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by DIANE HARDY
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A tax bill (H. 4216) recently proposed by Republican Leadership has stirred up a hornet’s nest in South Carolina. As the Executive Director of the Mom and Pop Alliance of SC I have been following this issue closely and thought I might weigh in on a recent article, “No Tax Bill is Perfect” written by Wendy Damron of Palmetto Promise.
I know Wendy personally. She is smart and articulate, and I respect her greatly. On this one issue, however, we disagree. She is right that no tax bill is perfect, and tax changes are always tough because it is a given that some people are not going to be happy. However, H. 4216 – which is being promoted as a tax cut – is in my opinion a non-starter for a multitude of reasons.
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NO CUTS TO GOVERNMENT SPENDING
Of course, we all want to see South Carolina have a lower income tax rate, but it should not be achieved on the backs of just one segment of the population (lower- and middle-class earners). It should be achieved alongside meaningful cuts in the state budget. If that happened, then maybe the decreases in standard deductions for taxpayers would not have to be as drastic as they are in H. 4216. If that happened, there might have been a “we’re all in this together” attitude and potential tax changes may have been easier for taxpayers to accept. Finally, this bill seems like less of a “tax cut” and more of a “tax shift” – with the majority of South Carolinians to experience a tax increase. According to an article in Kiplinger, 1.7 million filers will see a tax increase, while 550K will see a tax decrease. The phrase that the “devil is in the details” has never been truer than when it comes to analyzing H. 4216.
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RETHINKING THE FLAT TAX
Damron’s article says, “anytime you move from a graduated, progressive tax system to a fair, flat tax, some individuals, especially those who previously paid little or no state income tax, may pay slightly more.” Unfortunately, certain income brackets would not be paying “slightly more,” but A LOT more. For example, taxes on a single earner making $42K would go from $996 to $1,676 (a 68% increase).
I agree with her that a flat tax in many respects is fairer. After all, everyone should have “skin in the game,” right? But maybe it isn’t that simple. The thing is lower income earners are already disproportionately suffering through the recent ravages of very high inflation so any increase in taxes is especially difficult for them. Another problem I see is by taking away medical deductions (as H. 4216 does) it doesn’t account for extremes, like someone who’s entire income is spent on nursing home care. I am now rethinking the logic of a pure flat tax and would suggest that this topic requires further debate in the Palmetto State.
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WOULD WE REALLY EVER GET TO A 2.49% RATE?
Damron’s article states that “once the flat rate is fully phased in at 2.49% the vast majority of South Carolinians will see a tax cut.” Sounds fantastic, right? Notably, the details of how we might possibly, someday in the distant future reach 2.49% are left out. The language of this portion of the bill is complex and confusing, but it seems that very small annual interim reductions in the income tax rate would only happen if the projected growth for the upcoming year (as determined by SC Revenue and Fiscal Affairs Office) is at least 5%. So, it appears we would need over a decade of straight 5% projected growth (i.e., no recessions, no major disasters, or economic downturns) to get to the goal of 2.49%. It should also be noted that during economic downturns is when people most need to hold on to more of THEIR income. It’s not clear to me that this portion of the bill, when gamed out, demonstrates “transformational leadership” as the article proports.
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NEW DEDUCTIONS ARE MUCH LOWER
I would agree that shifting from the federal government’s standard deduction to one determined by our state is a good idea, so South Carolina is not – as the article says – “subject to constant changes, driven by the political whims of whichever administration is in power in Washington, D.C.” When one explores the actual numbers, though, the net results are not so great. More specifically, what concerns me with H. 4216 is not that we are moving away from the Federal Deduction, but rather how low the bill would cap its replacement via the S.C. Income Adjusted Deduction (SCIAD). For a single earner, the $15,000 federal standard deduction would be replaced by a $6,000 SCIAD, and for married filers the $30,000 standard deduction would be replaced by the new $12,000 SCIAD. This would cause lower- and middle-class earners to pay more. Even more shocking is that these new, modest deductions completely phase out between $30- and $40K for single filers, and $60- and $80K for married filers. So, if you make $41K you would have no deduction at all.
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RELATED | NO TAX BILL IS PERFECT
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RUNNING THE NUMBERS
We ran the numbers and here is the break even: Any single taxpayer earning less than $72,758 will see a tax increase. Married taxpayers making under $114,840 would also see their taxes increase.
In her article, Damron states she is “weary of those who complain and never bring real solutions.”
That is a statement with which I can COMPLETELY identify, but I have also seen a pattern in South Carolina where an issue is hammered out over time out of public view (we’ve been told this bill took over a year to produce) and then given to the legislature to pass quickly. We then hear from the proponents something to the effect of “well, you don’t have a solution, so we need to go with this because we have to do something.”
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IN SC BIG BUSINESSES GET GREAT DEALS
Additionally, regular folks see that South Carolina ranks among the top ten states nationally in terms of tax incentives given to big business. Citizens had no say in the $1.3 billion incentive package to VW/Scout, which passed both the S.C. House and State Senate in a matter of days. And understandably, they are frustrated with the unwillingness to streamline bloated state agencies. They rightly believe it is only reasonable that decreasing governmental spending should be a major part of a plan to reach a lower income tax rate.
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A ZERO INCOME TAX DOES NEED TO BE BASED IN REALITY
As for eliminating the income tax all together, Damron is right that any talk of that needs to “based in reality.” I would have concerns about HOW eliminating the income tax altogether would be accomplished, and believe it is likely best to have a balance among income tax, property tax and sales tax, which would allow everyone to pay something but wouldn’t hurt one group excessively. That said, I would suggest we should be open-minded to learning how other states have done it and how they are faring.
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PEOPLE REALLY ARE HURTING ECONOMICALLY
Ironically, I think the reason for the resistance to this bill in South carolina is “based in reality.” Here is a real-life anecdote that I think drives the point home. The same day I wrote my original article on this issue I was bringing a meal to a friend who is going through a rough time. Her family had scheduled to move to a new place the same week her husband was undergoing a major surgery for metastatic cancer. I was curious why they scheduled the move, knowing he was having surgery. She said, “Diane we didn’t have a choice. Our rent increased $200, and we just couldn’t afford it. We had to jump on this place so we had a place we could afford.” When I got home, I noticed the receipt on the counter for the two packages of ground beef I bought that day to make the meal. The amount was $29.02. When I saw that, I thought to myself: this is the reason why now is NOT the time to increase the tax burden on working-class people in our state.
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THE PERSPECTIVE OF THE PEOPLE NEEDS TO BE INCLUDED
Finally, I agree that getting our tax rate below 4% would be wonderful for everyone in SC and would provide great marketing for the economic development folks in attracting businesses to our state. Unfortunately, I think this bill was written by leaders (perhaps with good intentions) who went about it from the perspective of the state, not from the perspective of people who work full time but still struggle to pay rent, and who experience sticker shock every time they buy meat for their family. In a super-majority Republican state, the goal should be to lower the tax rate with the idea of truly letting folks keep more of what they earned, not just shifting the tax burden to give us a headline that South Carolina’s income tax rate is now below 4%!
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ABOUT THE AUTHOR…
Diane Hardy is a former nurse anesthetist turned entrepreneur, who (along with her business partner) recently opened her second franchise bakery in Greenville. She is the Executive Director of the Mom and Pop Alliance of SC, which she founded during Covid upon discovering South Carolina’s over 400,000 small businesses had little representation in our State House. The Alliance provides education, communication, and advocacy for SC’s family-owned businesses. Her passion for South Carolina’s small business is strong, and as such she donates her time to the organization, accepting no salary or government funding. Her love for our state isn’t new. Before launching the Mom and Pop Alliance she was the founder and host of The Palmetto Panel (2014-2019), an annual statewide conference highlighting issues impacting South Carolina. Diane has a bachelor’s degree in nursing and psychology from Michigan State as well as a master’s degree from MUSC.
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