Proposed SC budget exceeds recommended limit, could do more for tax relief

Bryce Fiedler

Written by
March 08, 2024

Proposed SC budget exceeds recommended limit, could do more for tax relief

Update 3/13/24: The House on Wednesday passed an initial draft of the next state budget, unchanged from the summary below. The week saw healthy debate and commendable efforts from lawmakers to challenge spending requests, including several noted in this report. We encourage the Senate, which goes next in the process, to utilize the available surplus for tax relief and reduce the top income tax rate to 6% immediately. 

The S.C. House is gearing up to tackle South Carolina’s FY2024-25 budget, with deliberations set to begin Monday, Mar. 11. With billions of taxpayer dollars at stake and new spending requests on the table, our budget breakdown reveals where that money could be going and shows how more could be done to slash taxes. The following is based on the House Ways and Means Committee's budget proposal. 

 

How big is the budget?
  • General funds (state tax revenue): $12.8 billion*

  • Other funds (fines and fees): $14.2 billion

  • Federal funds (federal tax revenue): $13.6 billion

  • Total: $40.6 billion

*Note: This amount does not include the $390.1 million in Capital Reserve Fund appropriations, which are addressed separately.

 

Healthy surpluses

Recurring funds

  • “Cost” of .1% personal income tax cut: $99.8 million
  • New available recurring revenues: $660.9 million

When it comes to the budget, this is the amount of new money that lawmakers expect to have on a recurring (ongoing) basis. That means it can be used to permanently cut taxes and, less desirably, to fund government programs.

Non-recurring funds

  • New available non-recurring revenues: $506 million*

This is the additional, non-recurring money that lawmakers have for the upcoming budget. That means it can be rebated to taxpayers, as South Carolina did in 2022, and pay for one-time government expenses.

*Note: This does not include an account of $1.8 billion recently discovered by state officials, apparently the result of an accounting mistake.  

 

Some tax relief, but more is possible

For two years, S.C. Gov. Henry McMaster has advocated for using South Carolina’s budget surpluses to accelerate tax relief. “If future revenues allow,” he said in his 2024 State of the State Address, “I ask the General Assembly to speed up the income tax cut schedule, and let taxpayers keep even more of their own money.”

McMaster is of course referring to the 2022 personal income tax cut, which at the time reduced the top rate from 7% to 6.5% and consolidated the lower tax bracket. It also scheduled annual .1% cuts to the top rate until it reaches 6%.

The proposed budget follows this directive, reducing the top rate from 6.4% to 6.3% – a reported cost of $100 million. However, SCPC supports accelerating this process to deliver more substantial relief to taxpayers. We estimate[1] it would only take an additional $300 million to bring the rate from 6.3% to 6%. This would use less than half of the available recurring surplus ($660.9 million). 

Why the urgency? In part, because the future reductions aren’t necessarily guaranteed. Under the law, general fund revenues must project at least 5% annual growth for the .1% cuts to trigger. If revenues fail to hit their target, citizens don’t see tax relief.

With that said, we commend the House for proposing a one-time $500 million property tax credit for owner-occupied homes. The money comes from a buildup of savings in sales tax revenue sitting in a property tax relief fund. The average credit for homeowners would be $359, according to House budget writers.

 

The budget exceeds our recommended limit

In an effort to limit state spending and contain government growth, the Policy Council in 2022 created the South Carolina Sustainable Budget (SCSB). The SCSB is a maximum limit on annual recurring general funds appropriations based on the rate of state population growth plus inflation.

The proposed budget exceeds this recommended limit:

  • Proposed House recurring general fund budget: $12,297,318,789
  • SCPC recommended budget limit[2]: $12,266,172,251
  • Verdict: The budget surpasses our recommended limit by $31,146,538 ($31.1 million)

Applying more of the surplus to income tax relief would allow South Carolina to stay within the recommended ceiling and therefore reduce the government’s burden on taxpayers.   

Where is your money going?

The following is a list of noteworthy appropriations in the proposed budget. These represent new allocations (i.e. increases) on top of current agency budgets. The list does not include expenditures from the Capital Reserve Fund, which are noted separately.

Tuition mitigation: $57.5 million (recurring)

The combined appropriations to the state’s public four-year colleges and universities allowing them to freeze tuition for in-state undergraduate students. The program has been ongoing for several years, beginning in the FY19-20 state budget. Tuition mitigation accounts for 8.7% of the available recurring surplus.

Employee benefits

  • State Health Plan increases: $107.6 million (recurring)
  • Pay raise for public employees: $41.1 million (recurring)
  • Total: $148.7 million

Employee benefits collectively account for 22.5% of the available recurring surplus.

Department of Education

  • Teacher pay raise: $200 million (recurring)

This appropriation accounts for 30.3% of the available recurring surplus.

Department of Commerce

  • Closing Fund: $10 million (non-recurring)

According to its budget proposal, these funds are needed to recruit new jobs and investment to the state, though we contend this is not an appropriate use of taxpayers’ money. Making matters worse, Commerce’s budget document is woefully lacking on detail and effort. The Closing Fund request, for which the department asked $25 million, offers no explanation as to how this money will meet its goals, other than asserting the fund “offers greater flexibility than other incentive resources.”

  • Charleston International Airport: $20 million (non-recurring)
  • Greenville-Spartanburg International Airport: $4 million (non-recurring)
  • Myrtle Beach International Airport: $5 million (non-recurring)

Curiously, these appropriations are not listed on Commerce’s budget proposal.

Department of Health and Human Services

  • Maintenance of Effort Annualization: $36.1 million (recurring)
  • Provider rates, behavioral health: $18.5 million (recurring)
  • Provider rates, medial: $50.6 million (recurring)
  • Total: $105.2 million

These collectively account for 15.9% of the available recurring surplus.

Department of Public Health

  • Fiscal impact of restructuring: $4.5 million (recurring)
  • Fiscal impact of restructuring: $15.5 million (non-recurring)

According to its budget proposal, these funds are necessary to carry out the restructuring directed by Act 60 (S.399), which split DHEC into two separate agencies.

  • Healthcare campus relocation: $7 million (recurring)

Department of Environmental Services

  • Fiscal impact of restructuring: $5.8 million (recurring)
  • Fiscal impact of restructuring: $6.4 million (non-recurring)

According to its budget proposal, these funds are necessary to carry out the restructuring directed by Act 60 (S.399), which split DHEC into two separate agencies.

  • Workforce retention and credentialing: $3.2 million (recurring)

Office of Resilience

  • Operating expenses increase: $8.1 million (recurring)

While this appropriation only accounts for 1.2% of the available recurring surplus, it would dramatically grow the agency. The new funding takes the agency’s base budget from $2.7 million to $10.8 million – a nearly 300% increase. Moreover, the allocation is nearly double what the agency requested in its budget proposal.

University of South Carolina

  • School of Law: $3 million (recurring)

According to its budget proposal, this is to increase student support for new programs.

Medical University of South Carolina

  • Health Care 4.0 program: $2 million (recurring)

According to its budget proposal, this relates to using artificial intelligence (AI) to improve the delivery of healthcare services.

Department of Veterans’ Affairs

Veteran homes

  • Inherent costs: $25.5 million (recurring)
  • Program improvements: $954,244 (recurring)
  • Critical capability development: $866,392 (recurring)
  • Total: $27.3 million

According to its budget proposal, the bulk of this funding will go to one or more commercial vendors operating the five state veteran nursing homes.

Other

  • Military Enhancement Fund: $2 million (recurring)
  • Military Enhancement Fund: $8 million (non-recurring)

According to its budget proposal, these funds will be distributed as grants to local governments to either improve military installations or generally improve the quality of life for South Carolina military families.

 

Pricey capital projects

In a separate bill that coincides with the state budget, legislators annually spend tens, if not hundreds, of millions taxpayer dollars on new facilities and building renovations, often for colleges and universities. The money comes from the Capital Reserve Fund – a rainy day account required by the S.C. Constitution. If the fund is not needed to cover emergency expenses, it can be depleted and spent on desired projects, so long as it is replenished.

Doing this, of course, creates a major expense for taxpayers. The latest proposal spends $390.1 million from the Capital Reserve Fund, which must be repaid from the new state budget. That’s $390.1 million less that can be applied towards tax relief. We advise putting an end to this practice and leaving the fund untouched, unless it’s to meet the required reserve balance. 

Below are several proposed capital projects. Full list here.

Department of Commerce

  • SC Nexus: $50 million

Midlands Technical College

  • Capacity building request for Scout Motors: $5 million

Clemson University

  • College of Veterinary Medicine: $22 million

Medical University of South Carolina

  • College of Medicine Academic Building: $22 million

University of South Carolina (Columbia)

  • Health sciences campus: $22 million

University of South Carolina (Beaufort)

  • New convocation center: $5 million

State Ports Authority

  • North Charleston Economic Development Land Acquisition: $55 million

Office of Resilience

  • Disaster Relief and Resilience Reserve Fund: $30 million

Department of Veterans’ Affairs

  • Veteran homes – capital improvements: $49 million

Footnotes

[1] The cost estimate of reducing the top income tax rate from 6.3% to 6% comes from multiplying the $100 million estimate for a .1% reduction by three. The $300 million estimate generally aligns with projected fiscal impacts relating to the income tax cuts reported by the S.C. Revenue and Fiscal Affairs Office (see page 3).

[2] The SCSB appropriations limit is calculated annually with the state’s population growth rate plus U.S. chained-consumer price index (CPI) inflation for the previous year (2023). The estimated growth rates are population growth of 1.47% and U.S. chained-CPI inflation of 3.91%. These sum to a maximum growth limit of 5.38%. When applied to South Carolina’s recurring FY24 general fund budget of $11.64 billion, the FY25 limit is $12.27 billion.