South Carolina reduced its top income tax rate from 6.4 percent to 6.2 percent (after an initial drop from 7 percent to 6.5 percent under a 2022 law), with the goal of bringing it down later to 6 percent.
But North Carolina has gone much farther, lowering its flat income tax rate from 4.5 percent to 4.25 percent, with plans to further reduce it to 3.99 percent next year. North Carolina is also on pace to lower its corporate rate to zero by 2030, if it continues to meet its revenue forecasts.
If no changes are made after the income tax cuts passed in 2022 are fully implemented, South Carolina’s top marginal rate will remain at 6 percent, the highest in the Southeast. If South Carolina hopes to compete with its neighboring states, lawmakers must prioritize lowering income tax rates, ultimately aiming for full elimination.
Why hasn’t deeply conservative South Carolina matched North Carolina and other red states in enacting significant income tax cuts?
The answer lies in South Carolina’s persistent spending problem. Over the past decade, the state’s general fund budget has ballooned. Excluding the anomaly of the COVID-19 pandemic, South Carolina’s general appropriations have grown year over year for more than a decade.
In fiscal year 2013, the general fund budget was $6.6 billion. By fiscal year 2025, which started last July, it had more than doubled, reaching $12.4 billion. This growth reflects a lack of spending restraint and creates a significant barrier to achieving meaningful tax reform.
A major driver of this spending increase is the state’s rapid population growth. South Carolina has been the fastest growing state in the nation for the past two years. But state spending over the last dozen years has increased well beyond combined annual rates of population growth and inflation.
The growth in South Carolina’s budget is driven by a combination of factors, many of which lack clear justification. Addressing government spending is politically challenging, as both lawmakers and citizens are hesitant to eliminate incentive programs. However, reducing unnecessary expenditures is critical to achieving meaningful fiscal reform.
One area ripe for cuts is economic development incentives. Providing handouts to wealthy corporations under the guise of recruitment, such as the $1.3 billion package offered to an EV auto manufacturer last year, undermines free-market principles. The state should not be in the business of picking winners and losers in the economy.
Additionally, South Carolina has repeatedly subsidized costs that distort the market. For six consecutive years, in-state college tuition has been frozen at the expense of taxpayers, as have state employee premiums for 13 years. Although politically popular, these policies transfer financial burdens to taxpayers and suppress competition, which is essential for achieving fair pricing.
True free-market economics requires limiting government interference, not expanding it. These examples display how unchecked spending has contributed to year-over-year budget growth. If South Carolina is serious about tax relief, it must first confront its spending problem head-on.
The South Carolina Policy Council recommends adopting the South Carolina Sustainable Budget model, which limits spending growth to the rate of population growth plus inflation.
This approach ensures that government spending grows only at a pace taxpayers can afford. It does not dictate how money should be spent but provides a framework to cap total expenditures.
This session could be promising. South Carolina lawmakers have shown significant interest in more aggressive tax cuts. GOP state Rep. Jordan Pace has filed a bill to eliminate the state’s individual income tax entirely, while Republican state Sen. Josh Kimbrell has proposed reducing the rate to a flat 3.5 percent.
Our legislators should follow North Carolina’s example by focusing on comprehensive tax reform paired with responsible spending constraints. Achieving lower, competitive tax rates is essential to attracting businesses and new residents to the state.
Sam Aaron is the research director at the South Carolina Policy Council, the state's longest-serving independent, nonpartisan free market research organization.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
