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Charleston Business

Today's Other Number: 33

By Kevin Dietrich

Palmetto State business owners aren’t too optimistic when it comes to the state’s tax environment, which for years has been criticized as hindering development.

Washington, D.C., nonprofit The Tax Foundation reinforces that vexation with its latest State Business Tax Climate Index, which once again ranked South Carolina in the bottom half of the nation, at No. 33. Sales tax rates, individual income tax rates and property tax rates, which rank 31st, 34th and 34th nationally, respectively, hold the state back, according to The Tax Foundation.

Keeping South Carolina from finishing lower is the state’s corporate tax rate, fifth nationally, and its unemployment insurance tax rate, 24th overall, according to the foundation’s index, released late last year.

“Being in the bottom third is absolutely nothing to brag about. We have a lot of room for improvement,” said Swati Patel, interim CEO of the South Carolina Chamber of Commerce. “Regarding The Tax Foundation’s ranking of us, it’s abysmal. It’s terrible.”

In the Southeast, Florida ranked fourth; North Carolina, 10th; Tennessee, 18th; Georgia, 31st; Mississippi, 32nd; Alabama, 41st; Louisiana, 42nd; and Arkansas, 45th.

The top five states overall are Wyoming, South Dakota, Alaska, Florida and Montana. The bottom five are Minnesota, Connecticut, New York, California and New Jersey.

The business tax climate index is designed to show how well states structure their tax systems and also provides a road map for improvement. 

The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax or the sales tax. 

North Carolina benefits from its corporate tax rate (ranked fourth), unemployment insurance tax (10th), and individual income tax (16th), while its sales tax (22nd) and property tax (26th) were ranked middle of the pack. 

Georgia has a low corporate income tax, coming in at No. 7, but its property tax ranked 24th,

followed by sales tax, 27th, individual income tax, 36th, and unemployment insurance tax, 39th.

“Our income tax, for example, is something that always comes up in conversations with corporations,” Patel said. “They ask, what are we trying to do about our income tax rate?”

Despite South Carolina’s mediocre showing, there may be reason for hope going forward. Last year, lawmakers passed legislation overhauling the state’s business license tax system, which will cut time spent on paperwork, reduce confusion and increase productivity when it goes into effect next year.

In addition, while the Palmetto State lags considerably behind North Carolina, it wasn’t that long ago that the Tar Heel State was in a similar situation, according to Katherine Loughead, a senior policy analyst with the Center for State Tax Policy at the Tax Foundation, who helped draft South Carolina’s profile.

“A decade ago, North Carolina was in a similar position to South Carolina today, but it’s made many improvements since then and is now seen as a leader in how to structure a tax code,” she said. 

The Tax Foundation uses 120 variables to compile its ranking. Because some of the variables change over time, it’s not possible to make an apples-to-apples comparison with North Carolina in 2011 and South Carolina today, Loughead said.

“However, while today there’s a sizable difference between the two states, it’s quite possible for South Carolina to enact changes and make up some ground,” she added.

There are several factors hurting South Carolina’s business tax climate, including:

The Palmetto State has some of the highest individual income tax rates on middle- to high-earners in the Southeast. And the state’s 7 percent individual income tax rate kicks in at a relatively low level, beginning at $15,400.

The so-called marriage penalty hurts couples in the state. A married couple filing jointly faces a higher rate than if the pair filed individually. This is because the highest tax rate begins at $15,400, which means more of a married couple’s income is taxed at the highest level than would happen if the pair filed separately.

Business manufacturing machinery is subject to relatively high tangible personal property taxes in South Carolina. Because the state treats different classes of property differently, business property bears a bigger part of the burden. Without uniform assessment the tax code is discouraging investment in machinery.

The state’s capital stock tax, which is uncapped, is burdensome, as companies have to pay a tax on their net worth each year.

“South Carolina would do well to focus on lowering its Individual income taxes and property taxes and cleaning up its more antiquated policies,” Loughead said.

In addition, while South Carolina has a relatively low corporate income tax of a flat 5 percent, North Carolina’s is still lower, making things even more competitive for the former.

“When I talk with economic developers, especially in our border counties, it’s a real problem,” Patel said.

South Carolina took a step toward improving its business tax climate last fall when legislation was signed overhauling the state’s business license tax system.

“Effective Jan. 1, 2022, the legislation simplifies South Carolina’s business license tax compliance requirements by establishing a standard business license tax application, uniform classification schedule and centralized tax filing and payment portal for use by each taxing jurisdiction across the state,” according to a report released last November by Grant Thornton, a worldwide audit, tax and advisory firm. “The law also creates a standardized appeal process and allows taxing jurisdictions to immediately begin contracting with third-party collection agents that are subject to anti-harassment provisions.”

Counties and municipalities in South Carolina are allowed to levy a business license tax on the gross income of entities doing business within their jurisdiction. This means businesses are often required to maintain licenses and remit annual taxes or fees to each local jurisdiction in which they do business. The law was enacted to create uniformity across the state’s many local taxing jurisdictions.

The new law will establish a standard business license application, to be adopted by local taxing jurisdictions. It will require taxing jurisdictions to adopt a standardized business license class schedule and allow taxpayers to report and pay all business license taxes through a centralized tax portal.

The legislation also creates a streamlined statewide appeal process for business license tax audits and assessments.

Going forward, goals for the state chamber include lowering the individual income tax rate and the property tax rate, Patel said.

“We were making some headway toward lowering the individual income tax rate last year, but then Covid hit and we had to pause,” she said. “It’s something we’ll try to tackle again this year.”

On property taxes, chamber officials are meeting with legislators this year to explain the situation and how it impacts business. The goal is to see changes enacted next year. 

The Covid-19 pandemic has slowed progress, but Patel notes that there are other states in the Southeast and elsewhere that are making reforms to their tax codes despite the disruption. 

“We’re more in pause phase here, unfortunately,” she added.