S.C. income tax rates aren’t nearly as high or as flat as they look

THE RAP ON South Carolina’s individual income tax is that it’s high and it’s flat.

On paper, it’s both.

In the real world, where real people pay their income taxes, it is neither.

The confusion comes because, like practically everything else about South Carolina’s tax system, the income tax code is filled with tons of exemptions and deductions that skew the numbers.

That means that while charts comparing our income tax rates to those in other states show that we top out at an incredibly high 7 percent when you reach an adjusted gross income of just $12,000, no one pays that rate.

There’s no practical way to say exactly what the top tax rate is, or when it kicks in, because the first $12,000 of income is taxed at a lower rate, and our income tax code is filled with a variety of standard deductions and exemptions and credits and non-standard deductions. Together, these items serve to lower the effective tax rate and create countless different effective tax rates.

A couple of sets of numbers illustrate the effect, and demonstrate how far from reality are those national tax charts that show we have the 13th highest tax rate in the nation and start collecting that top rate sooner than any of the higher-tax states.

The state Revenue Department uses actual tax returns to show the total taxes paid by everyone, by income classes. Using these figures, you can calculate the average tax rate paid at various income levels. For instance, people whose taxable income is $12,000 actually pay an average of 3.9 percent of that income to the state. The effective tax rate hits 5 percent at about $20,000 taxable income, 6 percent at $75,000 and a maximum of 6.6 percent at $350,000.

The state’s chief economist, Bill Gillespie, has done a complex analysis that calculates tax rates for hypothetical individuals and families at various income levels in our state and other states. His numbers are slightly different, but the pattern holds. His hypothetical individual with an adjusted gross income of $20,000, for example, pays $531 in income taxes — or 2.7 percent of that income. The effective tax rate hits 4.1 percent at an income of $30,000, 5.3 percent at $50,000, 6 percent at $90,000 and 6.9 percent at $1 million. The rates start out lower for families but reach a similar level — 6.8 percent — at $1 million.

When he compared the tax burden for his hypothetical families to the actual tax burden in 11 other Southeastern states, along with New Jersey, Ohio, Pennsylvania and New York, Mr. Gillespie found that the effective income tax rate that most South Carolinians pay is on the low side. Both individuals and families with adjusted gross income of $10,000 or less — more than half of South Carolinians — pay lower taxes than people in 13 of the 16 states studied. (Two of those 16 states don’t collect an income tax.)

The tax rate for singles jumps to eighth at $20,000 and then lunges into the top five for higher income levels; but the effect is limited, since only a quarter of all tax filers — including couples and families — have taxable incomes of more than $20,000. The rate for the hypothetical family of four ranks 13th out of 16 at incomes of $20,000 and $30,000, rises to 10th at $40,000 and hovers at eighth and seventh until you reach $90,000. It tops out at the third highest for the 2 percent or less of families with incomes of $150,000 or more.

A national comparison by the District of Columbia government looked at income taxes for five hypothetical families in the largest city in each state. In the 43 cities where income taxes are collected, our taxes ranked 28th highest for a family with an income of $25,000 a year, 22nd for the $50,000 and $75,000 families, 21st for the $100,000 family and 20th for the $150,000 family. In other words, for all but the poorest family, we’re right in the middle.

What this means is simply this: We need to pose some serious questions about the arguments being made for lowering our income tax rates; and we need to understand what the cost is of lowering the tax rates.

If you lower the income tax rates as part of a comprehensive overhaul of the state and local tax code, as House Republican Leader Rick Quinn and Democratic Sen. Vincent Sheheen propose, then the cost is to those individuals who end up paying more in other taxes than they save in lower income taxes. If you lower income tax rates without raising any other tax, as Gov. Mark Sanford and pretty much the entire House proposed on Tuesday, then everyone gets a tax break, but they get fewer teachers in the classrooms, fewer troopers on the highways, fewer people guarding prison inmates and fewer prescription drugs being provided to the poor.

If your goal is to attract businesses and entrepreneurs who use those national tax charts to make decisions about where to live, as Mr. Sanford says his goal is, there are less disruptive approaches than the one on a fast track in the House. For example, if you lowered or eliminated some of the standard deductions, non-standard deductions, exemptions or credits, you could also lower the tax rates, and still collect the same amount of money.

If, on the other hand, your goal in lowering the income tax is to starve government, to make sure that it doesn’t provide services that it has traditionally provided, this latest proposal does the trick.

Ms. Scoppe can be reached at cscoppe@thestate.com or at (803) 771-8571.