State of the State: South Carolina Gov. McMaster Announces Bold Pro-Growth Tax Reform Agenda

In his first State of the State address, South Carolina Gov. Henry McMaster declared that federal tax reform and state tax cut proposals promise a new era of opportunity. His remarks contained key proposals to cut taxes and rein in government excess.

With “companies…announcing reinvestment and raises for employees” as a result of “the federal government cutting taxes, it is now more important than ever for us to do our part,” implored the governor. He further called on lawmakers to “respect the right of the people to their own money, for their own purposes, according to their own priorities.” The governor’s budget proposal provides nearly $2.2 billion in cumulative tax relief over the next five years. Under the plan, each of the state’s five tax brackets will be lowered by 1 percentage point per year for five years. The reforms would save residents $139 million in just year one. Additionally, it provides that first responders and law enforcement “will never pay state income taxes on their retirement pay again.” The governor said the change would enhance financial well-being during retirement and would help improve workforce retention.

Governor McMaster argued that South Carolina desperately needs broad pro-growth tax cuts to spur economic growth and opportunity. South Carolina ranks 27th in economic outlook nationally, according to the ALEC-Laffer State Economic Competitiveness Index—below average both nationally and especially regionally. The governor noted “South Carolina currently has the highest marginal income tax rate in the southeast,” putting the state at a substantial disadvantage in competitiveness. Nearby Florida and Tennessee do not levy income taxes, while neighboring North Carolina has the lowest corporate tax rate among states that levy them. All have reduced tax burdens by billions over the last 5 years, and all continue to experience substantial, broad-based economic growth. In a region as competitive as this, South Carolina has fallen behind simply by standing still. Noting this, the governor said “taxes of all kinds at all levels add up – little by little – to smother growth,” and implored lawmakers to consider a comprehensive overhaul of the state’s tax code.

Shifting to workforce and economic development McMaster quipped “workers who previously carried tool boxes now carry tablets.” In order to modernize, he called for increased spending on workforce education. The governor’s proposal focuses on rural and underserved through the creation of a “South Carolina Workforce Partnership” connecting high schools with technical colleges. More funding for various workforce grants and scholarships is also planned.

Addressing the looming pension crisis, Governor McMaster decried the state’s large unfunded liability, calling lawmakers to close the state’s defined benefit system to new entrants and move to the more sustainable defined contribution model. While the pension system’s official documents show just $24 billion in unfunded liabilities, the situation is far more dire. After stripping away rosy accounting assumptions, South Carolina’s unfunded pension liability stands at nearly $82 billion according to Unaccountable & Unaffordable: 2017. Worse, the report shows South Carolina’s pensions are only 28% funded, ranking 42nd nationally.

The governor went on to applaud last year’s pension reforms, which increased employee and employer contribution requirements for the South Carolina Retirement System and the Police Officers Retirement System. Asking lawmakers to build on these successes, he asked for reforms to the unfunded cost-of-living adjustments and raise the age of retirement eligibility. As if reading straight from Keeping the Promise, McMaster implored “We must maintain our commitment to the many people who rely on our state retirement systems. We must protect the taxpayers from bearing the financial burden caused by delay.”

Looking next to education, the governor announced the state’s Department of Education found $338 million in potential savings over five years simply by consolidation. He argued such savings would allow funding prioritization on activities making the most substantive impact on a student’s education. According to the governor, a jobs growth and economic investment from a business-friendly environment “will do more to improve educational opportunity than simply sending money from Columbia.” Despite the emphasis on efficiency, he pledged increases in “base student cost” along with an additional $3.3 million to computer science training for teachers to use in the classroom. Further addressing education reform, the governor called on lawmakers to continue expanding and investing in school choice. Although the state ranks 12th place on overall education policy according to the ALEC Report Card on American Education, access to private school choice programs is still lacking.

A number of narrower issues were also addressed. Governor McMaster noted a growing and secure economy “requires an abundant supply of clean and affordable energy.” He admonished that “customers must either get the reactors or get their money back” following the collapse of a multi-billion project to construct two nuclear reactors for the state. He also briefly touching on prison reform and requested $10 million for opioid abuse treatment and prevention. “Government cannot and should not attempt to be all things to all people,” concluded the governor. Fortunately, he understands that opportunities flourish by lightening the burdens of excessive taxation and bloated government. With the 15th highest personal income tax rates, highly progressive tax code, and 7th highest debt service levels, the reforms hinted at by the governor will be welcomed by many taxpayers.