South Carolina Moves Toward Two-Tier Income Tax System: What It Means for Residents and Revenue

South Carolina is on track to overhaul its income tax structure after the state House advanced a new proposal introducing a two-tiered tax system. The plan is a departure from earlier flat-tax proposals and is designed to reduce the tax burden on low- and middle-income earners while preserving state revenue from higher earners.

The bill, which still needs Senate approval, could reshape how millions of South Carolinians file their state taxes as early as 2026.

What’s in the New Tax Proposal?

The legislation replaces South Carolina’s current income tax framework with a simplified two-bracket system:

• 1.99% tax rate on the first $30,000 of taxable income

• 5.39% tax rate on all income above that threshold

The goal is to deliver broad-based tax relief while still maintaining enough state revenue to fund public services.

Who Benefits?

Supporters of the bill argue that the plan will:

• Lower taxes for more than 40% of filers, particularly in low- and middle-income brackets

• Simplify the overall filing process by replacing multiple marginal rates with just two brackets

• Enhance economic competitiveness by reducing the effective tax burden on work and productivity

House Republicans emphasize that the new structure is more equitable than a flat tax, which would have resulted in higher taxes for many low-income residents.

What Are the Concerns?

Opponents warn the new plan could create a $400 million revenue shortfall in its first year, potentially threatening funding for schools, infrastructure, and healthcare.

Critics also argue that the top bracket—while better than a flat tax—still favors high earners and doesn’t go far enough to ensure progressive taxation.

There is also concern that the bill lacks detailed provisions on how the state would offset revenue losses, particularly in future years when economic growth may slow.

What Happens Next?

The bill now heads to the South Carolina Senate, where lawmakers are expected to debate adjustments to the structure and funding mechanisms.

If passed, the new two-tier system could take effect beginning with the 2026 tax year.

Tax professionals, business owners, and residents should monitor developments closely, as the final version may include changes that affect planning strategies for the coming years.

Final Thought

South Carolina’s move toward a two-tier income tax reflects a broader national trend: simplify state tax codes while easing pressure on lower earners. But the real test will be balancing economic stimulus with fiscal sustainability.

At Bizora AI, we’ll continue tracking this legislation and offering timely insights to help CPA firms and individuals plan with confidence.