Calling for ‘holistic’ reform, Senate GOP leader cites the cost of dining out in SC

COLUMBIA — Taxes on a restaurant meal in parts of South Carolina can run higher than rates paid in many of the United States’ largest cities, including Los Angeles and New York City.

That tax quirk in a state where politicians tout a low cost of living and business-friendly policies was cited by the Senate’s GOP leader as an example of why the Legislature needs to tackle wholesale tax reform, not just more income tax cuts. That includes sales and property taxes that fund local governments, said Senate Majority Leader Shane Massey.

“In the name of home rule, we’ve let some localities go crazy,” the Edgefield Republican told the SC Daily Gazette. “That has an impact on the business climate.”

But he recognized that big changes to the tax code will prove difficult. Any proposal that stems local governments’ ability to raise revenue is sure to bring opposition. How much would depend on the details.

At the top of House Republicans’ wish list is another round of “historic income tax cuts,” following a 2022 law that promised to reduce state revenue by more than $1 billion annually when fully implemented. That’s on track to happen Jan. 1, 2026, after legislators last year stepped up the law’s timetable.

However, even after those cuts are fully realized, the state’s top tax bracket of 6% will remain the highest in the Southeast. The state’s average effective rate — what people pay after the state’s deductions — was well below its neighbors before the law passed. It fell from 3.4% to 2.7% with the law’s first, and biggest, incremental cut, according to a 2023 analysis by the state Office of Revenue and Fiscal Affairs.

But the 2022 law still left the perception that South Carolinians are taxed the most, since the so-called top marginal rate — what legislators have likened to the sticker price on a car for sale — is still out of whack, legislators contend.

In reality, even after legislators in Georgia and North Carolina cut taxes too, whether tax filers with the same income in those states would pay more or less in South Carolina depends on variables such as family size, according to the analysis by state fiscal experts.

“We had this big push that we needed to lower our rate” to be competitive, Massey said. “The problem is, we’re still the highest in the Southeast, even with those new rates, so I think we need to look at that.”

How income taxes might be further cut or restructured remains to be determined. There is no proposal yet. The 2025 legislative session kicks off next Tuesday.

Some GOP legislators have called for eliminating state income taxes. Last fiscal year, income tax collections totaled $6.1 billion, accounting for nearly 45% of the general fund revenues. They’re expected to put $6.3 billion in state coffers this fiscal year, according to the state Board of Economic Advisors.

“We have all decreed that tax relief is our priority,” House Speaker Murrell Smith, R-Sumter, told reporters in November. “I think that there’s a commitment and there’s a will in our body.”

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Massey said he agrees with the speaker on income taxes.

“But I also think we need to look at the rest of tax policy,” Massey said. “We need to look at it holistically.”

That includes property taxes and various types of local tax options that fund city and county services and public schools.

Taxes on meals

Massey said it took him by surprise while traveling in California a few years ago that the sales tax on his tab was often less there than it was in parts of South Carolina.

“If you go out to eat here in Columbia, you’re going to pay higher sales taxes than what you pay in Los Angeles,” he said.

The city of Myrtle Beach has the highest sales tax rate in the Palmetto State, at 11.5%. And that’s if you drink water, sweet tea or soda with your meal. Tack on an additional 5 pennies on the dollar for alcoholic beverages.

The state sales tax is 6%. That goes in state coffers, as does the so-called liquor-by-the-drink tax — a portion of which is distributed to counties.

But state law allows local governments to add additional pennies for certain expenses, called local option sales taxes, if they’re approved by voters in a referendum. So-called hospitality sales taxes need approval only from county council.

The sales tax rate in Myrtle Beach includes a penny-on-the-dollar for school improvements, another for local road construction, and another for tourism. For meals, there’s an additional 2.5% in hospitality taxes shared by the city and county, according to information provided by the city.

So, if your entree costs $22, and you order an $8 cocktail or glass of wine, expect to see $3.85 in taxes on the bill.

In Charleston, the sales tax rate is 11%, according to the latest data from the state Department of Revenue and the state fiscal affairs office. It’s 10% in Columbia and Aiken. In Hilton Head, it’s 9% and in Greenville, it’s 8%.

New York City’s sales tax, by comparison, sits at 8.75% with no extra tax on restaurant meals, according to the nonpartisan Tax Foundation. Washington D.C. is at 10%, Seattle is 10.35% and Los Angeles is 9.5%.

Of the largest cities in the country, only Chicago, at 11.75%, and Minneapolis — which is 12%, plus an extra 2.5% on alcohol and 3% more if there’s entertainment, such as a live band — are higher.

“The local add-ons are what make things so expensive,” Massey said. He believes the Legislature should consider curtailing local governments’ revenue-raising abilities in the future.

The South Carolina Association of Counties has no hard and fast opposition to reform as it relates to sales taxes at the local level. At the same time, counties have a limited number of ways to raise revenue, and any measure that reduces those funding options without replacing that lost revenue source would cause concern, according to the organization’s leadership.

Time to try again?

They suggested instead reducing the state sales tax rate by eliminating exemptions. But that’s been tried before at the Statehouse — repeatedly — without success.

The list of items exempted from the 6% state sales tax is long.

Last year, the state exempted an estimated $3.6 billion worth of sales and use taxes. Two of the highest-dollar exemptions, water and fuel, date to the onset of the state sales tax in 1951.

During previous attempts to whittle down the list, legislators have agreed that such essentials, to include prescriptions, should remain untaxed. The problem is they haven’t been able to agree on what’s not essential.

In 2012, a lawsuit challenging sales tax exemptions resulted in a House bill that eliminated $220 worth. But the proposal got watered down to less than $11 million after affected special interests pleaded their case. Senators never bothered to take up the bill, and the lawsuit was tossed.

This fiscal year, sales taxes are expected to put $5 billion into state coffers, according to the Board of Economic Advisors.

“There are a lot of things we don’t tax, like services, and there are a lot of things we do tax that we should not,” Massey said.

The last time the Legislature enacted large tax code changes affecting state and local taxes was 2006, with the much-derided law known by its number: Act 388.

It increased the state sales tax by a penny on the dollar to pay for reductions in homeowners’ property taxes, while also reducing sales taxes on groceries. It also brought a host of unintended consequences, but undoing it would mean immediately increasing property taxes, so legislators haven’t been willing to touch it.

But they have continued piecemeal cuts. In 2007, they went on to eliminate sales taxes on groceries as well as the lowest income tax bracket. That cut from the bottom helps explain why nearly 45% of South Carolina tax filers pay no state income taxes.

Massey acknowledged that achieving anything approaching comprehensive tax reform will be difficult.

Various legislative committees have spent a lot of time studying the issue without getting any traction, despite pushes from the state Chamber of Commerce. That includes the committee dubbed TRAC (Taxation Realignment Commission), which was tasked by state law with creating a tax reform blueprint for the Legislature. But the report it ultimately produced in 2010 was largely ignored.

Massey said it’s time to try again.

“We shouldn’t avoid the hard issues,” he said.

And with the November elections giving the Senate a GOP supermajority, two years after Republicans gained a supermajority in the House, Massey said he hopes that means both chambers will “look at it more seriously.”

After all, the state’s economy continues to do well, with both growing population and industry bolstering the state’s coffers.

Even after legislators cut taxes and put aside more in rainy day reserves, the latest state forecast predicts new recurring revenues next fiscal year will still surpass a half-billion dollars.