The Senate approved a plan Wednesday to cut taxes on South Carolina’s small businesses — setting up a showdown with the House over Gov. Mark Sanford’s broader, more expensive income tax cut.

Sanford’s proposal, approved by the House in February, would apply to anyone who falls into the state’s top income bracket. Senators voted Wednesday to lower the income tax rate on small businesses to match what large corporations pay.

The Senate rejected Sanford’s plan Wednesday when it killed an amendment that closely mirrored the larger cut by a vote of 33 to 10.

“What we passed is responsible, reasonable tax reform,” said Sen. Joel Lourie, D-Richland.

The Senate bill, sponsored by Finance Committee chairman Hugh Leatherman, R-Florence, would drop the tax rate on small-business income to 5 percent from the current 7 percent.

The plan, supported by some business groups, is expected to cost the state about $128 million in tax dollars over five years.

“It puts money back into that small business and fires up entrepreneurs to grow businesses,” said Michael Fields, director of National Federation of Independent Business/South Carolina.

Because the Senate and House tax plans differ, lawmakers from both chambers will negotiate a compromise. That conference committee could meet in the next couple of weeks.

Leatherman, noting that his bill got the support of all but five of the 46 senators, said they’re unlikely to back down.

“The Senate has taken a very a strong position,” he said. “It may be a very long conference.”

The House version would cut income taxes to 4.75 percent from 7 percent over a decade. Anyone earning a taxable income of more than $12,650 would see some reduction.

That proposal worries some lawmakers because state economists estimate it would take more than $1 billion out of state coffers over the next decade.

Sanford and others argue the tax cut would pay for itself by increased purchasing and attracting retirees and corporate headquarters to the state.

“There’s a real divide now on where we go next,” Sanford said. “If you really want to impact people’s propensity to work, if you want to impact capital formation and job creation, you’ve got to look at cutting marginal rates.”

But Bill Gillespie, the state’s chief economist, testified last week before a Senate committee that broad tax cuts no longer pack the kind of “spinoff effect” that could revitalize the economy.

House Speaker David Wilkins, R-Greenville, disagrees.

“It’s just common sense to me that if you let people keep their hard-earned dollars, they’re not going to put it in a tin can and put it in the back yard,” Wilkins said.

Reach Stensland at (803) 771-8358 or jstensland@thestate.com.