As the S.C. General Assembly looks to do “tax reform,” a new report, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States by the D.C.-based Institute on Taxation and Economic Policy [ITEP] illuminates the flawed premise which underlies the effort to make our taxes “lower, flatter and fairer”.

Focused especially on lowering income tax rates for upper income taxpayers, those efforts would push income tax burden further down the income scale. Looking at state and local taxes as a whole, the distribution of taxes paid by SC families is already, compared to most other states, relatively flat across income groups, except that our highest income families contribute a lower percent than most South Carolinians. Shifting income tax shares from upper income families onto lower-income families makes our tax system less flat and less fair … not more.

Who Pays? shows that our lowest income families, those below $19,400 annual income in 2015, pay 8.3 % of their income to state and local taxes under laws in effect on September 10, 2018.[1] For the top 1 % of family incomes, above $416,000, only 6.8 % of that income goes to state and local taxes. Our state and local taxes are regressive when our lower-income families are contributing more as a share of income than our wealthiest families.

Driving differing shares at different income levels, the below table shows, is that the bulk of tax revenues come from progressive taxes on income and regressive sales and excise taxes. When you combine them with the moderately regressive property tax, you produce a combined tax burden that is higher on poor people (and the middle class) than on our wealthiest families.

So, to improve fairness, we should fix the particularly regressive features of our income tax code:

• Make our Earned Income Tax Credit refundable so that those who don’t owe income taxes can access it.
• Tax ordinary income and capital gains at the same rate, instead of ignoring 44 % of capital gains income.
• Tax pass through income at the same rate as other personal income.
• Make any tax credits that offset sales, excise or property taxes refundable so that lower-income households can access those credits.
• Reimpose the tax on large estates and inheritances.

At the same time, when the General Assembly looks at sales taxes, the way to lower sales tax rates is to expand sales taxes on services and not onto the higher-dollar exemptions on items like groceries, drugs, and household electricity and water that make our overall tax system less regressive.

And, as nearly every member of the General Assembly knows, they should repeal Act 388 that eliminated property taxes for school operations on owner-occupied homes. They paid for it, largely, by increasing the regressive general sales tax and shifted property tax burdens onto businesses and renters. That would take more courage than anyone believes they have.

As the General Assembly moves to “tax reform” discussions in 2019, there should be a full recognition that there are no “noncontributors”. All South Carolina families pay taxes and families in the lowest 20 percent of incomes pay 22 % more in state and local taxes as a share of income than those in the top 1 percent. If they only look at income taxes, they will not see the whole picture.

[1] South Carolina adopted  H. 5341 on October 3, 2018 to update our conformity and nonconformity with federal tax law. Analyses of that legislation suggests that the final bill has a slightly progressive effect, though not enough to change the general shape of the distribution in South Carolina as described in Who Pays?