Gov. Mark Sanford’s proposal to gradually cut the state’s top income tax rate by nearly one-third (from 7 percent to 4.74 percent) not only threatens to undermine South Carolina’s efforts to build an education system capable of meeting the new economy’s demand for knowledge and skills, but also represents flawed tax policy and a misguided approach to economic development.

Rather than create jobs and generate investment in South Carolina, this wrongheaded tax-cut proposal writes a prescription for long-term economic stagnation and inadequate education.

The most important reason the Legislature should reject it is the long-term damage it would inflict on the state’s struggle to build a high-wage, high-salary, knowledge-based economy. Flying in the face of two impressive reports insisting that the road to enhanced economic competitiveness is not paved with low wages or low taxes but with higher levels of education and enhanced job skills, the governor is recommending a plan that would ultimately cost the state nearly $1 billion in annual revenue.

Under the proposed cut, South Carolina’s public schools, along with its colleges, universities and technical schools, would continue to face chronic and worsening funding problems. Yet these are the institutions best-positioned to transmit and create the knowledge and skills that lie at the heart of the high-wage economy.

Moreover, no compelling evidence indicates that South Carolina’s current levels of taxation place it at a competitive disadvantage. Indeed, by all objective measures, South Carolinians pay much lower taxes than most other Americans. A 2004 study of combined state and local tax burdens in the United States by the nonpartisan Tax Foundation revealed that South Carolina had the seventh-lowest state and local tax burden (9 percent of total income) in the nation last year. Taxpayers in 43 states paid a higher percentage of their incomes in state and local taxes. Additionally, South Carolina’s total tax burden remained substantially lower than those of Georgia and North Carolina.

There is a litany of reasons why the proposed cuts in income tax rates represent bad tax policy. First, the proposed change would make the state’s tax system significantly more regressive, increasing unfairness in a system already in need of a major overhaul. State economist Bill Gillespie has estimated that the richest 1.7 percent of taxpayers would receive nearly 25 percent of the proposed cuts, while 50 percent of all taxpayers would receive virtually no benefit.

Additionally, the lowering of income tax rates would disrupt the healthy balance in the state tax base, inevitably shifting the tax burden toward the sales and property taxes. While hardly progressive as currently structured, the state income tax is the least regressive tax relied on by the state.

The sales tax, currently the workhorse of state and local governments, hits lower- and middle-income families much harder than the well-to-do. Local property taxes, the most-criticized tax in the state, are a special hardship for low- and fixed-income property owners. Lowering income tax rates would inevitably increase the state’s overall reliance on these more regressive taxes.

Also, the proposed income tax cut would take substantially more money out of the state treasury than it would return to taxpayer wallets. Because state income taxes are deductible on federal returns, lower state tax rates would lead higher-income taxpayers to pay more in federal taxes. This loss of the federal deduction would siphon off 20 percent to 25 percent of the lost state revenue to the federal government as a result of the rate cut.

Finally, the argument that the proposed tax cut would enhance economic development efforts in South Carolina looks unpersuasive when examined carefully. After paying increased federal taxes, Palmetto taxpayers could either spend or invest the remaining money, but there is no guarantee (or even incentive) for them to do either in South Carolina. Investments, in particular, are normally made in active and fluid national and international capital markets, and nothing about the income tax cut earmarks money for investment in the Palmetto State.

Using tax incentives to promote economic development is a time-tested strategy, one generally well-used by South Carolina since the 1950s. But historically, these tax incentives have been targeted specifically to businesses that invest capital and create jobs in South Carolina. These focused tax-incentive packages doubtless need refinement in light of the new economy, but they represent laser-like sharpness compared with the unproven scatter-gun approach of the governor’s plan.

It is imperative that South Carolinians interested in the state’s long-term progress and prosperity work together to make sure this shortsighted measure does not become law.

Dr. Ford is a professor of history at the University of South Carolina specializing in the political and economic history of the American South and twice a National Endowment for the Humanities Research Fellow.