Economy & Jobs

Consumption or Income? The South Carolina Income Tax Debate

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Governor Nikki Haley’s plan to improve state roads includes a gradual reduction in the South Carolina income tax rate from 7 to 5 percent and an increase in the state’s consumption tax on gasoline by 10¢ per gallon. This has South Carolina leading the debate between income tax and consumption tax rates. How does replacing one tax for another help the middle class?

As the country inches closer to the 2016 presidential election, this debate could quickly expand past the southern state’s borders. And while Haley’s plan might sound like a great trade-off for everyone, there are some critical issues involved in this major change in the state tax code.

Consumption Is Assumption

Sales and gas taxes are personal consumption taxes, and the governor’s plan is a flat rate, which means all motorists in the state of South Carolina will pay the same amount for gas despite personal income levels. The assumption behind this plan is that everyone needs gas, therefore, it would be an equal rate for all consumers (in-state citizens and those driving through) and guarantees revenue for the state.

The assumption is also that better roads will lead to increased driving. According to The State, “the amount of pavement on primary roads rated in good condition would double and the percentage of traffic riding on good roads would swell to 48 percent from the current 29 percent.” What this assumption doesn’t take into account is a potentially reduced demand for gas at a higher price, the increased use of hybrid and electric vehicles, and potential impact on public transportation.

Weighing Out the Options

Looking at state gas taxes across the board, South Carolina is currently one of the lowest state gasoline taxes in the nation at 16.75¢ per gallon (not including federal excise taxes), according to the American Petroleum Institute. Gas taxes in this state look especially appealing in comparison with neighboring North Carolina, currently at 37.75¢ per gallon in state taxes and fees. Governor Haley’s plan to raise the gas tax by 10¢ per gallon would still place South Carolina below the national average of 29.89¢ per gallon, and still be an appealing alternative for those driving from North Carolina.

However, the South Carolina income tax rate is one of the highest in the Southeast, at 7 percent. The second half of the plan would gradually decrease the income tax rate from 7 to 5 percent in the next 10 years, allowing more families to keep a little extra in their pocket.

Where Taxes Are Invested

Governor Haley’s plan to increase in the state’s consumption tax not only aims to recover the loss of the income tax reduction, but also improve state roads and highways. But where else does taxpayer money go? According to the Center on Budget and Policy Priorities, in 2012, the District of Columbia and the 50 states spent slightly over $1 trillion in state revenue on the following expenditures:

  • K–12 education: 25 percent
  • Medicaid: 16 percent
  • Higher education: 13 percent
  • Corrections: 5 percent
  • Transportation: 5 percent
  • Public assistance: 1 percent
  • Other (i.e. pensions, assistance to low-income families, environmental projects, etc.): 34 percent

A progressive increase in the consumption tax on gas could be a step in the right direction, but as you can see from the above, states require quite a bit of revenue to function properly. Many argue that consumption taxes, unlike income taxes, aren’t stable sources of revenue. But others debate that consumption taxes leave the level of taxation in the hands of the consumer. Either way, more money in your paycheck makes this debate a little easier.