How South Carolina’s income tax cuts compare to the Southeast

With the governor's recent approval of the FY25 state budget, South Carolina will continue its positive trajectory on personal income tax rates, accelerating the reduction adopted two years ago by lowering the top marginal rate from 6.4% to 6.2%. Initially, the House this year proposed a 0.1% point reduction in addition to one-time property tax credit, but the Senate proposal including a 0.2% point decrease prevailed.

Though the change might seem modest, this reduction will free up funds for consumers to pour back into the South Carolina economy. Plus, it moves the state ahead of schedule under the 2022 income tax relief measure. The law initially reduced the rate from 7% to 6.5% and scheduled additional 0.1% point reductions annually until it reaches 6%.  

This is encouraging, as we hope to see continued acceleration in tax relief to reach the statutory 6.0% cap more quickly. 

How we compare

South Carolina and Alabama are the only states in the Southeast with a graduated income tax rate. This means that the tax rate increases as the income amount increases. 

South Carolina’s top marginal income-tax rate is the highest across the Southeast. In comparison, multiple states have no income tax rate, and several have lower flat rates.

Rates in the Southeast

A few of these states are on track to have significant reductions in their tax rates as well. At a minimum, accelerating South Carolina’s rate reduction will make the Palmetto State more competitive to prospective residents and workers. And the state can easily afford it if the tax surplus, which came in at around $500 million, is used to cover the reduction. 

Why South Carolina needs relief

Recent inflation has reduced spending power for the residents of South Carolina and across the nation. As of late, the dollar's value has plummeted. The accelerated income-tax rate reduction will put purchasing power back in South Carolinians pockets, which is greatly needed.

Income tax cuts encourage people to work, save, and invest more, bolstering the economy and reducing the effects of existing tax distortions. A tax is considered distortionary if the cost of the tax changes how people make purchasing decisions. The amount of income tax paid certainly influences how a person chooses to spend their income. 

By reducing income taxes, individuals have more disposable income available, which they can choose to spend on necessities and enjoyable activities, decreasing the need to avoid certain purchases or activities due to tax concerns.

Conclusion

The full impact of accelerating the income-tax rate reduction remains to be seen, but it brings cautious optimism for the state's future. Lawmakers should aim to speed up rate cuts to reach the targeted top marginal rate of 6% before the 2027 deadline under state law.

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Sydney Forte is a research intern for the South Carolina Policy Council