As part of his proposal to attract more out-of-state businesses and encourage job growth, Gov. Mark Sanford last week announced a series of proposed tax changes that are expected to be revenue neutral and are not likely to affect South Carolina’s credit rating, according to an economist.

Sanford said his plan would phase out the current 5% corporate income tax over the next 10 years and would be offset by eliminating most corporate tax exemptions and other incentives. He also proposed changing the graduated personal income tax rate to an optional flat rate of 3.65%.

The optional plan would cut by almost half the 7% personal income tax rate paid by those in the state’s highest tax bracket. The graduated tax structure would remain available for earners who pay less than 3.65%. The plan includes indexing the tax rate to inflation.

The tax cuts would be offset by hike in the cigarette tax to 30 cents from seven cents — the lowest such tax in the country — as well as a $3 per ton tax on landfill dumping to profit from the garbage South Carolina imports from other states. Sanford also proposes ending sales tax holidays.

The tax changes “wouldn’t give me particular reason to worry about the state’s credit rating,” said Josh Barro, an economist with the Tax Foundation in Washington, D.C. He said the tax cuts are designed to be “revenue neutral” because they are offset by the proposed tax increases. Corporate income taxes only account for 4.8% of state tax revenues.

“If the revenues fell short, that could change the state’s revenue picture, but that would also be true even without a change to the tax code,” Barro said.

South Carolina collected $5.6 billion in taxes in fiscal 2008, said a Dec. 15 report on budgets from the National Governors Association and the National Association of State Budget Officers, and those revenues were estimated to increase by 5.8% in fiscal 2009.

However, lawmakers held a special session in October and slashed the state budget by $488 million due to lagging revenues. The state expects another deficit by the end of the fiscal year.

South Carolina is rated triple-A by Moody’s Investors Service and Fitch Ratings and AA-plus by Standard & Poor’s.

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