The South Carolina Senate approved sweeping changes to the state’s income tax system Tuesday, voting 39-5 to decouple from federal tax rules and reduce rates for most filers starting with returns due in spring 2027. The amended legislation now heads back to the House, where lawmakers must decide whether to accept the Senate’s version or negotiate a compromise before incorporating any tax changes into the 2026-27 state budget.
Under the Senate’s version of House Bill 4216, approximately 43 percent of South Carolina’s 2.3 million tax filers would see lower taxes in the first year, while 23 percent would pay more and 35 percent would see no change. The plan would cut state income tax revenue by $308.7 million initially, more than double the $119.1 million reduction in the House version passed last year.
The bill represents South Carolina’s second attempt at major income tax reform within a year. Sponsored by House Ways and Means Chairman Bruce Bannister, the legislation aims to make the state’s tax burden more competitive with neighboring states like North Carolina and Georgia by breaking away from the federal tax code and eventually moving toward a flat tax system.
Breaking From Federal Tax Rules
South Carolina is one of just five states that historically based state tax filings on federal taxable income, meaning residents started their state calculations with income already reduced by federal deductions. This system made South Carolina’s 6 percent top marginal rate appear high compared to neighboring states, even though residents’ actual tax burden was comparatively low.
The legislation eliminates this connection. Instead of using federal taxable income as a starting point, South Carolina filers would calculate state taxes independently using adjusted gross income. The bill replaces federal standard and itemized deductions with a state-specific adjusted deduction system.
“It actually levels the playing field with our neighboring states,” said Sen. Ross Turner, a Greenville Republican who managed the bill on the Senate floor. “We’ve never really been able to compare apples to apples, saying, ‘We’re this and North Carolina’s this.'”
The decoupling decision carries immediate consequences for taxpayers filing 2026 returns this spring. Without legislation adopting recent federal tax changes, South Carolina residents face dual calculation systems and won’t receive breaks they might expect from federal law, including provisions eliminating taxes on tips and overtime pay that President Donald Trump signed into law last summer.
Who Pays More, Who Pays Less
The bill’s impact varies significantly across income levels. Currently, nearly 45 percent of South Carolina tax filers pay zero state income taxes, while the top 10 percent of earners pay roughly 65 percent of all state income tax collections, according to the state Revenue and Fiscal Affairs Office.
Under the Senate plan, 35 percent of filers would still pay no state income taxes. But some low-income residents who currently pay nothing would see new tax bills. The legislation requires a 1.99 percent tax on incomes up to $30,000, affecting those previously exempt.
“When someone goes from paying zero to paying $20, yes, they had a tax increase,” Turner said during floor discussion. “Welcome to the game.”
The bill reduces the top marginal rate from 6 percent to 5.39 percent, with a long-term goal of moving all filers to a 1.99 percent flat rate over five years. Higher earners would see the most significant dollar savings, though the percentage reduction applies across income brackets.
Sen. Tameika Isaac Devine, a Columbia Democrat who voted against the bill, said she supports tax reform but felt the plan was rushed and didn’t adequately help those most in need. “I would rather put that money in resources that we need in the state,” she told reporters after the vote.
Federal Tax Package Complicates State Plans
The Trump administration’s tax package signed in July 2025, known as the “one big, beautiful” law, created unexpected complications for South Carolina’s reform efforts. If the state conformed to the new federal tax code as it normally does each year, South Carolina would lose an estimated $515.4 million in revenue for the coming fiscal year.
Major provisions of the federal law, including the elimination of taxes on tips and overtime, phase out in 2028. Any extension would depend on who controls the White House and Congress at that time, creating uncertainty about long-term revenue impacts.
Sen. Wes Climer acknowledged that staying aligned with federal tax rules would provide bigger immediate cuts for taxpayers. “I would argue we’re a little shy on this tax cut,” Climer said before voting in favor of the Senate plan.
Turner countered that South Carolina filers would benefit more over time by breaking free of federal control. “Even though this one-year blip may fall in their favor, long-term, I don’t believe staying in the situation we are right now is a benefit to anybody in South Carolina,” he said.
Path Toward Elimination Remains Uncertain
The legislation sets a goal of eventually eliminating state income taxes entirely, which currently generate $6.6 billion annually for South Carolina’s budget. The bill includes a trigger mechanism requiring $200 million in additional cuts each year that income tax collections grow by at least 5 percent.
Several senators questioned whether the state would ever reach full elimination. As the income tax rate decreases, the state would see diminishing returns from each percentage point reduction, potentially pushing the elimination goal decades into the future.
“That’s the math that I wasn’t mathing with exactly,” said Sen. Russell Ott, a St. Matthews Democrat who voted against the bill. “That’s not possible, correct?”
“I would say we won’t be here to see it,” Turner replied.
Matt Humm, state director for Americans for Prosperity South Carolina, praised the legislation in a statement. “H.4216 will create the lowest flat tax rate in the country, position our state optimally for economic investment, and get us closer to eliminating the state income tax entirely,” he said.
Combined Impact With Property Tax Relief
The income tax changes come alongside Senate Bill 768, which the Senate advanced last week to expand property tax breaks for seniors. That bill increases the homestead exemption for primary residences of those 65 and older to $75,000 after five years of residency and $150,000 after ten years, with proof of income tax filing required.
The property tax relief carries an estimated $260 million price tag in its first year. Combined with the income tax cuts, the two measures could reduce available state revenue by approximately $556 million, potentially affecting budget negotiations for the 2026-27 fiscal year.
Floor debate on the House’s first spending plan for 2026-27 begins in two weeks. The House must decide whether to accept the Senate’s amendments to the income tax bill or work toward a compromise version. Any final tax cut plan will need to be incorporated into the state budget process.
Four Democrats and one Republican voted against the income tax legislation. The bill now returns to the House, where it originated last year under Bannister’s sponsorship as a second attempt at comprehensive income tax reform.