Under the Responsible Budget, But Not Done

The good news first: South Carolina’s recurring General Funds budget is under the South Carolina Responsible Budget benchmark this year. 

Using the latest figures, a $13.25 billion FY26 base increased by 1.79 percent population growth plus 2.62 percent inflation allows for a FY27 budget of about $13.83 billion. The proposed recurring budget is about $13.7 billion, or roughly $130 million below the limit.

That is a real win. It shows lawmakers can restrain recurring spending when they choose to do so, and they should get credit for that.

That matters because recurring spending is the part of the budget lawmakers control most directly. It is also the part that matters most for permanent tax relief. 

If recurring spending is held below the rate of population growth plus inflation, the difference becomes recurring surplus. And recurring surplus is what can sustainably buy down income tax rates to zero over time.

That is why this year’s result is encouraging. But it is not enough.

As South Carolina in a Spending Spiral argues, one restrained year does not erase a decade of spending growth that too often outpaced the average taxpayer’s ability to pay. That broader point still stands. 

South Carolina may be under the annual benchmark now, but it is doing so from a much larger spending base than it would have had if lawmakers had consistently followed a population-plus-inflation standard since 2013. This year should be treated as progress, not proof that the spending problem has been solved.  

That distinction matters even more because the state has now enacted major income tax reform through H.4216. Beginning in tax year 2026, the law sets a 1.99 percent rate on taxable income up to $30,000 and 5.21 percent on taxable income above $30,000, while creating a legal path to keep reducing the rate until the income tax is eliminated. 

That is a major achievement and a meaningful move toward a flatter, lower, more competitive tax code. But lawmakers should be clear-eyed about the law’s weakness.

Future rate cuts are tied too much to projected revenue growth and not enough to actual surplus buydown through spending restraint. 

Under the official fiscal impact statement, the tax rate falls only if projected individual income tax revenue, net of transfers to the Trust Fund for Tax Relief, is expected to grow by at least 5 percent in the following fiscal year. The annual cut is then sized to reduce revenue by about $200 million or 25 percent of the recurring income tax revenue surplus, whichever is greater. 

That is better than no trigger at all. But it still puts too much emphasis on what forecasters think revenues might do and not enough on what lawmakers can actually control, which is spending.  

A better approach is straightforward: make surplus buydown the priority.

If lawmakers keep recurring spending at or below the Responsible Budget limit each year, then excess recurring collections should automatically go to reducing the income tax rate. That keeps the focus where it belongs. 

The goal should not be to wait and hope revenues come in high enough to unlock relief. The goal should be to spend less than taxpayers send in, preserve the surplus, and use that surplus to drive the income tax to zero faster.

That is what responsible budgeting looks like.

It is also what a free-market approach requires. Government does not create prosperity. Families, workers, entrepreneurs, and investors do. The more money lawmakers leave in the private sector, the more room there is for investment, hiring, wage growth, and upward mobility. 

When the government grows more slowly than the economy, people prosper faster.

The current budget debate is important because it tests whether lawmakers are serious about that principle. The Senate’s version of the budget has now passed and been sent to the House. That means there is still time for discipline to hold or for old habits to return. 

Conference committee could still push spending higher. And if future revenue estimates rise, the temptation will be to spend more instead of cutting taxes faster.  

That would be the wrong lesson.

The right lesson is this: take the win on recurring spending, then build on it. Keep recurring appropriations under the Responsible Budget limit. Make that restraint the rule, not the exception. And use recurring surplus dollars to buy down income tax rates until the tax reaches zero.