The South Carolina Legislature is considering House Bill 3526, new legislation that would eliminate the imposition of the income tax on individuals, estates, and trusts in the Palmetto State.
Throughout recent legislative sessions, many elected officials have turned their sights towards state revenue and budgets. Legislative sessions have been particularly unique following the COVID-19 economic downturn, which has been exacerbated by the highest level of inflation in 40 years.
These economic worries have galvanized many legislatures and governors to advocate for harmful economic policies, such as increases in income taxes and minimum wage hikes. HB 3526 attempts to buck this trend by eliminated the income tax on individuals, estates, and trusts. This move would incentivize South Carolinians and small business owners to remain in the Palmetto State, instead of relocating to places like Florida or Texas, which have no state income taxes.
Inversely, high state income taxes motivate productive residents to move to other states with more favorable tax codes, and these wealthy taxpayers transport their income, capital, and tax revenues with them.
Examples of this phenomenon have occurred in New York and other states with excessive state income tax burdens. Many of these states are experiencing mass population exoduses due to the fallout surrounding the COVID-19 pandemic and accompanying lockdown orders from mostly Democratic leaders. According to the U.S. Census Bureau, net domestic out-migration from 2010 through 2019 saw 1.4 million leaving New York; 912,000 deserting California; and 865,900 fleeing Illinois.
Moreover, the rosy revenue projections from higher tax rates have fallen short in states where they have been imposed. Relying on a steep income tax rate with a small base is historically unreliable and can lead to large budget deficits. It is evident that lawmakers in the South Carolina House of Representatives understand this economic fallacy by introducing HB 3526.
House Bill 3526 would likely spur Americans to consider moving to South Carolina, effectively expanding the tax base and adding to the Palmetto State’s growing economy.
Personal income and corporate tax hikes are generally considered to be the most destructive economic policies because they deter production, stifle innovation, and disincentivize investment. Recent studies show states with no income tax or with low-income tax rates perform better economically while facilitating population growth and job creation.
On the other hand, high income taxes discourage economic development by dissuading high-income earners and new capital from moving into a state. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.”
States with high tax rates grow more slowly than states with lower taxes, after considering for other control factors. A ranking of all states by their overall tax burden ultimately shows that real personal income grows more on average in the states with the lowest state and local taxes as a percentage of income.
Keeping all of this in mind, South Carolinians should carefully consider all of the positive economic growth that would likely occur after eliminating the state’s personal income, estate, and trust taxes. As the country prepares for a likely recession, taxes are not a viable economic solution, particularly income and estate taxes. All states should follow the lead of House Bill 3526 instead of turning to destructive and unreliable tax hikes.
The following articles provide more information about state income tax and the associated economic effects.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Federal Tax Reform: The Impact on States
https://taxfoundation.org/federal-tax-reform-the-impact-on-states/
Nicole Kaeding and Kyle Pomerleau of the Tax Foundation examine the effect of the federal tax reform on the states and how they can use the changes to push for tax reforms of their own.
Tax Reform Moves to the States: State Revenue Implications and Reform Opportunities Following Federal Tax Reform
https://taxfoundation.org/state-conformity-federal-tax-reform/#9
This paper by Jared Walczak of the Tax Foundation discusses what options are available to states as they respond to federal tax changes. “In the wake of federal tax reform, states have a golden opportunity to move their own tax codes in a more simple, neutral, and pro-growth direction,” writes Walczak.
Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.
Taxing the Rich Will Bankrupt Your State
https://heartland.org/publications-resources/publications/taxing-the-rich-will-bankrupt-your-state
John Nothdurft explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
