Getting the most tax relief out of the FY25 budget

Bryce Fiedler

Written by
May 07, 2024

Getting the most tax relief out of the FY25 budget

Update 6/21/24: After weeks of negotiations between House and Senate leaders, a budget conference committee on Friday advanced a compromise FY25 state appropriations bill that will accelerate this year's income tax reduction, taking the top rate from 6.4% to 6.2%. However, the House proposal to provide one-time property tax credits, discussed in this report, did not make the finalized version. Lawmakers will return to Columbia on Wednesday, June 26, where they are expected to pass the new budget. 

Update 5/8/24: The House on Wednesday passed an amended FY25 budget that, among other changes, reduced the funding appropriated for property tax credits from $500 million to $150 million. If funded at this level, we estimate the average tax credit would amount to roughly $108 (down from $359). SCPC recommends delivering a final budget that maximizes tax relief by utilizing the entire sales tax surplus for property tax credits, while also accelerating the scheduled income tax cut. 

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As competing budget proposals for the new fiscal year come into focus, South Carolina finds itself with a significant opportunity for tax relief. The House FY 2024-25 budget aims to provide homeowners with a sizeable one-time property tax credit, plus enact a small income tax cut. The Senate budget proposes an income tax cut that is twice in size, though it doesn’t offer property tax credits.  

“How wonderful it is to have the House and the Senate fighting over which tax deduction is best,” Sen. Finance Chairman Harvey Peeler recently told reporters, according to the SC Daily Gazette.  

But what if we didn’t need to pick a winner in this tax-cut showdown? What if South Carolina delivered a budget achieving maximum tax relief – one that speeds up income tax reduction and lowers the next round of property tax bills? Not only is this possible from a financial standpoint (not to mention the best choice for taxpayers), it is also the correct thing to do under state law.  

To understand this, let’s take a closer look at the House and Senate budget proposals. 

 

Tax relief takeaways 

House plan 

  • Uses $500 million in sales tax surplus to provide one-time property tax credits 
  • Delivers a permanent 0.1% personal income tax cut (6.4% -> 6.3%) 

Senate plan 

  • Spends the $500 million on roads and bridges, rural infrastructure, and a new medical campus for the University of South Carolina 
  • Delivers a permanent 0.2% personal income tax cut (6.4% -> 6.2%) 

SCPC recommendation  

  • Combine the tax-relief proposals for maximum effect
  • Utilize the entire sales tax surplus (up to $600 million) to provide property tax credits 
  • Deliver a 0.2% personal income tax cut, if not greater  

 

 Budget spending at a glance

Senate proposed FY25 appropriations

  • General funds: $13.4 billion*
  • Other funds: $13.4 billion
  • Federal funds: $13.6 billion
  • Total: $40.4 billion

House proposed FY25 appropriations (as amended May 8th)

  • General funds: $13 billion*
  • Other funds: $14.2 billion
  • Federal funds: $13.6 billion
  • Total: $40.8 billion

*Note: These amounts do not include the $390.1 million in Capital Reserve Fund appropriations, allocated in a separate bill (H.5101). 

The figures above reflect appropriation totals from the House and Senate budget summary control documents. General funds relate to state tax revenue; other funds relate to fines and fees; and federal funds relate to federal tax revenue. 

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House tax-relief proposal

One-time property tax credit 

The staple of the House budget proposal, approved in March, is a plan to offer one-time credits on property tax bills for owner-occupied homes, which would apply automatically to the next round of tax bills. The average credit would be worth $359, according to the House Ways and Means Committee.  

Credits would be funded using a buildup of sales tax revenue that comes from Act 388 – a tax-swap measure that exempted owner-occupied homes from paying school operating costs on property tax bills in exchange for a statewide 1% sales tax hike. Revenue from the extra penny goes into the Homestead Exemption Fund to reimburse school districts.  

Fueled by a boost in consumer spending that started during the pandemic, the fund today has a surplus of $600 million, according to the Senate budget (line 38).  

But here’s where things get interesting: the House tax-credit proposal is not only a wise policy decision – it is also required by law. Act 388 says that any money left over after reimbursing school districts must be used for property tax credits on owner-occupied homes. It reads: 

“(C) When determined, any balance in the Homestead Exemption Fund remaining at the end of a fiscal year after the payments to school districts and counties pursuant to subsections (A) and (B) of this section must be segregated within the Homestead Exemption Fund and remitted in the next fiscal year to counties in the proportion that the population of the county is to the total population of the State. Population data must be as determined in the decennial United States Census and the most recent update to that data as determined by the Revenue and Fiscal Affairs Office. Revenues received by the county must be used to provide a property tax credit against the property tax liability for county operations on owner-occupied residential property classified for property tax purposes …" 

In other words, treating the tax credits as a voluntary matter would be wrong. This is not about differences between House and Senate budget priorities; this is a question of following the law. The final FY25 budget must provide for property tax credits in line statute. 

  

Small income tax cut

In addition to the property tax credits, the House budget allocates $100 million in surplus funds to achieve a modest 0.1% personal income tax cut, which would bring the top tax rate to 6.3%.  

Taxpayers saw the same cut last year, thanks to a 2022 tax relief measure. That law initially lowered the rate to 6.5% and scheduled additional 0.1% reductions to trigger annually until it reaches 6.0%. 

It will take until at least 2027 for the law to fully phase in, unless legislators accelerate the plan. We use "at least" because the incremental reductions are not guaranteed. Under the law, general fund revenues must project at least 5% annual growth for the .1% cuts to trigger. 

The unpredictable nature of the tax cuts makes a strong case to speed things up. Moreover, the state can afford it. In a January analysis, we showed that South Carolina could reduce the top income tax rate to 6% this year using less than half of the available recurring surplus. At the very least, a reasonable step forward would be to pass a 0.2% cut as proposed by the Senate. 

 

Senate tax-relief proposal

Accelerated income tax reduction

The Senate budget plan, approved last month, would double the size of this year’s personal income tax cut and take the top rate from 6.4% to 6.2% (rather than to 6.3%). Not only would this deliver more relief in the current year, but it would also mean South Carolina reaches its target tax rate 6.0% ahead of schedule.  

The plan is strongly supported by taxpayers. A survey of Policy Council readers found that 85% of respondents said it is very or somewhat important for the accelerated rate cut to pass. This comes as rising inflation puts pressure on everyday South Carolinians. The same survey showed that 91% of respondents were very or somewhat concerned with their family’s ability to pay their bills.   

In neighboring North Carolina, the state’s flat income tax of 4.5% is on track to reach 2.49% in the coming years, subject to revenue triggers being met. Meanwhile, Forbes reports that Governor Brian Kemp recently signed another tax cut that will bring Georgia’s flat income tax rate from 5.49% to 5.39%. In this context, it is clear that South Carolina needs an aggressive tax relief strategy to stay competitive in the region. Accelerating the income tax schedule is an excellent place to start. 

 

Spending most of the surplus 

Instead of utilizing the sales tax surplus to provide property tax credits as mandated by law, the Senate budget spends most of it on various projects. These projects include: 

  • County transportation funding – $200 million 
  • Bridge work and repair – $100 million 
  • Rural road safety – $117.4 million 
  • Rural infrastructure – $15 million 
  • Water and sewer projects – $15 million 
  • University of South Carolina Health Sciences Campus – $53 million 
  • Total – $500 million 

Where things get interesting is that the remaining $100 million surplus is used to pay for the accelerated income tax cut. This, of course, would seem to conflict with the law – even if the money is being used for a worthwhile purpose. So, here’s the obvious question: Is this allowed? Technically speaking, it is, just as it is technically possible to spend the other $500 million of the surplus on different projects. This is because of a budget proviso.

Provisos are effectively mini-laws within the budget that last for one year. Their purpose is to instruct agencies on how to spend funds appropriated in the budget. But sometimes, they are used to make general policy changes.

As it turns out, every budget since fiscal year FY2021-22 has contained a proviso suspending the section of law that requires the sales tax surplus to be credited to property tax bills. This practice may have initially started because the surplus was not big enough to provide meaningful tax credits; however, that is no longer the case.  

The Policy Council generally does not favor using provisos to override state law, a practice that can be abused to circumvent legal obligations. We view the Senate’s proposal to spend most of the surplus as an example of this. Using a portion of the surplus for income tax relief is perhaps less objectionable, as this would at least adhere to the spirit of Act 388.  

Preferably, the finalized FY25 budget should use the entire $600 million sales tax surplus to provide property tax credits, while paying for the extra .1% income tax cut using other available funds. The budget projects a recurring surplus (separate from the sales tax surplus) of $677 million, which is far more than enough to cover the $100 million price tag of an additional 0.1% reduction and thereby bring the tax rate to 6.2%. 

 

Conclusion 

The House and Senate have each brought worthy tax relief proposals to the table. The House budget, in accordance with state law, uses a surplus of sales tax revenue to provide one-time property tax credits to homeowners, worth on average $359. It also provides a small income tax cut. The Senate budget offers a bigger income reduction – taking the top tax rate from 6.4% to 6.2% – but does not provide property tax credits.  

To ensure the greatest benefit, we recommend passing a FY25 budget that includes both tax-relief measures in the finalized bill, providing property tax credits and accelerated income tax reduction. Not only is this financially achievable, as shown in this report, but our recommendation is also supported by state law, which requires the sales tax surplus in question to be credited to property tax bills.