Economic Development Update - Comprehensive Tax Cut Act of 2022

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On June 15, 2022, both the House and the Senate of the General Assembly unanimously passed the Comprehensive Tax Cut Act of 2022 (A228, R259, S1087). 

Governor McMaster signed the Act into law two days later on June 17, 2022.  The Act significantly impacts the State and local tax regime in South Carolina, both with respect to property taxes as well as State income taxes.  Below is high-level summary of the legislation, which has already taken effect in South Carolina.

Manufacturer’s Property Taxes

First, and most importantly to York County and its manufacturer taxpayers, the Act effectively lowers the standard/non-incentivized assessment ratio (one of the three variable in the property tax calculation) for “manufacturing property” down to 6%.  “Manufacturing property” includes “all real and personal property owned by or leased to manufacturers and used by the manufacturer in the conduct of [its] business.”  Actual property tax assessment ratios are found in the State Constitution. Accordingly, for decades, the actual, and effective, assessment ratio applicable to manufacturers was 10.5%.  However, in 2021, and in light of the challenges in amending the State Constitution, the General Assembly adopted a workaround to effectively reduce the assessment ratio applicable to manufacturers by adopting a phased-in property tax exemption applicable to the taxable value of “manufacturing property”, which effectively reduced the applicable assessment ratio to 9% over a six-year period.  With the Act, the General Assembly has now amended the prior exemption and, again, reduced the property tax value such that the effective assessment ratio applicable to manufacturers is, effective immediately, 6% (the applicable assessment ratio in many fee in lieu of tax arrangements).

The Act further increases the prior 2021 revenue loss reimbursement cap for taxing entities from $85 million to $170 million.  Additionally, as the increased exemption applies to both existing and new manufacturing property in the State, it is likely to impact both existing and new property tax incentive arrangements (i.e., fee in lieu of tax and special source revenue credit arrangements) throughout the State.  Despite the Act, there are still advantages to both manufacturers and, even, counties in entering into fee in lieu of tax arrangements with manufacturers.

Reduction of Individual Income Tax Rates

While South Carolina has a very pro-taxpayer individual income tax (IIT) base (i.e., federal taxable income), it has historically had a very high IIT tax rate with a 7% tax rate for its highest tax bracket.  This has continued to cause perception problems for the State and efforts have been underway for years to reduce the rate.  The Act reduces the IIT rate to 6.5% for taxable years after 2021, and beginning with tax year 2023, the top rate decreases by one-tenth of one percent if General Fund revenues increase by at least 5% until it reaches 6% in tax year 2027.  The remaining current tax brackets – 4%, 5% and 6%— have all been reduced to 3% immediately.  What follows is a sample of what the tax rate cuts will be worth, on average, based on taxable income ranges, and how many tax filers are in each group:

• 206,449 tax filers between $5,000 and $10,000 — $17
• 249,770 between $20,000 and $30,000 — $245
• 136,503 between $40,000 and $50,000 — $351
• 63,891 between $70,000 and $80,000 — $511
• 40,917 between $125,000 and $150,000 — $839
• 7,060 between $500,000 and $1 million — $3,660
• 2,337 above $1 million — $13,453

If, as planned, the highest tax rate is eventually reduced to 6 % for tax year 2027 returns, a family with between $70,000 and $80,000 in taxable income would save $929 compared to prior tax rates. Those with $1 million-plus of taxable income would average $29,926 in savings that year.

Income Taxes Military Retirement Income

The Act also provides that an individual taxpayer may deduct all military retirement income from taxable income for South Carolina income tax purposes.  Stated another way, military retirement income will be State income tax-free — which is estimated to collectively save military retirees approximately $8 million next year alone.  Though not specifically stated in the Act, the intent behind this change is to attract and retain military retirees to South Carolina with an eye on bolstering our workforce.