How to get real income tax relief in South Carolina

An objective fact about South Carolina’s fiscal trajectory is that the state general fund has nearly tripled in the last 25 years. Because the state constitution mandates a balanced budget, this growth means tax revenue has climbed in step with spending. 

The issue emerges when that growth is compared with three benchmarks: inflation, population growth, and income tax reform. When viewed through this lens, it becomes clear that general fund spending has consistently outpaced both inflation and population growth, with minimal accompanying tax relief. 

Background 

Compiling long-term general fund data is difficult for years prior to 2000. However,  a 2018 report from the S.C. Revenue and Fiscal Affairs Office shows that in fiscal year 2000 the general fund was just shy of $5 billion. It fluctuated slightly in the years following but began to steadily rise after FY11, when the fund hit nearly $5.5 billion. Today, the FY26 general fund (excluding the capital reserve fund) stands at approximately $14.7 billion, nearly tripling since 2000. 

South Carolina has continued to be a destination state across the country, experiencing substantial population growth over the past 25 years. In 1999, the state’s population was reported to be 4 million. In 2024, that number has grown to nearly 5.5 million, a 37.5% increase.  

Inflation followed a similar trend. $100 in 2000 would be worth about $190 in 2025, reflecting a 90% increase. 

On the tax side, South Carolina has made only incremental reforms. The most notable was in 2022, when the state implemented a relatively modest 0.5-percentage-point income tax cut, with 0.1-percentage-point reductions scheduled for subsequent years 

Today, the top marginal rate in SC is down from 7% in 2021 to 6%.But state general-fund spending has continued to grow. If this spending growth had been limited to just population growth plus inflation over time, South Carolina would have no income tax like our friends in Tennessee and Florida. 

To move in that direction, the Palmetto State must pursue a meaningful spending limit. 

During the first year of the 2023–2024 legislative session, House lawmakers passed a bill to gradually eliminate the state income tax. That was a meaningful first step, but it addressed only half the problem. The other half is spending. 

What is a spending limit? 

A spending limit is a policy that restricts the growth of government budgets. There are many forms of spending limits, but the gold standard has been a set formula based on population growth plus inflation. While exceptions may be made for major disasters or economic crises, this limit functions as a hard cap on budget growth. Legislators could override the cap only with a high-threshold vote. 

SCPC recommends a spending limit using population growth plus inflation. The combined total of these metrics allows for manageable growth that the average taxpayer can afford but eliminates excessive spending growth. 

Consider the data outlined above. Over the last 25 years, combined population and inflation growth totaled approximately 127.5%. General fund growth has rapidly outpaced that with a 194% increase. 

Roughly 10 states have succeeded in keeping spending within the bounds of inflation and population growth. With the right reforms, South Carolina can join them. 

Without a spending limit, any attempt to reduce or eliminate the income tax could be unsustainable. But by coupling income tax reform with a spending limit, South Carolina could become a national model for fiscal responsibility. 

Surplus triggers and tax relief 

Spending limits align well with another policy SCPC strongly supports: surplus triggers. These mechanisms direct surplus revenue (money collected above the spending limit) toward tax relief. 

This approach reinforces the principle that every dollar the government doesn't spend should be returned to taxpayers because it is their money. It also makes clear to lawmakers that their decisions on spending directly affect how much money their constituents keep. 

The surplus-trigger principle is championed by SCPC Senior Economic Fellow Dr. Vance Ginn. Surplus triggers are advantageous compared to revenue triggers, which create arbitrary revenue targets, with tax relief provided only if those targets are met. Surplus triggers, in contrast, tie tax cuts to real money, not arbitrary goals. 

 Lawmakers must first establish a baseline spending limit, and the previous year’s general-fund total is a good place to start. That figure would then be multiplied by the sum of population growth and inflation of the prior year. Any revenue collected above that level becomes surplus. 

To uphold the surplus-trigger principle while ensuring stability, SCPC recommends that all recurring surplus dollars be directed toward immediate tax relief. Nonrecurring surpluses should be used strategically—whether for additional tax relief, paying down general-obligation debt, addressing unfunded pension liabilities, or strengthening reserves to sustain future tax relief. 

It is important to note that South Carolina already maintains two constitutionally required reserve funds: the General Reserve Fund and the Capital Reserve Fund. The goal of surplus triggers is not to duplicate these reserves, but to ensure that nonrecurring surplus dollars are used in ways that promote long-term fiscal stability and sustainable tax relief, preventing future tax hikes during economic downturns. 

Looking ahead  

By embracing policies like surplus triggers and spending limits, South Carolina can be a leader to states across the country and show the path to reining in spending and eliminating their income tax.  

With tax reform in focus for the coming session, lawmakers must not overlook the spending side of the equation. Controlling spending growth is the key to lasting tax relief. SCPC has produced several reports on this topic our Responsible Budget report is a great place to start. 

By adopting a spending limit tied to population and inflation, South Carolina can build a sustainable path to eliminate the income tax and serve as a model for other states to follow.