A lot has changed.

Today the average salary in America is nearly 10 times what it was in the '50s, cars cost a small fortune and TVs not only have color, they are as thin as an envelope and as big as a drive-in.

But some things never change, at least not in South Carolina.

Gov. Mark Sanford recently announced a proposed economic stimulus package that will be one of his primary goals this upcoming Legislative session. A linchpin of the plan is a 15 percent income tax cut that would lower the top rate from 7 percent to 5.9 percent.

It is the first time in a long while that any administration has focused specifically on the state income tax, surprising given the fact that South Carolina has changed the rate only slightly since Elvis was king. Set in a time when salaries and the cost of living were but a fraction of today, the state's income tax code is a relic so out of touch that it is probably too late, and too costly, to fix, officials say.

The current income tax rate was enacted in 1959 and set the highest tax rate at 7 percent for people who earned more than $10,000 in taxable income. At the time, the average South Carolinian was making far below that.

In the 44 years since, inflation has been exponential, increasing both salaries and the cost of living. Today the average South Carolinian has a per capita income of $25,400, according to the U.S. Bureau of Economic Analysis.

The state's income tax, however, has shifted only modestly. In the 1990s the income tax brackets were widened and the highest tax rate was pushed up to $12,300.

Ultimately this means that today most people in the state pay the highest possible tax rate.

"You hit the maximum very quickly, that's for sure," said Richard White, a professor at the University of South Carolina and chairman of its accounting program. "In fact, South Carolina basically has a flat tax, because nearly everyone working full time earns enough to pay the highest rate."

The federal income tax rate shifts year to year to address changes in the economy. To do this it uses the Consumer Price Index, a rate that measures the change in the cost of goods and services over time.

For example, in 1960 you could buy two loaves of bread in Charleston for 29 cents and a movie ticket for 60 cents. Today a loaf of bread costs about $2.50 and a movie ticket costs about $7.50.

Since the state's income tax rate was first set, the CPI has increased 620 percent. Most states index the state income tax to the national rate of inflation, piggybacking the changes on the federal level.

In the mid-90s, the South Carolina Legislature passed a law that adjusted the income tax brackets by half the federal rate, not exceeding 4 percent. Legislators stopped short of full indexing because it simply would have cost the state too much. It was not the first time such a decision was made.

According to Senate Pro-Tem Glenn McConnell, the Legislature passed a measure in the '80s that would have piggybacked the federal rate. But the following year, before the measure was implemented, legislators voted to suspend it. The idea eventually died.

"We got in a big fight over it," he said. "That was back when President Reagan was doing something similar on the national level, and many of us felt it was a blueprint for growth in the state. But they couldn't figure out how to make up for all that money."

According to the state Board of Economic Advisers, if the state were to index income taxes fully today, the 7 percent tax bracket would not kick in until a person reached $74,000 in taxable income.

That would mean lower taxes for many people. The average South Carolinian pays $1,667 in income taxes every year under the current system. If the state were to fully index to the Consumer Price Index, that number would drop to about $790.

Such a change would cost the state $1.5 billion in tax revenues, a huge budget hit in even the best economic climate. This has led many legislators to consider tweaking the code, which is exactly what the governor suggests.

The state, which has a total budget of about $5 billion, currently faces a $350 million deficit. The governor says his plan would provide about $222 million in immediate income tax relief and make the state competitive in attracting jobs and capital investments. The loss of tax revenues would be made up by a 61-cent increase in cigarette taxes and the institution of a sales tax on lottery tickets.

The federal government wrestled with income taxes during the 1970s. Inflation skyrocketed, and the tax brackets used on a national level were too rigid to adjust for shifts in the economy. Reagan led a push to revise the tax code that resulted in a more flexible system.

"The country was experiencing what was called 'bracket creep,' " said Calvin Blackwell, a professor of economics at the College of Charles-ton. "The brackets were not keeping up with the times. And that's exactly what has happened here."

Blackwell said South Carolina has a tax policy that moved from progressive to regressive. A progressive policy places a heavier burden on people in the higher income bracket. A regressive policy puts the burden on people at the lower end of the salary spectrum.

For Blackwell, it comes down to a question of fairness. "When we allow the brackets to stay the same, we have moved from progressive to regressive," he said. "And whether that's a good thing or a bad thing depends on what you believe."

Over the years the state has addressed the income tax issue through numerous deductions, which lower the base amount of taxable income a person has to claim. While most states have similar deductions, South Carolina's are substantially larger than those allowed by its neighbors.

In South Carolina a married couple filing jointly can take a $7,600 deduction. That same deduction is $5,000 in North Carolina and $3,000 in Georgia.

The South Carolina head-of-household deduction is $6,650, while North Carolina's is $4,400 and Georgia's is $2,300. In fact nearly all the state's deductions and exemptions surpass those of neighboring states. According to the BEA, these deductions help lower the actual amount of income taxes paid in the state to about 5.5 percent. And several economists in the state estimate the amount paid is closer to 3 percent.

"That's why I say income taxes are not a problem in this state," said state Rep. John Graham Altman III. "I never hear anyone complaining about it, really. What I hear is people complaining about property taxes."

Will Folks, a spokesman for the governor, acknowledged that income tax reform is not necessarily the highest priority for some people. But, Folks said, when trying to spur capital investment and small business creation in the state, the income tax is vital. So far, the governor has not released a detailed account of how the code would look if his plan passed.

Click here to return to story:
http://www.charleston.net/stories/112803/loc_28tax.shtml