South Carolina Enacts Major Income Tax Overhaul, Lowering Rates for 2026

COLUMBIA, S.C. — Governor Henry McMaster signed into law a significant tax reform bill on Wednesday that will lower state income tax rates and restructure the tax bracket system for South Carolina residents, with the changes set to take effect in the 2026 tax year. The legislation, known as House Bill 4216, is projected to save state taxpayers between $309 million and $325 million in its initial phase. In a statement, Governor McMaster said that cutting the personal income tax has long been a priority and that the new law continues the state's efforts to reduce the tax burden on its residents. This move by South Carolina reflects a broader trend of states using tax policy as a primary tool for economic competition. While headlines focus on individual savings, for business owners and high-income professionals, these changes demand a proactive review of their entire financial picture, from residency status to entity structure. The law's primary structural change is the simplification of the state's income tax system, consolidating the current three tax brackets into just two. Supporters, including advocacy groups like Americans for Tax Reform and Americans for Prosperity, argue that the overhaul will make South Carolina more economically competitive and attractive for business investment and relocation. The financial impact of the law, however, will be distributed unevenly across different income levels. According to an analysis by the Institute on Taxation and Economic Policy (ITEP), the state’s highest earners stand to gain the most. The top 1% of taxpayers in South Carolina, who have an average annual income of $1.7 million, are projected to see an average tax cut of $3,139 per year. In contrast, middle-income and working-class families are expected to save an average of just $146 annually. Critically, the ITEP analysis also found that the lowest 20% of earners in the state—households with incomes below $23,200 per year—will receive no tax savings from the legislation. This disparity has become a central point of contention for critics of the bill, who argue it disproportionately benefits the wealthy while offering minimal relief to those who need it most. Further complicating the bill's impact is its overhaul of deductions. The law eliminates the ability for taxpayers to use federal standard and itemized deductions on their state returns. It replaces them with a new, state-specific “South Carolina Income Adjusted Deduction.” This new deduction is designed to phase out as a taxpayer's income increases. Consequently, an estimated 23% of taxpayers, particularly higher-income individuals who previously itemized deductions for things like mortgage interest and charitable contributions, could potentially see their state tax liability increase despite the lower top rate. In our experience, tax simplification is rarely simple. The replacement of familiar federal deductions with a new, state-specific phased-out deduction is a classic example of a change that can create unexpected tax liabilities, even under a 'tax cut' bill. Business owners and individuals can't assume a lower top rate automatically means a lower tax bill; the devil is in the details of how taxable income is calculated. Navigating these state-by-state nuances is a core part of the tax preparation and compliance services we provide. To ensure your financial strategy adapts to these new rules, contact C&S Finance Group LLC at csfinancegroup.com. House Bill 4216 also establishes a framework for the eventual elimination of the state's personal income tax altogether. Beginning in 2027, the law includes an automatic trigger for further tax cuts. If the state's income tax revenues grow by 5% or more in a given year, the top income tax rate will be incrementally reduced. This process is designed to continue until the top rate falls to 1.99% and, ultimately, to zero. While supporters champion this as a path to greater prosperity, opponents have raised serious concerns about the long-term fiscal health of the state. Fully eliminating the personal income tax would remove what currently constitutes approximately 45% of South Carolina's general fund revenue. Critics warn that such a drastic reduction could jeopardize funding for essential public services, including education, infrastructure, and law enforcement, potentially undermining the very stability that attracts businesses in the first place. South Carolina now joins a growing conversation among states, with nine, including Florida and Texas, currently levying no personal income tax. With the law now signed, attention will shift to its implementation and the performance of the state's economy. The revenue growth triggers starting in 2027 will be a key metric to watch, as they will dictate the pace of future tax reductions and the corresponding pressure on the state's budget and public services.