Path to Prosperity: A Fiscal Roadmap for South Carolina

Key Takeaways

South Carolina’s complex and inefficient tax system ranks 33rd in tax competitiveness nationally due to irresponsible spending. These fiscal burdens include a complex, inefficient tax system that penalizes work, investment, and entrepreneurship.
H.4216 would provide a much-needed income tax rate reduction, but is unfortunately designed in a way that would increase income tax burdens for approximately 60% of South Carolina taxpayers in the first year by eliminating deductions and applying a flat rate to a newly calculated income amount with revenue triggers to reduce it thereafter to zero.
A sustainable fiscal reform strategy should include simple income measures for calculating taxes, broad standard deductions, spending less than population growth plus inflation, priority-based budgeting, and surplus triggers. With this fiscal discipline, South Carolina can reduce income taxes to zero by 2032 and become a leader in tax competitiveness, benefiting the state and many more South Carolinians.

Executive Summary

South Carolina can become a national leader in economic growth and fiscal responsibility with pro-growth tax reform and responsible budgeting. South Carolina ranks 33rd in tax competitiveness nationally, burdened by a complex, inefficient system that penalizes work, investment, and entrepreneurship. The state currently has record surpluses and economic momentum. The goal of flattening income taxes, broadening the tax base, and achieving the lowest possible tax rate will improve the state’s fiscal and economic situations. However, current tax reform legislation risks disproportionately increasing taxes on low- and middle-income earners more than necessary, which could harm economic growth and the benefits it yields.

H.4216, the legislature’s attempt to improve the state’s personal income tax code, is a bold start but needs improvements. It overcomplicates the tax base with the new South Carolina Income-Adjusted Deduction (SCIAD), raises taxes on nearly 60% of filers, and ties future tax relief to speculative revenue projections instead of real budget surpluses. While this is a tax bill and is considered separate from government spending, excess spending in prior years has led to high taxes, and the surpluses should be returned to taxpayers. More of a focus on spending, whether in a bill or lawmaker's discretion, would better comply with the late economist Milton Friedman’s point that the true burden of government is its spending.

This report outlines a path forward grounded in fiscal discipline, priority-based budgeting, and structural simplicity. By implementing a responsible spending limit, embracing a truly pro-growth flat tax system, and utilizing surplus triggers for income tax cuts until they are zero, South Carolina can become more competitive, transparent, and prosperous.

South Carolina’s Economic and Fiscal Landscape

As of February 2025, South Carolina's economy remains resilient but shows signs of pressure. According to the SC Department of Employment and Workforce, the state’s unemployment rate rose to 4.5% in February 2025, up from 3.5% in February 2024. This indicates a slowdown in the labor market despite a growing labor force now at approximately 2.55 million. This uptick in unemployment underscores a need to pursue policies that support job creation and financial security for working families. Meanwhile, Bureau of Economic Analysis data show South Carolina’s real GDP grew at an annualized rate of 3.6% in Q4 2024, above the national average (see Figure 1).

Personal income rose 6.0% year-over-year, ranking South Carolina among the top ten states in income growth. These are encouraging signals, but persistent inflation and cost-of-living pressures suggest the need for targeted tax relief and fiscal prudence. The state budget reflects these contradictions, with revenues being relatively strong, but general fund appropriations are surging. According to the South Carolina Policy Council, general fund appropriations have grown faster than population growth plus inflation —a good measure of the average taxpayer’s ability to pay for government —since 2013 (see Figure 2).

General fund appropriations have increased by more than 103%, while population growth plus inflation has grown by just 56% since 2013. This mismatch represents nearly $15 billion in cumulative overspending since then, which could have been used to reduce income taxes over time instead. In FY 2025 alone, the state overshot the responsible spending limit by almost $3 billion for a general funds budget of $12.4 billion, compared to what it would have been if it had followed this key metric over the period (see Figure 3).

The FY 2026 budget could be the largest in state history, totaling $43.1 billion in all funds. It includes $14.5 billion in general funds, $14.6 billion in fines and fees, and $14 billion in federal funds. Despite this growth and the availability of surplus funds, including $683 million in recurring surplus and $1 billion in non-recurring surplus, lawmakers have yet to enact permanent, pro-growth tax cuts that would improve household finances and business investment across the state. This overspending is not sustainable. Without prioritizing core services and capping growth, lawmakers will continue to crowd out private sector opportunities and miss chances to deliver lasting tax relief. Without intervention, South Carolina risks falling behind more competitive Southern states, such as Florida, Georgia, and North Carolina, which have adopted more aggressive tax and spending reforms.

The Latest Tax Reform Proposal: Promise and Pitfalls

Current System vs. H.4216

South Carolina currently operates a graduated individual income tax system with a standard deduction of $15,000 for single filers and $30,000 for couples. The progressive marginal tax rates are 0% up to $3,560, 3% up to $17,830, and 6.2% above $17,830. The taxable income base starts with gross income and deductions that shield low- and middle-income taxpayers. H.4216 replaces this with a flat 3.99% tax on federal adjusted gross income (AGI), eliminating standard and itemized deductions and introducing a South Carolina Income-Adjusted Deduction (SCIAD).

According to the state’s Revenue and Fiscal Affairs Office, this reform could cause nearly 60% of filers to pay more taxes, particularly those in the $20,000 to $150,000 income range, who currently pay much less, if any–as is the case with 60% of South Carolinians, in state income taxes. SCIAD has a significantly broader tax base than the current system, which is generally beneficial for a broad base and lower rates. However, these changes disproportionately shift the tax burden onto lower-income working families. As Manish Bhatt at the Tax Foundation warns, “The less generous deduction, paired with the rate applied to all income, leaves the state’s lowest-income residents with higher taxes—a non-neutral and unsound tax policy.”

Surplus vs. Revenue Triggers

H.4216 would reduce the flat rate further, down to 2.49%, but only if revenue projections meet 5% growth benchmarks known as revenue triggers. These revenue triggers rely on optimistic forecasts and assume uninterrupted economic growth. They can delay or cancel promised tax cuts if revenues fall short of expectations. This creates uncertainty for taxpayers and businesses, often leading policymakers to reverse course during downturns, which hinders the goal of promoting more economic activity and eliminating personal income taxes. Kansas is an example of why this shouldn’t be the case, as lawmakers chose to overspend, raise taxes, and hurt tax relief for a decade thereafter.

Surplus triggers, by contrast, are grounded in reality. They only allow tax cuts when there is actual excess revenue above limited spending growth at the end of a fiscal year. By linking tax relief to real surpluses, these triggers:

Ensure Stability: Tax cuts are only enacted when the state can afford them.
Promote Fiscal Discipline: Coupled with a spending cap based on population growth plus inflation, surplus triggers help keep government growth in check.
Avoid Political Backsliding: Because they reflect actual fiscal conditions, surplus-triggered tax cuts are less likely to be reversed.

Use the Tax Relief Fund to surpluses, applied to reduce the flat tax rate over time to zero, and direct any remaining funds to a reserve fund.

This mechanism ensures that tax relief is stable, sustainable, and conducive to long-term prosperity. It avoids the trap of cutting taxes during booms only to raise them during busts. Instead, it rewards restraint and prioritizes the interests of taxpayers. Surplus triggers similar to those used in Colorado’s Taxpayer’s Bill of Rights (TABOR), but for tax rate cuts rather than refund checks, with actual surpluses incentivizing less spending for more sustainable tax cuts. Patrick Gleason of Americans for Tax Reform acknowledged that while the plan uses part of the surplus for tax cuts, the outcome depends heavily on fragile revenue projections. “If revenue targets aren’t met, taxpayers are left waiting for relief that may never come.”

Pairing surplus triggers with spending caps based on population growth plus inflation provides the most sustainable path to tax relief. States like Texas and North Carolina have successfully adopted elements of this strategy.

South Carolina Tax Reform: Two Scenarios, One Lesson

Let’s consider the following two scenarios, where the first one is very similar to H.4216 and the second is an alternative to help with the income distributional effects. These

Scenario 1 (H.4216): 3.99% Flat Income Tax with $7,500 Deduction (EITC Limited)

Flat rate: 3.99%
Deduction: $7,500 individual / $15,000 joint, phases out at $60,000
Estimated General Fund Tax Relief: $307.8 million
Distributional impact: 58.7% of filers face a tax increase; just 17.9% see a decrease

This version of the flat tax aggressively flattens the income tax while compressing deductions. The low deduction threshold ($7,500 for individuals) and tight EITC limit make it punitive for lower- and middle-income families. This reform would substantially increase taxes on approximately 60% of filers, many of whom earn less than $100,000, and would leave the marriage penalty intact, damaging household budgets and slowing economic growth. While the lower rate is preferable, these distributional effects can have economic and political implications, hence the pushback on the bill by some.

Scenario 2: 4.74% Flat Income Tax with SC Income Adjustment Deduction

Flat rate: 4.74%
Deduction: Starts at $19,000 and phases out at $80,000
Estimated General Fund Tax Relief: $282.3 million
Distributional impact: 38.6% see a tax increase; 25.1% receive a tax cut

Scenario 2 is an improvement over Scenario 1. It spreads the tax burden more evenly, but remains overly harsh on middle-income earners and complicated due to the SCIAD phase-outs and marriage penalty.

Scenario Comparison Chart

Figure 4 presents a comparison of these proposals from the SC Department of Revenue with the net percentage of returns after tax increases under both scenarios. The impact on working-class taxpayers is notably harsh under Scenario 1. Scenario 2 mitigates some harm but still places burdens on middle-income earners.

A Pro-Growth Policy Roadmap

South Carolina should adopt a flat income tax with broad, stable deductions similar to North Carolina’s system, which features the lowest flat income tax rate and generous standard deductions. At the same time, lawmakers must rein in spending growth and adopt priority-based budgeting that combines performance reviews and zero-based budgeting to justify each taxpayer dollar spent.

Three-Step Recommendations:

Tax Reform: Transition to a federal adjusted gross income (AGI) for the new income tax system, as many other states have already done. Adopt a broad-based flat tax rate of 4.75%, with the lowest rate preferable and especially below 5% to become competitive in the region. Include a standard deduction that will not disproportionately push a higher tax burden on lower-income families. Eliminate the marriage penalty.
Spending Restraint: Reduce spending by reining in current expenditures through a sustainable spending limit, priority-based budgeting, and independent efficiency audits of all state agencies.
Surplus Trigger: Use surplus triggers above the sustainable spending limit, not revenue triggers based on forecasts, to reduce income tax rates to zero by 2023.

Table 1 shows how this surplus trigger operates. These data are from the South Carolina Revenue and Fiscal Affairs Office. The calculations use historical averages from 2016 to 2025 for general fund revenue, general fund spending, and population growth plus inflation for the new spending limit. The amount of income tax relief is based on the surplus each year and utilizes 25% of the surplus to reduce income taxes, with the remaining 75% allocated to the reserve fund.

These percentages can change, but with this conservative approach, personal income taxes can be eliminated by 2032. Figure 4 illustrates what this looks like over time for personal income taxes, which are projected to reach zero by 2032.

Table 2 shows how this would work for the combined personal income and corporate income taxes. A similar surplus trigger approach to reduce individual and corporate income taxes could be eliminated by 2033.

Figure 5 illustrates what personal and corporate income taxes would look like with this approach.

This method is reliable, sustainable, and equitable. It prevents abrupt tax increases, lowers compliance costs, and ensures that all taxpayers benefit as the economy expands. Lasting tax cuts should be paired with spending restraints.

The foundation of any pro-growth tax policy is a budget that grows no faster than taxpayers’ ability to fund it. That’s why South Carolina should adopt a priority-based budgeting framework. Instead of rubber-stamping past expenditures, this framework requires agencies to justify every dollar based on effectiveness and alignment with public priorities. Pair this with a formal spending cap—tied to population growth plus inflation—and lawmakers will be able to preserve services while returning excess revenue to the people who earned it. In Colorado, TABOR has done just that, keeping growth in check while refunding billions to taxpayers. These reforms also align with the principles of Milton Friedman, who argued that “the real problem is government spending.” Tax reform must begin with reforming spending to make it sustainable and to reduce income taxes to zero as quickly as possible.

Conclusion

South Carolina can lead on tax reform—but only if it commits to spending less, taxing less, and reforming with transparency. H.4216, as written, would shift burdens without reducing them for most. By modeling reform on the principles of surplus triggers, priority-based budgeting, and taxpayer-first simplicity, South Carolina can create a path to a zero-income tax rate that strengthens families, fosters small business growth, and unlocks prosperity throughout the state. Now is the time to act. Legislators must act decisively to adopt a comprehensive reform framework built on three pillars: strict spending control, surplus-triggered income tax reductions, and a flat tax structure with deductions that prevent unintended tax hikes on working families.

About the Author: Vance Ginn, Ph.D. - Senior Economic Fellow at South Carolina Policy Council

Vance Ginn, Ph.D., is a nationally recognized economist and one of the country’s leading voices for free-market policies that drive economic growth, expand opportunity, and promote fiscal responsibility. As founder and president of Ginn Economic Consulting and host of the Let People Prosper Show podcast since 2022, Ginn has dedicated his career to advancing policies that empower individuals and limit government overreach.

His influence grew on the national stage when he served as Associate Director for Economic Policy (Chief Economist) at the White House’s Office of Management and Budget under President Trump from June 2019 to May 2020. There, he helped shape federal economic policy during a critical period, focusing on fiscal discipline, tax reform, and regulatory relief. This experience further cemented his commitment to limited government and long-term economic 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.