With the passage of South Carolina’s FY23-24 budget – which grows state government considerably and totals $41 billion in combined funds and $13.7 billion in state funds – it's time for a serious discussion on spending, tax reform, and keeping our state on the right track.
We prepared the following fact sheet to assist in this effort, offering context, analysis, and background information on important tax and budgetary issues.
Budget surplus – a missed opportunity
Thanks to a thriving economy and continued business growth, South Carolina state government is flush with excess tax revenue. But the new budget uses only a fraction of this surplus for permanent tax relief.
- FY23-24 revenue surplus: $1.4 billion (recurring)
- Amount used for tax relief: $96.2 million
The budget puts just 7% of surplus revenue towards tax relief
A modest tax cut
2023 income tax rate change: 6.5% --> 6.4%
The $96.2 million tax cut in the FY23-24 budget lowers the top personal income tax rate from 6.5% to 6.4% for tax year 2023. The reduction was established by last year’s income tax relief legislation, which sets up a .1% cut each year until the top rate reaches 6%. But as is explained below, there’s a catch.
The pros and cons of last year's tax law
The 2022 income tax cut law immediately reduced the top personal rate from 7% to 6.5% and collapsed the lower bracket to just 3%. It also scheduled additional annual .1% reductions until the top rate reaches 6%. However, these cuts are not guaranteed. The law requires state revenues to have a projected growth of at least 5% each year for the .1% cuts to trigger. If revenues don’t meet their target, South Carolinians don’t get a tax cut.
For this reason, we strongly urge an immediate top rate reduction to 6%, which would be a good temporary measure until South Carolina can transition to a lower, flat income tax. The current plan leaves taxpayers at the mercy of an uncertain future economy and could take many years to fully implement.
We can afford 6%
We estimate it will cost around $500 million in state revenue to lower the top rate from 6.5% to 6%, based on the new budget and projections from the state Revenue and Fiscal Affairs Office. Given the relatively small price tag, why aren't we passing this tax cut right now?
Actual FY23-24 cost (6.5% --> 6.4): $96,236,000
Estimated FY24-25 cost (6.4% --> 6.3%): $105,816,000
Estimated FY25-26 cost (6.3% --> 6.2%): $113,110,000
Estimated FY26-27 cost (6.2% --> 6.1%): $122,105,000
Estimated FY27-28 cost (6.1% --> 6%): $64,028,000
Total General Fund impact: $501,295,000
Note: The estimation combines the actual and projected per-year “cost” of the .1% tax cuts across a five-year period. However, an all-at-once tax cut is likely to generate increased economic activity, helping to offset a loss in state revenue.
Highest in the Southeast
Despite South Carolina’s recent effort on tax relief, our top personal income tax rate remains the highest in the Southeast. For tax year 2023, North Carolina has a flat rate of 4.75%; Georgia has a top rate of 5.75% (and will move to a lower flat tax next year); and of course, Florida and Tennessee have no state income tax. If we don’t speed things up, we risk being left behind by our neighbors and losing our competitive edge.
State budget growth
South Carolina has seen a large rise in public spending across the last decade or so, exceeding what is considered healthy based on state population growth and inflation. Our S.C. Sustainable Budget project seeks to limit spending increases based on these objective metrics, as other states have recently done.
SC general fund appropriations (FY13 - FY23): $86.9 billion (+69.9% growth)
Appropriations if limited to population + inflation (FY13 - FY23): $77.3 billion (+42.2% growth)
Difference: $9.6 billion
By not following a sustainable budget over the measured period, individual taxpayers carried an additional tax burden of about $300 for the FY23 budget, or about $1,200 for an average family of four.