The South Carolina Senate is advancing legislation that would give the Palmetto State a more competitive income tax code than neighboring North Carolina, a state that has long been a model for pro-growth tax reform.
North Carolina has long been a national model for pro-growth tax reform. States across the country have enacted income tax rate-reducing reforms facilitated by revenue triggers for more than a decade, just as North Carolina began to do in 2013. Some states where lawmakers have emulated North Carolina’s approach to tax reform have even surpassed North Carolina when it comes to rate reduction. Take Arizona, where lawmakers who were inspired by and received tax reform guidance from North Carolina lawmakers have gone on to achieve greater rate cuts.
Arizona now has the nation’s lowest flat income tax rate at 2.5%, which North Carolina could beat in the coming years. North Carolina’s flat income tax rate dropped from 4.25% to 3.99% on the first day of 2026 and is scheduled to continue falling in the coming years, provided that revenue triggers are met, until the rate reaches 2.49%. Yet one of North Carolina’s neighbors, South Carolina, is now poised to come out of nowhere and leapfrog both Arizona and North Carolina to possess the nation’s lowest flat income tax rate.
Earlier this week, a South Carolina Senate subcommittee advanced H.4216, legislation that would move South Carolina from a progressive income tax code with a top rate of 6% to a 1.99% flat rate over the next five years. H.4216, which the House passed last year, would establish revenue triggers for subsequent years that, if met, would continue cutting the income tax rate until it reaches zero. Should the South Carolina Senate pass H.4216 with no changes, it would go straight to Governor Henry McMaster (R-S.C.), who has said he would sign it. The full Senate Finance Committee will take up the bill next Tuesday, January 20, at 3:00 p.m.
The budget passed by the North Carolina Senate last year would schedule further rate reduction in the future, such that the rate would eventually fall to 1.99% rather than stopping at 2.49%. The budget passed by the North Carolina House, meanwhile, would adjust the triggers such that the income tax rate would no longer be expected to fall to 3.49% in 2027. The budget passed by the North Carolina Senate last year, were it to be enacted, would ensure that South Carolina would not be able to boast a lower flat income tax rate in five years. Were the North Carolina House budget to be enacted, North Carolina would likely soon have an income tax that is two entire percentage points higher than South Carolina’s soon-to-be 1.99% flat rate. Keep in mind that South Carolina already boasts a lower overall average tax burden than North Carolina.
Membership in the club of no-income-tax states stands at eight states but is poised for growth in the coming years. That’s because lawmakers in Mississippi, Oklahoma, Kentucky, West Virginia, and Indiana have enacted legislation in recent years that codified gradual income tax phaseouts. South Carolina appears most likely to be the next state to enact legislation putting its personal income tax on the path to zero.
“With reform packages that would eliminate state income taxes poised for enactment in neighboring South Carolina, Georgia, and nearly 10 other states across the country, a new budget that keeps North Carolina’s income tax rate higher in the coming years than would otherwise be the case under current law would take North Carolina in the wrong direction,” said Grover Norquist, president of Americans for Tax Reform, adding that “it would be a shame to see North Carolina, a state that has served as a model for conservative tax reform for so long, become an outlier among states that are continuing to pursue aggressive income tax rate reduction and perhaps even full elimination.”
