Imagine a car dealership where the sticker prices were high — but thanks to automatic rebates and deep discounts on all but the most expensive luxury vehicles, it was actually the cheapest place in town for the average person to buy a car.
Experts say that’s how South Carolina’s current tax code works for most state residents — high sticker-price rates, but some of the lowest tax bills in the country after deductions, credits and exemptions.
And it’s why they warn that state GOP leaders’ promise of “historic” tax cuts in the 2025 legislative session could lead to a bait and switch, where tax rates go down but the average South Carolinian sees no real benefit — or possibly even a backdoor tax increase.
After all, if the car dealer eliminates or caps rebates and discounts to slash the sticker price on luxury automobiles, the person buying a regular car could easily wind up paying more.
“Since 2021, about half the states in the country have cut income taxes,” said Neva Butkus, a tax policy analyst with the Institute on Taxation and Economic Policy in Washington, D.C.. “And they eventually have to pay for that with something — usually raising or expanding sales taxes and fees or kicking responsibilities down to the locals, all of which ask more of lower- and middle-income families.”
Fast facts about the current system
To follow the debate, experts say it helps to know a few facts about the state’s current tax system and the debate surrounding it.
- South Carolina’s $14 billion general fund relies on two principal sources of tax revenue — the income tax, which produces about half of all state revenues, and the sales tax, which produces almost 40%. The state also collects an additional $2.7 billion from corporate taxes and other sources. .
- At 6.2%, S.C. has the highest nominal income tax rate in the Southeast, though it’s set to fall to 6.0% under current law. GOP leaders in the Statehouse have pledged to get it “below that of our neighbors” during this legislative session — presumably referring to Georgia’s 5.5% and North Carolina’s 4.5%.
- In theory, the average Palmetto State resident is in the state’s top 6.2% income tax bracket — but in reality, only pays 2.7% after deductions, credits and income adjustments. Experts say this typically results in lower tax bills than in Georgia or N.C.
- 45% of South Carolinians pay no income taxes at all, while the top 10% of income earners pay almost 65% of all income taxes collected. As a result, any major cut would primarily benefit high-income residents.
- The state sales tax is 6% — but due to a broad array of exemptions, including food, medicine and most services, it only applies to about 30% of the things people buy. In North Carolina and several other states, lawmakers have “paid for” income tax cuts in part by expanding the sales tax to cover more goods and services. And by extension, that meant that average wage-earners subsidized tax cuts for the wealthy.
The case for tax reform, including rate cuts
Despite South Carolina’s low rates for most people, the state’s current tax system is far from ideal, according to many tax policy analysts.
First, it fails the basic test of transparency due to the wide gulf between the official rates and what most people pay, adding complexity for collectors and confusion for residents. And second, because the tax rate is actually higher than the Southeastern average for wealthier individuals — the luxury car buyers who don’t enjoy the full benefits of rebates and discounts — it can limit their willingness to move to the Palmetto state and invest in its economy, leading to lower growth for everyone.
“Right now, we have the highest [income tax] rates in the Southeast — higher than North Carolina, higher than Georgia and Mississippi and Alabama, and higher also than Tennessee and Florida, which have zero,” said Sam Aaron of the S.C. Policy Council. “That’s a huge deterrent to people who are looking at South Carolina.”
Moreover, while Aaron says “a portion” of the money needed to fund a major tax cut would probably come from expanding the sales tax to cover more items, he believes the bulk of it can and should come from spending reductions.
“Over the past decade our state budget has doubled from $6.1 billion to $12.4 billion, which is just off the charts,” Aaron said. “So the main way you’re going to have to go about this is with some sort of spending restraint . . . like our ‘Responsible Budget’ plan.”
Under that plan, which was released Jan. 6, future state spending increases would be limited to population growth plus inflation.
But some, such as S.C. Rep. Jordan Pace (R-Berkeley), head of the House Freedom Caucus, favor an even more aggressive approach to spending cuts, with an eye toward eliminating the income tax entirely.
“The question most people ask is ‘where are we gonna find the money?’ or ‘what are we going to replace it [the income tax] with?’” Pace told Statehouse Report on Jan. 6. “And my answer would be nothing. Cut spending.”
Still, concerns remain
S.C. Senate Minority Leader Brad Hutto (D-Orangeburg) agrees that a carefully crafted tax cut could make sense for South Carolina, but says “the devil’s in the details.”
“We all support tax reform and think it’s a very appropriate discussion for us to have,” Hutto said in a Jan. 6 interview. “Nobody wants any citizen to be paying any more taxes than they absolutely need to — but it’s kind of hard to just up and say we’re going to change one tax without doing a global look at how it’s gonna affect every citizen and the state as a whole.”
What’s more, Hutto notes that the kind of unprecedented spending cuts some of his colleagues are discussing may not be possible as the state’s population continues to explode.
“We’re the fastest growing state in the nation, which means that as people move in here, our infrastructure needs — roads, schools, fire departments, water and sewer — are growing, too,” Hutto said. “We just need to make sure that as we lower one tax, we don’t unwittingly leave ourselves without enough money to run state government.”
Wesley Tharpe, the senior advisor for state tax policy at the Washington-based Center on Budget and Policy Priorities, says he shares those concerns about basic services. But even more, he argues, draining state government coffers with upper-income tax cuts limits the flexibility future leaders may need to address critical concerns.
“Those could be over-the-horizon investments like strengthening the road network, or environmental investments along the coastline in an era of climate change, or maybe bolstering the foster care system,” Tharpe said. “And whenever these big tax cuts are passed, there’s an implicit choice being made not to hold onto those dollars to make those important investments down the road.”
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