Research & Commentary: South Carolina Income and Gas Tax Swap

Published February 17, 2015

In her 2015 State of the State address, South Carolina Gov. Nikki Haley proposed a unique tax swap plan increasing the state’s gasoline tax by $0.10 per gallon while reducing the state’s income tax rate by 30 percent. The plan would reduce state revenues by $9 billion over the first decade. Once fully phased in, the income tax cuts would reduce revenue by $1.8 billion per year and the gas tax increase would bring in an additional $340 million per year. Taxpayers would save an average of nearly $700 each per year. 

Haley has said she would withdraw her support for the gas tax increase if the legislature failed to approve the income tax cuts. The plan also dictates all gas tax revenues be dedicated to road maintenance. 

Like most tax swaps, there are costs and benefits. The income tax reduction is a positive and necessary step; South Carolina’s income tax rate has long put the state at a competitive disadvantage. The current top income tax rate of 7 percent is 12th-highest in the nation, and it is the highest among its regional neighbors. Haley’s proposal would reduce the top individual income tax rate from its current 7 percent to 5 percent over the next 10 years. 

These reductions would put South Carolina’s rate below North Carolina’s flat rate of 5.75 percent and Georgia’s top rate of 6 percent. Recent studies found states with no income tax or lower income taxes perform better economically and experience greater job and population growth than those with higher taxes. 

The gasoline tax is problematic for drivers and taxpayers as well, but this is somewhat mitigated by the fact South Carolina’s gas tax is one of the lowest in the nation at 16.75 cents, far below the average state gas tax of 28.9 cents per gallon. South Carolina’s current gas tax rate went into effect in 1989, when the average state gas tax was 13.4 cents; since then, much of the value of the gas tax has been eroded by inflation. Haley’s tax swap proposal would increase the gas tax by 10 cents to 26.75 cents per gallon over three years. This rate would be close to Georgia’s and 12 cents lower than North Carolina’s. 

In recent years, the rise of fuel-efficient cars has cut into motor fuel tax revenues and disproportionately shifted the burden to low-income drivers, who typically own older, less fuel-efficient vehicles. As motor fuel tax revenues decline, states will have to explore more modern and efficient ways to fund road construction and traffic infrastructure. These include privatizing roads and establishing toll systems. In several cities, transportation agencies are using congestion pricing – varying toll prices based on congestion – to manage demand and limit traffic problems. 

Patrick Gleason, director of state affairs at Americans for Tax Reform, noted, “This income tax cut proposal is especially important given that there are two states with no income tax in the region, Tennessee and Florida. North Carolina just reduced their income tax rate, while Georgia is looking to follow suit.” 

The following articles examine South Carolina’s proposed tax swap, gas taxes, and income taxes.

Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Tip Sheet: State Income Tax Reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes. 

South Carolina Governor Offers Tax Swap
Liz Malm and Jared Walczak of the Tax Foundation examine South Carolina Gov. Nikki Haley’s proposed tax swap and its likely effects on tax revenue and spending. 

Paying at the Pump: Gasoline Taxes in America
Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements; in many cases, however, governments exploit the taxes for political reasons, spending them on projects other than their intended uses. 

Reconsider the Gas Tax: Paying for What You Get
Jeffrey Brown of the University of California-Los Angeles notes the gasoline tax was created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of that purpose and lump it together with other unpopular taxes. The challenge for policymakers, he argues, is to restore the connection in the public’s mind between the tax and the roads it provides, and to reassert the gasoline tax’s original rationale as a user fee. 

Research & Commentary: Congestion Traffic Pricing
Congestion pricing, an alternative to gasoline taxes, uses market principles to address traffic congestion. Under congestion pricing, operators of a road charge a variable price based on congestion, allowing the operator to manage demand and limit congestion. Heartland Institute Senior Policy Analyst Matthew Glans examines several proposals for implementing pricing systems to alleviate traffic congestion. 

Fuel Taxes, Tolls Pay for Only One-Third of Road Spending
Examining how states acquire transportation funds, Joseph Henchman of the Tax Foundation finds highway user taxes and fees make up just 32 percent of state and local spending on roads; financing for the rest of the projects comes out of general revenues, including federal aid. 

Raising Gas Taxes Won’t Fix Our Bridges
Writing in the aftermath of the I-35 bridge collapse in Minneapolis, Adrian Moore of the Reason Foundation argues increasing fuel taxes should not be the only response to state transportation funding problems: “First we must examine how we spend transportation dollars now. Then we maximize the value out of those dollars. Finally, the last step is to address the need for additional revenue.” 

State Income Taxes and Economic Growth
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth through an endogenous growth model. The researchers used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004. They found higher marginal tax rates inflict significant reduction of economic growth. 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at, The Heartland Institute’s website at, and PolicyBot, Heartland’s free online research database at 

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