code to give it back, how about restoring the personal exemption? There are about 600,000 people under the age of 18 in this state. Many of them live in households that pay no state income tax—at least 40 percent, according to the Department of Revenue. So their taxes are not affected. That leaves 360,000 kids whose families could use some help in clothing, feeding and otherwise caring for their children—help they used to get from the personal exemption. Even at the top rate of seven percent, a $4,000 personal exemption would cost the state about $280 per child or about $168 million.
So, friends of children in the legislature, how about giving parents back a personal exemption at the state level and, if estimates are right, take that leftover $32 million windfall and spend it on school buses? Parents will think kindly of you in the coming elections for that thoughtful response.
Holly Ulbrich is retired professor emerita of economics from Clemson University.
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