Budget to Offer Optional Income Tax Rate Cut of 50 Percent

GOVERNOR PROPOSES OPTIONAL FLAT TAX, TO BE OFFSET BY CIGARETTE TAX INCREASE

Columbia, S.C. - December 19, 2007 - In the latest preview of his upcoming Executive Budget, Governor Mark Sanford today called for an optional 50 percent reduction to the state’s top marginal income tax rate - from the current 7 percent to 3.4 percent - to be offset by a 30-cents-per-pack increase to the state’s cigarette tax.

“This is about beginning a long-overdue conversation in South Carolina about the way we tax and about the need to simplify our tax structure. To that end, we’re making this proposal as a way of starting that conversation and as a way to take a meaningful step in that direction,” Gov. Sanford said.

The proposal would offer South Carolinians two options for paying their taxes, starting in 2009 - to either pay the current 7 percent rate and be eligible for current deductions, or to pay a flat tax of 3.4 percent with no deductions. The measure would mean about $107 million in tax relief, offset by an increase to the cigarette tax. Additionally, the flat tax would put South Carolina more in line with other Southeastern states’ income tax rates. At 7 percent, our state’s rate is effectively the highest in the region.

States’ marginal income tax rates are key to their ability to grow the economy. According to a recent study from the Atlanta Federal Reserve Board, “Relative marginal tax rates have a statistically significant negative relationship with relative state growth.” Put another way, the lower the tax rate the greater the state’s economic growth.

“This proposal is ultimately about both improving South Carolina’s competitive position when it comes to taxes and about improving the health of individual South Carolinians,” Gov. Sanford said. “Whether you’re looking nationally or internationally, the bottom line is that marginal rates matter in terms of bringing jobs and investment to our state. As well, we think this plan has a host of benefits when it comes to improving the quality of life for thousands of South Carolinians by impacting the cost of smoking, and therefore the rate of smoking.”

Seven other states currently have a flat tax - all well below our top marginal income tax rate of 7%, while Rhode Island is in the process of providing an optional flat tax for their taxpayers of 5.5 percent. Rhode Island’s Democratic House Speaker William Murphy said of his state’s proposal, “The ultimate goal is to put more money directly into people's pockets both by giving relief to those who need it and by making Rhode Island a more attractive place for business.” Utah just voted in favor of a 5 percent flat tax.