The dawn of 2025 ushers in a wave of income tax cuts across numerous states, prominently featuring North and South Carolina. North Carolina’s flat income tax rate will decrease from 4.5% to 4.25%, a continuation of a multi-year effort to significantly reduce its previously high rate of 7.75%. Future reductions are planned, potentially reaching a nation-leading low of 2.49% if revenue targets are met. This aggressive approach has transformed North Carolina’s tax landscape, positioning it as a highly competitive state for businesses and individuals. South Carolina also welcomes 2025 with a reduction in its top marginal income tax rate, from 6.4% to 6.2%. This change is part of a phased reduction plan established in 2022, ultimately targeting a 6% top rate. However, key legislative figures in South Carolina, including House Speaker Murrell Smith, have signaled their intention to pursue further tax reductions in the upcoming legislative session, emphasizing the importance of remaining competitive with neighboring states that have enacted substantial tax reforms.
The momentum for tax relief in South Carolina transcends party lines and legislative chambers. Speaker Smith highlights the disparity between South Carolina’s top marginal rate and those of competing states, arguing that this higher rate puts South Carolina at a disadvantage in attracting investment and talent. He points to the trend of “monumental tax reform” in other states as justification for further reductions in South Carolina. This sentiment is echoed in the Senate, with prominent members like Senator Sean Bennett advocating for comprehensive tax code reform to address structural flaws and enhance competitiveness. Senator Josh Kimbrell has even proposed legislation to implement a flat 3.5% income tax rate, a move that would drastically reposition South Carolina from having the region’s highest rate to one of the lowest, trailing only Florida and Tennessee, which have no income tax.
While South Carolina’s overall tax burden is currently lower than that of its neighbors, the focus remains on the perceived negative impact of the high top marginal rate. This rate, even with the scheduled reductions, remains higher than those in neighboring states like Georgia and North Carolina, as well as in other states vying for the same investments and workforce. Despite the lower average burden, the optics of a high marginal rate are seen as a deterrent to potential investors and businesses, hindering South Carolina’s economic growth. The argument is that a lower, more competitive top rate will attract higher earners and businesses, ultimately boosting the state’s economy and generating more revenue. This perspective emphasizes the psychological impact of tax rates on economic decision-making, suggesting that a lower top rate, even if offset by other taxes, sends a more positive signal.
Beyond the Carolinas, seven other states are also implementing income tax cuts at the start of 2025. This coincides with the anticipated extension of the federal personal income tax cuts enacted in the 2017 Tax Cuts and Jobs Act under President Trump. These federal changes, potentially including the reinstatement of full expensing for capital expenditures and research and development, will further compound the tax relief experienced by residents of these states, including South Carolina. This confluence of state and federal tax reductions creates a unique situation for South Carolinians, placing them among a select group experiencing tax relief on both fronts. This dual benefit is expected to boost disposable income and potentially stimulate economic activity within the state.
The underlying theme driving these tax cuts is the growing emphasis on interstate competition, particularly in the southeastern United States. States are increasingly viewing tax policy as a critical tool for attracting businesses, investment, and high-earning individuals. The trend toward lower income tax rates, and in some cases, a shift to flat tax systems, reflects this competition. States are vying to create the most favorable tax environment to stimulate economic growth and improve their relative standing. This race to the bottom, while potentially beneficial for taxpayers in the short term, raises questions about the long-term implications for state revenue and public services.
The debate surrounding these tax cuts hinges on the balance between attracting economic activity and maintaining adequate funding for essential government services. Proponents argue that lower taxes stimulate economic growth, generating more revenue in the long run despite the initial reduction. They contend that a dynamic economy attracts businesses and individuals, ultimately broadening the tax base. Critics, however, express concerns about the potential negative consequences for public services, such as education and infrastructure, if tax revenues decline significantly. They advocate for a more balanced approach, emphasizing the importance of investing in public goods to support long-term economic prosperity. The ongoing debate in South Carolina reflects this broader national tension between tax competitiveness and the need for sustainable public funding.
