House committee reviews HB 4,216 tax-reform options; no votes taken

COLUMBIA — The South Carolina House Ways and Means Committee on Tuesday heard a technical briefing and policy discussion of House Bill 4,216, a proposal to change the state income-tax starting point to federal adjusted gross income and to move the state toward a single-rate structure. No motion or vote was taken; the meeting was described by the chair as a “listen and learn” session and was adjourned for later committee consideration.

The committee heard detailed analysis from Frank Rainwater, who presented estimates of the bill’s fiscal effects and three staff alternatives that change how a new standard deduction and phaseouts would operate and whether the system would be flat or remain graduated. “This is not a simple process,” Rainwater said. He emphasized there is no single “average taxpayer” and that changes to starting point, rates and deductions affect filers differently depending on income type, filing status and deductions.

Why it matters: Individual income tax is the single largest general‑fund revenue source in the state, Rainwater told the committee. He said that about 45% of general‑fund revenue in fiscal 2024 came from individual income tax and that changes to the tax base and rates would therefore affect budget choices that fund schools and health programs.

What the bill would do: Under the version discussed, HB 4,216 would shift South Carolina’s starting point from federal taxable income to federal adjusted gross income (AGI), eliminate the state’s current standard and itemized subtraction approach, and create a state income adjustment deduction. The introduced bill included a flat-rate proposal with an initial rate of 3.99% (phasing later toward 2.49% under growth triggers) and a state AGI deduction that phases out by income; Rainwater said the bill would retain several existing state-specific deductions (retirement, military, partial Social Security exemption, dependent exemptions) and would propose withholding-table adjustments to reduce refund timing issues.

Fiscal and distributional findings presented: Rainwater summarized the committee’s recalculation of roughly 2.8 million returns and the distributional results he presented: • The introduced House bill was shown to reduce state revenue by roughly $216 million in the initial illustration and would produce an estimated 59% of returns experiencing an increase in liability with an average increase of about $560 for those returns, while about 19% of returns would see a decrease (average decrease ~ $2,100). • Alternative A (flat rate 3.99% but larger AGI deduction phased out later) was presented as costing about $307 million and reduced the share of returns with increased liability slightly (about 58.7%). • Alternative B (higher flat rate, larger standard/AGI deduction) was shown at roughly $282 million in cost, increasing the share of returns with decreases (25% of returns with decreases, average decrease ~$9,055 in the presentation) and lowering the share with increases (about 38.6%). • Alternative C (a two-rate design that preserves progressivity: 1.99% for lower incomes and 5.49% for higher incomes with a larger standard deduction and phased reductions) was shown at ~ $289 million and produced the largest share of returns with decreases (39%) and the smallest share with increases (28%), with average increases and decreases varying by AGI band.

Rainwater cautioned that the three alternatives are illustrative and that the results change materially when rates, deduction amounts and phase‑out thresholds are adjusted. He also noted cash‑flow complications linked to withholding and refunds (the department issues roughly $2.3 billion in refunds), which affect fiscal-year timing and practical implementation.

Expert testimony and policy context: Manish Bhatt, senior policy analyst at the Tax Foundation, testified virtually about tax competition and the policy rationale for simpler, lower marginal rates. Bhatt noted recent state moves to single-rate systems in other states and argued a lower, flatter top marginal rate can improve competitiveness for business and residents. He also acknowledged distributional concerns and said design choices matter for fairness and revenue stability.

Committee response and next steps: Committee members pressed staff for more granular estimates and clarifications. Questions focused on (1) the number and income bands of filers who would see increases or decreases, (2) the treatment and expected expansion of the state Earned Income Tax Credit (EITC) under the changes, (3) how the growth triggers for future rate reductions are defined, and (4) alternative revenue swaps such as modest sales‑tax increases. Rainwater said the proposed growth trigger requires roughly a 5% increase in income‑tax receipts and the statutory language limits the amount allocated to rate reductions to a maximum (he cited a $200 million cap in the bill language while noting a 5% growth on a roughly $6 billion income‑tax base is about $300 million).

No action was taken: The chair said the committee would not take action and would meet again after members consult their caucuses. Representative Cobb Hunter and others urged caution, raised concerns about prior tax shifts (citing Act 388 of 2006) and asked that the committee prioritize measures to protect lower‑income households (including bolstering EITC design) if a reform proceeds.

Background and numbers cited by staff: Rainwater and staff emphasized three main drivers of tax outcomes — types of income, deductions and rates — and presented distributional charts showing that about 44% of returns currently have zero liability and that roughly 10% of returns pay about 65% of total liability. Staff also noted the state’s taxable base (after state deductions) represents a smaller share of total personal income because many benefits and transfer receipts are excluded from AGI calculations.

What is unresolved: The committee asked staff to provide more disaggregated analysis (including the identity of income bands most likely to see increases, the likely growth and cost trajectories tied to the proposed triggers, and more detail on out‑of‑state filer impacts and how EITC utilization might change). The committee scheduled a follow‑up full committee meeting in the coming days to continue discussion.

The hearing closed with the chair adjourning to allow members to attend legislative session and to continue caucus-level consultations before the committee reconvenes.