Fast Facts: South Carolina’s Corporate Income Tax
Instead of playing games with tax credits and economic development boondoggles, the best way for the state to attract new business is to lower taxes. In particular, lawmakers should eliminate the state’s corporate income tax as a means of stimulating economic growth and creating jobs.
What is South Carolina’s corporate income tax rate?
The state’s corporate income tax rate is a flat 5 percent, except for savings and loans which are taxed at 6 percent. According to the Tax Foundation, South Carolina ranked 25th in the nation in 2009 in terms of business tax climate. North Carolina ranked 39th and Georgia ranked 27th. The only states that do not impose a corporate income tax are Nevada, Washington and Wyoming, considered among the most business-friendly in the nation.
Who pays the corporate income tax?
The tax applies to all corporations and to all entities taxed as corporations for federal income tax purposes, excepting businesses that file as an S corporations. The tax burden for an S Corporation is divided and passed along to shareholders. Small businesses that do not file as corporations — e.g., sole proprietors and partnerships — are given the option (via an I-335 form) of filing as pass-through businesses that are then taxed at 5 percent. Otherwise, the state’s top bracket for the personal income tax kicks in at 7 percent for every dollar over $13,700 (for 2009).
Who really pays the corporate income tax?
Surprisingly, the answer is not typically businesses. Corporations bear responsibility for compliance with the tax, but they usually pass compliance costs on to consumers. According to a study by the Tax Foundation, households earning less than $23,700 per year paid $271 in corporate income taxes and $171 in personal income taxes in 2007. Additionally, the Tax Foundation found that the average worker loses $2.50 in real wages for every $1.00 increase in the corporate income tax because businesses pass costs on to employees by lowering wages.
How much revenue is generated from the corporate income tax?
For FY08-2009, South Carolina collected $268,643,839, or approximately 4.5 percent, of its annual General Fund revenue from the corporate income tax. By comparison, personal income taxes accounted for 44 percent of revenue and sales taxes for 39 percent. In addition, businesses paid millions in fines and fees. These include an annual corporate license tax (paid annually at $15 plus .001 times capital stock and paid-in surplus). Another fee of $25 is paid to the state at the time of incorporation.
When was the state corporate income tax enacted?
The state corporate income tax became a popular source of revenue during the Progressive Era of the early 1900s. Wisconsin was the first state to begin taxing corporate net income. South Carolina adopted the tax in 1927, and by 1940 most states had followed suit with their own corporate tax. Today, 47 states impose a corporate income tax in addition to the corporate income tax burden established by the federal government. The federal government levies the tax using a sliding scale between 15 percent and 35 percent depending on the net income of a business.
How does the corporate income tax impact business?
The Tax Foundation conducted a 1995 compliance cost study on paying corporate income taxes and found that businesses spent $38.70 per hour on compliance. Factoring for inflation, in today’s dollars that means businesses spend approximately $54.69 per hour complying with federal corporate income taxes. Every dollar spent on compliance costs means fewer dollars available for job creation and private investment. In fact, businesses may very well spend more money complying with the corporate income tax than the amount of revenue the state collects from the tax.
What efforts are underway to eliminate the tax?
During the 2009 session, legislation (S 378/H 3424) was introduced that would have phased out the corporate income tax over 10 years. This proposal died in committee. In past years, lawmakers have considered bills that would have reduced the corporate income tax rate to between 1.5 percent and 5 percent, depending on taxable net income.
Such an approach, however, would likely have increased compliance costs even more. The Taxation Realignment Commission (TRAC) will also be studying the corporate income tax as part of its comprehensive review of state and local taxes.
The best option is to eliminate the tax altogether — not over 10 years, as proposed by S 378/ H 3424 — but immediately. According to the Cato Institute, state corporate income taxes as a whole constitute a relatively small percentage of revenue in comparison to the costs to administer and comply with such taxes.
Given that the tax only makes up 4.5 percent of General Fund revenue, eliminating the tax could be made possible by enacting targeted budget cuts. In fact, repealing the corporate income tax would likely boost personal income and sales tax revenues while also stimulating private investment and job creation, thus leading to an overall increase in tax revenue.