No income tax? This US state proposal ignites hype and serious budget fears

No income tax states US: A proposal to eliminate personal income tax in South Carolina is generating excitement but also raising major concerns about the state’s financial future.

South Carolina Moves Toward Eliminating Income Tax

Lawmakers have passed legislation, H 4216, to gradually phase out the state’s individual income tax, as per a report. The move could reduce revenue by $309 million in 2026 alone, with full elimination projected to cost more than $6.6 billion annually, nearly 45% of the state’s current general fund, according to the Institute on Taxation and Economic Policy (ITEP), as reported by The Sun.

Supporters Call It Simpler, Critics Warn of Risks

Supporters see the plan as a step toward a simpler and more competitive tax system. But critics warn the cost could come at a steep price. ITEP called the proposal “short-sighted,” cautioning that it could jeopardize public services that residents rely on.

What the New Tax Law Changes

The legislation, signed into law by Governor Henry McMaster in March, restructures the state’s tax system by moving from three income tax brackets to two. It also introduces a trigger mechanism starting in 2027, allowing further automatic rate cuts based on revenue growth, with the long-term goal of eliminating income tax entirely, as per The Sun report.

Some Taxpayers May See Higher Bills Initially

But the path forward may not be smooth for everyone. According to ITEP, about 23% of filers could initially see their taxes increase, with most of those increases affecting the top 20% of taxpayers. Meanwhile, the overall structure of the changes has been described as “regressive,” with the bottom 20% of household, those earning less than $23,200, expected to receive no tax savings, as per The Sun report.

Who Benefits the Most Over Time

Middle-income and working-class residents may see modest relief, with an average tax cut of $146 per year. In contrast, top earners are projected to benefit more significantly, with average savings of $3,139 in 2026. Over time, as rates fall closer to zero, those benefits are expected to grow. ITEP estimates that once income tax is fully eliminated, the top 1% could receive an annual tax cut of $51,063, or 3.46% of their income.

Broader Context: Other States Taking a Different Path

The proposal comes as other states move in the opposite direction, trying to preserve revenue amid financial pressures linked to federal tax and spending changes under US president Donald Trump’s One Big Beautiful Bill Act.

Support and Opposition Around the Plan

While critics highlight the potential risks, some groups, including Americans for Tax Reform, Americans for Prosperity, and the South Carolina Policy Council, support the plan, arguing it promotes tax reduction and simplification.

FAQs

What is South Carolina planning to do with income tax?

The state plans to gradually eliminate personal income tax through new legislation.

How much revenue could the state lose?

The plan could reduce revenue by $309 million in 2026 and over $6.6 billion annually if fully implemented.