In my ongoing quest to encourage tax reform in South Carolina, I have introduced a flat tax bill to offer a solution to the inherent problems with our current state income tax structure.
The current SC income tax code, combined with the federal code, has many exemptions and credits. It also has six tax brackets ranging from 0% to 7%. This structure means that 41% of those who file a return do not pay any taxes. The rest pay taxes based on politically negotiated definitions. Needless to say, it is not a fair system.
Last year I wrote here about reforming the federal income tax code. In that article, I criticized those in Congress who wanted to eliminate deductions without offering a tax rate up front. On the state level, I discovered that if we eliminated all of the exemptions and deductions, the state would receive approximately the same amount of revenue if all income taxpayers were taxed at a 3.5% rate based on their adjusted gross income from their federal return.
Of course, this would mean those 41% would go from a 0% rate to a 3.5% rate. Since these taxpayers are low-income workers, I devised a single “tax forgiveness” credit to offer them relief while requiring them to participate in the system like all other earners.
The credit is calculated based on income and the number of dependents. It would exempt part of the 3.5% rate. For example, a single worker who earns $5,000 would be taxed at .4375% (instead of 3.5%) which equals $21.88 in income tax. This would be the lowest rate and would gradually increase to 3.5%. To see the table please look here. Note that you multiply 3.5% by the credit percentage to determine the lowered rate.
The advantages of this approach are:
It simplifies the state income tax code.
It de-couples our system from the IRS code.
As individual wages increase, it offers a sustained tax cut for those individuals over the long term.
It is a fair tax that requires all earners to minimally participate in the support of state government.
It stabilizes revenue going into the General Fund and would eliminate the “money tree” phenomena as described by our Governor. (Note that the “money tree” is the tax revenue increase projected by our chief economist during the yearly budget debate.)
The disadvantages are:
Those individuals who have benefited from special exemptions and deductions may pay more.
The 41% who have not paid anything in the past would be tax at least the minimal rate of .4375%.
Interestingly, each bill that comes up for debate must have a fiscal impact statement attached to it. This statement is prepared by the SC Board of Economic Advisors. As of now, the SC Department of Revenue has not turned over the necessary data to the BEA to allow the fiscal impact to be calculated. My calculations suggest that this bill would cut income taxes overall by $126 million, but this is a rough estimate using IRS data.
Ultimately, this is a “concept” bill designed to provide a foundation for what a modern income tax structure should resemble. Hopefully, it will be a catalyst for serious discussion.