Big spending, bigger choices for South Carolina

South Carolina lawmakers are once again facing an important choice. As budget subcommittees meet through early February and the Senate prepares to debate income tax reform on the floor, the state must decide whether strong revenue growth will be used to expand government or to deliver lasting tax relief.

According to the South Carolina Policy Council’s latest analysis of the FY27 budget proposal, state spending continues to grow faster than what taxpayers can reasonably afford. The governor’s proposed budget would once again rank among the largest in state history, even though South Carolina continues to collect recurring surpluses. This pattern matters because spending growth today determines tax pressure tomorrow.

A responsible benchmark for spending growth is population growth plus inflation. That measure reflects how fast the tax base grows without placing additional strain on households. In South Carolina, population growth plus inflation has averaged about 4 to 4.5 percent annually in recent years. Yet General Fund spending has grown much faster than that over the past decade, while General Fund revenue has averaged roughly 7 percent annual growth. The gap between revenue growth and responsible spending growth creates surpluses, but only if lawmakers resist the urge to spend them.

This is not a theoretical concern. The state is already more than $150 million over budget on commitments tied to the Scout Motors incentive package, showing how quickly long-term promises can crowd out other priorities. When spending grows rapidly during good economic times, it leaves the state less prepared for downturns and makes permanent tax relief harder to sustain.

That context is critical as lawmakers debate income tax reform. The Senate has advanced the amended income tax bill to the floor with no changes in committee, meaning it is largely the same proposal debated last year. Public discussion has focused on distributional effects and complexity, but the more important question is whether the reform is anchored to spending discipline.

The amended bill reflects a meaningful improvement by incorporating two important mechanisms. First, it uses a revenue trigger that directs revenue growth above five percent toward income tax relief. Second, it includes a surplus trigger that dedicates 25 percent of actual General Fund surpluses to further reducing income tax rates. This change aligns with recommendations long made by the South Carolina Policy Council.

The difference between revenue triggers and surplus triggers matters. Revenue triggers depend on forecasts that assume steady economic growth. If the economy slows or revenues fall short, promised tax relief can be delayed or abandoned. Surplus triggers work differently. They only activate after the state has already collected more money than it spends. That makes tax relief more reliable and ties it directly to responsible budgeting.

Surplus-based tax relief also encourages better decision-making. When lawmakers know that lower spending growth leads directly to faster tax cuts, they have a clear incentive to prioritize core services and avoid unnecessary expansion. Over time, this approach can steadily buy down income tax rates without cutting services or raising other taxes.

South Carolina’s budget math shows why this works. If General Fund revenue continues growing near its historical average of about 7 percent and spending growth is held near population growth plus inflation at roughly 4.4 percent, the difference produces an annual surplus of about 2.5 to 3 percent. Even dedicating a portion of that surplus to tax relief can significantly reduce income tax rates year after year. Over time, this creates a realistic path to eliminating the income tax entirely.

Without spending restraint, however, tax reform remains fragile. Expanding the budget absorbs surpluses that could otherwise be returned to taxpayers. That is why the FY27 budget debate is just as important as the tax bill itself. Tax relief that is not supported by disciplined spending will not last.

The Senate now has an opportunity to build on the progress made in the amended bill. Strengthening the connection between spending restraint and tax relief would improve affordability for families, make the state more competitive for jobs and investment, and protect taxpayers during future downturns.

South Carolina has the revenue growth needed to reform its tax system. The challenge is not money. The challenge is discipline. If lawmakers align the FY27 budget with responsible growth and continue strengthening surplus-based tax relief, today’s surpluses can become tomorrow’s prosperity.

This report may be republished in whole or in part, provided that proper credit is given to the author(s) and the South Carolina Policy Council.