Broaden the base, lower the rates: Is tax reform coming to S.C.?

This was the second in a series of hearings that the subcommittee, chaired by Sen. Sean Bennett, R-Dorchester, will hold over the next few months. The panel offered differing perspectives on how to structure a fair and effective tax system, but a central theme emerged: South Carolina should broaden its tax base, eliminate exemptions, and lower tax rates. 

At the subcommittee’s initial meeting on September 10, Sen. Bennett identified addressing the problems created by Act 388 of 2006 as one of the subcommittee’s primary goals. 

Act 388 sought to provide property tax relief while maintaining school funding by: 

These provisions were intended to protect homeowners from excessive property tax increases, but assessment caps created new problems. Homes with similar market values and identical millage rates can receive significantly different assessment values depending on when they were last sold, resulting in unequal tax bills. Over time, this can discourage homeowners from selling and contribute to the affordability crisis making homeownership feel impossible for many young people. 

During the panel, discussion turned to alternatives that could provide more predictable limits on property taxation without creating the same distortions. 

Levy limits restrict the total revenue local governments can collect through property taxes. Softer levy limits may allow local governments to exceed their limits following public input, such as a public hearing or referendum. Hard levy limits, by contrast, impose stricter restrictions established by the state. 

The panel favored soft levy limits tied to population growth plus inflation over assessment caps to protect taxpayers from excessive property taxes while preserving the sovereignty of local governments. 

Beyond property taxes, the panel debated differing interpretations of tax equality, specifically who should bear the tax burden. Patrick Gleason of Americans for Tax Reform, along with others, argued for a system in which everyone pays the same tax rate, while Neva Butkus of the Institute on Taxation and Economic Policy supported higher tax rates for higher earners. 

The panel was divided on the prospect of eliminating the income tax, with some supporting full elimination and others preferring a lower, flat rate. Despite these differences, panelists generally agreed that lawmakers must change their spending habits to achieve reliable income tax reductions. 

Gleason highlighted that more than a decade of undisciplined spending growth presents a fundamental obstacle to tax reform. The Policy Council also believes that reduced state spending must precipitate income tax reform. 

Sales tax reform presents another opportunity to lower rates without necessarily reducing revenue. 

Act 388 placed responsibility on the state to replace school districts’ lost property tax revenue, prompting the increase in the state sales tax rate; however, South Carolina offers 136 sales tax exemptions, and the state excludes most services from sales tax. 

Ben Salmon, a research fellow at the Mercatus Center, testified that just five of those 136 exemptions account for approximately 70% of the revenue lost to sales tax exemptions. 

Rather than relying on a narrower group of taxable transactions, the panel agreed that a broader sales tax base would distribute the tax burden across more economic activity and allow lawmakers to lower rates without sacrificing revenue. 

The panel’s emphasis on broadening the tax base raised questions from lawmakers about fee-in-lieu-of-tax agreements, commonly known as FILOTs.