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COMMITTEE REPORT
March 30, 2005
H. 3007
Introduced by Reps. Wilkins, W.D. Smith, Harrell, Cato, Chellis, Harrison, Townsend, Witherspoon, G.R. Smith, Vaughn, Sandifer, Coates, Barfield, Young, Kirsh, Leach, E.H. Pitts, Battle, Viers, Clyburn, Littlejohn, Taylor, Rice, Hinson, Clark, Walker, Bales, Simrill, Mahaffey, Toole, Talley, Umphlett, Brady, Bailey, Hagood, Edge, Clemmons, Huggins, Neilson, Vick and Delleney
S. Printed 3/30/05--S.
Read the first time February 3, 2005.
To whom was referred a Bill (H. 3007) to amend the Code of Laws of South Carolina, 1976, by adding Section 12-6-515 so as to reduce the seven percent top marginal rate of South Carolina, etc., respectfully
That they have duly and carefully considered the same and recommend that the same do pass with amendment:
Amend the bill, as and if amended, by striking all after the enacting words and inserting:
/ SECTION 1. Article 5, Chapter 6, Title 12 of the 1976 Code is amended by adding:
"Section 12-6-545. (A) As used in this section:
(1) 'Active trade or business income or loss' means income or loss of an individual, estate, trust, or any other entity except those taxed or exempted from tax pursuant to Sections 12-6-530 through 12-6-550 resulting from the ownership of an interest in a pass-through business. Active trade or business income or loss does not include:
(a)(i) passive investment income as defined in Internal Revenue Code Section 1362(d) generated by a pass-through business and income of the same type regardless of the type of pass-through business generating it; and
(ii) expenses related to passive investment;
(b) capital gains and losses;
(c) any payments for services referred to Internal Revenue Code Section 707(c);
(d) amounts reasonably related to personal services. All amounts paid as compensation are deemed to be reasonably related to personal services. In addition, if an owner of a pass-through entity who performs personal services for the entity is not paid a reasonable amount for those personal services as compensation or payments referred to in Internal Revenue Code Section 707(c), all of the owner's income from the entity is presumed to be amounts reasonably related to personal services.
(2) 'Pass-through businesses' mean sole proprietorships, partnerships, and S corporations, including limited liability companies taxed as sole proprietorships, partnerships, or S corporations.
(B)(1) Notwithstanding Section 12-6-510, an income tax at the rate provided in item (2) of this subsection is imposed annually on active trade or business income received by the owner of a pass-through business. The amount subject to tax pursuant to this section is not subject to tax pursuant to Section 12-6-510.
(2) The rate of the income tax imposed pursuant to this subsection is:
Taxable Year Beginning in Rate of Tax
2006 6.5 percent
2007 6 percent
2008 5.5 percent
after 2008 5 percent
(C) Notwithstanding any other provision of this chapter, active trade or business loss must first be deducted, dollar for dollar against active trade or business income. Any remaining active trade or business loss is multiplied by a fraction the numerator of which is the rate of tax imposed pursuant to subsection (B)(2) of this section, and the denominator of which is the highest income tax rate imposed pursuant to Section 12-6-510. The resulting amount is deductible from income taxed under Section 12-6-510 if otherwise allowable."
SECTION 2. This act takes effect upon approval by the Governor. /
Renumber sections to conform.
Amend title to conform.
HUGH K. LEATHERMAN, SR. for Committee.
REVENUE IMPACT1/
This bill, as amended by the Senate Finance Committee, is expected to reduce general fund individual income tax revenue by an estimated $2,250,0000 in FY2005-06, $22,500,000 in FY2006-07, $54,500,0000 in FY2007-08, $85,900,000 in FY2008-09 and by $128,900,000 in FY2009-10 when the top marginal rate of 5.0 percent would be reached.
Explanation of Amendment (March 29, 2005) - By the Senate Finance Committee
This bill, as amended by the Senate Finance Committee, would reduce the tax rate imposed on active business income earned by sole proprietors, shareholders of "S" Corporations, and owners of Partnerships (including Limited Liability Companies) by 0.5 percentage points per year beginning tax year 2006 until the top marginal rate reaches 5 percent in tax year 2009. Passive income such as interest, dividends and capital gains when not directly associated with a taxpayer's normal business activities would not be taxed at the reduced rates proposed by this bill. Adjusting for this exclusion and based on data from the Internal Revenue Service, reducing the top marginal individual income tax rate imposed on active business income earned by sole proprietors, shareholders of "S" Corporations, and owners of Partnerships (including Limited Liability Companies) by 0.5 percentage points per year beginning tax year 2006 would reduce General Fund individual income tax revenue by an estimated $22,500,000 in FY2006-07, $54,500,0000 in FY2007-08, $85,900,000 in FY2008-09 and by $128,900,000 in FY2009-10 when the top marginal rate of 5.0 percent would be reached. Factoring that taxpayers accounting for an estimated 10 percent of income would be expected to adjust their withholdings and/or estimated payments in anticipation of the first rate cut reduces general fund individual income tax revenue by an estimated $2,250,000 in FY2005-06.
Explanation of Amendment (February 2, 2005) - By the House of Representatives
This amendment changes the effective date in Section 3 of H.B. 3007 from July 1, 2006 to January 1, 2006 thereby making the effective date consistent with language in Section 1(A) of the bill. Tax year 2006 begins January 1, 2006 and ends December 31, 2006. This analysis already accounts for "taxes due for the 2006 taxable year". Expected adjustments to withholdings in response to anticipate tax law changes under this amendment would not differ from those already accounted for in the January 6 and January 20, 2005 impact statements. As such, changing the effective date of H.B. 3007 to January 1, 2006 would not change the current fiscal impact of the bill.
Explanation of Amendment (January 19, 2005) - By the House Ways and Means Committee
This bill, as amended, would reduce the current 7 percent top marginal rate by .225 per year beginning tax year 2006 until the top marginal rate reaches 4.75 percent and would fully adjust the state's tax brackets for inflation. Reducing the top marginal individual income tax rate by .225 percent per year and fully adjusting the state's tax brackets for inflation reduces General Fund individual income tax revenue by an estimated $6,700,000 in FY2005-06, $67,000,000 in FY2006-07, $137,000,000 in FY2007-08, $215,000,000 in FY2008-09 and by increasing amounts in succeeding years up to an estimated $1,012,000,000 in FY2015-16 when the top marginal rate of 4.75 percent is expected to be reached.
Explanation
This bill would reduce the current 7 percent top marginal rate by .225 per year beginning tax year 2006 effective on July 1, 2006 until the top marginal rate reaches 4.75 percent, which is expected to occur by tax year 2015. Based on personal income tax growth projections during the reduction period, individual income tax revenue is expected grow an average of 5 percent per year through 2015. As such, reducing the top marginal individual income tax rate by .225 percent per year beginning July 1, 2006 would reduce general fund individual income tax revenue by an estimated $62,000,000 in FY2006-07, $130,000,000 in FY2007-08, $204,000,000 in FY2008-09 and by increasing amounts in succeeding years up to an estimated $959,000,000 in FY2015-16 when the top marginal rate of 4.75 percent is expected to be reached. Because employees are not required to disclose their motivations when adjusting their withholdings, Section 2 of this bill is not expected to preclude adjustments to withholdings beginning in January 2006 by taxpayers who choose to take advantage of the rate reduction as soon as possible. As such, employees accounting for an estimated 10 percent of income would be expected to reduce their withholdings between January 1, 2006 and June 30, 2006 in anticipation of the first rate cut scheduled for July 1, 2006. These adjustments are expected to reduce individual income tax revenue by an estimated $6,000,000 in FY2005-06.
Approved By:
William C. Gillespie
Board of Economic Advisors
1/ This statement meets the requirement of Section 2-7-71 for a state revenue impact by the BEA, or Section 2-7-76 for a local revenue impact or Section 6-1-85(B) for an estimate of the shift in local property tax incidence by the Office of Economic Research.
TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING SECTION 12-6-515 SO AS TO REDUCE THE SEVEN PERCENT TOP MARGINAL RATE OF SOUTH CAROLINA INDIVIDUAL INCOME TAX IN EQUAL ANNUAL INCREMENTS OF .225 PERCENT UNTIL A PERMANENT TOP MARGINAL RATE EQUAL TO 4.75 PERCENT IS ACHIEVED AND TO PROVIDE THAT A SCHEDULED REDUCTION IS POSTPONED IF GENERAL FUND REVENUE GROWTH FOR THE APPLICABLE FISCAL YEAR IS LESS THAN TWO PERCENT.
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. Article 5, Chapter 6, Title 12 of the 1976 Code is amended by adding:
"Section 12-6-515. (A) Notwithstanding the rates of taxes imposed pursuant to Section 12-6-510, beginning with taxes due for the 2006 taxable year and continuing each taxable year thereafter, the then applicable top marginal rate of income tax imposed by that section is reduced by .225 until the top marginal rate of income tax attains a permanent rate of 4.75 percent. The department shall make the necessary adjustments to the rates and the brackets otherwise applicable pursuant to Section 12-6-510.
(B) Notwithstanding the scheduled reductions in the top marginal income tax rate provided in subsection (A) of this section, beginning with the top marginal rate applicable for taxable year 2007, the reduction otherwise scheduled must not be made for that taxable year if estimated general fund revenue growth as established in the February fifteenth revenue forecast of the Board of Economic Advisors is less than two percent of the most recent estimate by the board of general fund revenues for the current fiscal year. No reduction in the top marginal rate made pursuant to this section may exceed .225 for any one taxable year.
In addition, no reductions in the income tax rates provided for in this section for any taxable year may occur unless the Board of Economic Advisors certifies that sufficient general fund revenues for the fiscal year immediately following the reduction will remain available for the General Assembly in the annual general appropriations act for that year to maintain K-12 education funding at the level of the previous year.
In addition, no reductions in the income tax rates provided for in this section for any taxable year may occur unless the Board of Economic Advisors certifies that sufficient general fund revenues for the fiscal year immediately following the reduction will remain available for the General Assembly in the annual general appropriations act for that year to maintain law enforcement funding at the level of the previous year."
SECTION 2. Section 12-6-520 of the 1976 Code is amended to read:
"Section 12-6-520. Each December 15, the department shall cumulatively adjust the brackets in Section 12-6-510 in the same manner that brackets are adjusted in Internal Revenue Code Section (1)(f). However, the adjustment is limited to one-half of the adjustment determined by Internal Revenue Code Section (1)(f), may not exceed four percent a year, and the rounding amount provided in (1)(f)(6) is ten dollars. The brackets, as adjusted, apply in lieu of those provided in Section 12-6-510 for taxable years beginning in the succeeding calendar year. Inflation adjustments must be made cumulatively to the income tax brackets."
SECTION 3. Section 1 of this act takes effect January 1, 2006. Section 2 of this act takes effect upon approval of this act by the Governor and first applies for bracket adjustments calculated for taxable year 2006.
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