The 2026 South Carolina Responsible Budget: A Blueprint for Fiscal Discipline and Economic Growth

Originally published at South Carolina Policy Council with Sam Aaron. See this link for all figures.

​By Vance Ginn, PhD., and Sam Aaron

South Carolina has enjoyed significant economic success. With strong labor market growth and a favorable climate for business investment, the state continues to be one of the fastest-growing states in the nation. However, without a responsible approach to budgeting, this progress risks being overshadowed by excessive government spending. 

The S.C. Policy Council created the South Carolina Responsible Budget (SCRB) project to encourage lawmakers to adopt responsible spending restraints. This report highlights why state legislators must prioritize fiscal discipline through a responsible budgeting framework that aligns spending growth with population growth and inflation. Such a policy will enable long-term prosperity and provide room for meaningful relief – specifically, the eventual elimination of personal income taxes.

What is a Responsible Budget
A responsible budget is a budgeting model that limits appropriations based on population growth plus inflation. This approach accounts for these two metrics while considering economies of scale, recognizing that a simple increase in population does not always require a proportional increase in spending.

The SCRB does not specify how general funds should be allocated. Instead, it sets a recommended limit on the total amount that should be appropriated, ensuring that any necessary spending growth remains affordable.

Last year, South Carolina accelerated the income tax cuts passed in 2022, simplifying and lowering personal income taxes (as supported by SCPC). However, if the state is serious about eliminating income taxes, it must follow a model that restrains spending. The SCRB is the perfect tool for this purpose.

Current Labor Market and Economic Standing
South Carolina’s labor market remains strong but faces challenges in maintaining its competitive edge. As of September 2024:

• Civilian Labor Force: 2.53 million, an increase of approximately 43,000 from April 2024. This growth reflects South Carolina's ability to attract workers and underscores the need for policies supporting continued job creation. (The civilian labor force is the total number of employed plus unemployed persons.)
• Unemployment Rate: Rising to 4.5% from 3.2% in April 2024, highlighting the importance of job growth through fiscal responsibility and business-friendly policies.
• Non-farm Employment: Non-farm jobs have increased by 25,900 since April, with notable growth in the construction (8%) and information services (6.6%) sectors. The construction industry is critical, especially as South Carolina experiences significant population growth and urban development.

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South Carolina’s real Gross Domestic Product (GDP) grew by 4.5% annually in Q2 2024, outperforming the national average of 3.0%, while personal income rose by 6.9% year-over-year, the fastest in the country. 
These metrics reflect a healthy economy; however, fiscal mismanagement could put this progress at risk. Excessive spending, as seen in recent budgets, jeopardizes long-term growth and diminishes the state’s ability to respond to future economic challenges.

SC Appropriations vs. Responsible Budget
South Carolina’s general fund appropriations have consistently exceeded sustainable limits, as shown in Figure 1. Over the last decade, the state has failed to align spending with population growth and inflation, opting for rapid budget expansion. This trend threatens the state’s fiscal foundation.

Key Takeaways

1. Had South Carolina followed the SCRB, the FY25 budget would have been $2.9 billion smaller than the actual budget. This means nearly $3 billion could have remained in taxpayer hands. The cumulative annual budget differences amount to an astonishing $14.86 billion, funds that could have remained with taxpayers under the SCRB framework.
2. Actual appropriations increased by over 103% from FY13 to FY25, while a responsible approach based on the rate of population growth plus inflation would have limited growth to nearly 56%. These substantial, scarce taxpayer resources could have been used for tax relief. 
3. The gap between actual and SCRB-limited appropriations is getting larger. Actual FY25 appropriations ($12.4 billion) are 30.5% higher than SCRB-limited appropriations ($9.5 billion) for the same year, whereas actual appropriations exceeded SCRB-limited appropriations by 27.4% for FY23.

Spending Growth vs. Inflation and Population
Such uncontrolled spending burdens taxpayers and reduces the state’s ability to maintain a competitive tax environment. Without reform, South Carolina risks falling behind neighboring states like North Carolina, which has adopted more disciplined budgeting practices.

Setting a Responsible Budget Limit
South Carolina must adopt the SCRB framework for fiscal year 2026, which starts July 1 this year,  to curb excessive growth. Under this model:

• The FY 2026 SCRB limit is $12.96 billion, an increase of 4.56% based on estimated population growth of 1.59% and an index inflation rate of 2.97% in 2024 over the FY 2025 base of $12.40 billion (Figure 3). Staying below this threshold will ensure that spending aligns with taxpayer affordability.

By adhering to this limit, South Carolina can establish a fiscal surplus that supports tax reductions, particularly the acceleration of personal income tax cuts. The South Carolina Policy Council's data-driven recommendations support this approach.

The Case for Surplus Triggers
South Carolina’s current revenue triggers for tax reductions rely on meeting specific revenue growth thresholds. While effective in the short term, these triggers often delay relief during economic uncertainty. Conversely, surplus triggers directly tie tax cuts to actual budget surpluses, ensuring that excess revenue is returned to taxpayers without incentivizing unnecessary government growth.

States like North Carolina have successfully implemented revenue-triggered tax cuts, reducing their income tax rate to 2.49% by 2030. South Carolina should follow this direction but instead, use the surplus buydown that allocates surplus funds above a strict spending limit to:

• Immediately reduce the top income tax rate to 6%.
• Develop a phased plan to eliminate personal income taxes.

Surplus triggers, combined with spending limits, create a disciplined framework for reducing and eliminating personal income taxes based on actual fiscal health. This approach ensures responsible, lasting tax relief while fostering economic growth and long-term competitiveness.

Comparisons with Nearby States
South Carolina’s tax system ranks 33rd overall in the Tax Foundation’s 2025 State Tax Competitiveness Index. While the state boasts a competitive corporate tax rate of 5%, its individual income tax system and reliance on property and sales taxes hinder its economic standing:

• Nearby States:
  • North Carolina: Flat individual income tax rate of 4.25% (heading to 2.49%).
  • Georgia: Lower overall tax burden and competitive regulatory environment.
  • Tennessee: Zero state income taxes ranking 8th on the Tax Foundation's Index.
  • Florida: Zero state income taxes ranking 4th on the Tax Foundation's Index.

South Carolina’s reliance on a split-roll property tax system and capital stock taxes penalizes investment and business growth. The state’s split roll property tax system imposes school taxes on commercial and industrial properties while exempting residential properties. This policy increases costs for businesses and renters, creating an uneven tax burden that disadvantages job creators and those who lease rather than own homes. Addressing these structural issues is critical to ensuring South Carolina remains competitive in attracting jobs and businesses. 

Recommendations for Reform
To secure South Carolina’s fiscal future, legislators should adopt the following reforms:

1. Cap Spending Growth: Limit annual state appropriations to a maximum of the rate of population growth plus inflation, ensuring the government does not outpace the economy. This spending limit should be applied to local governments as well like Colorado’s Taxpayer’s Bill of Rights. (TABOR)
2. Implement Surplus Triggers: Use surplus revenue for immediate tax relief, prioritizing income tax cuts.
3. Zero-Based Budgeting: Require state agencies to justify all expenditures annually, eliminating wasteful spending. (SCPC)
4. Eliminate Income Taxes: Gradually phase out the state income tax, allowing South Carolina to compete with no-tax states for talent and investment.

Conclusion
South Carolina’s economic growth and rising revenues present an opportunity to implement transformative fiscal policies. The state can ensure long-term prosperity while maintaining its competitive edge by adhering to a responsible budget framework and prioritizing tax relief. Legislators must decisively curb overspending and return resources to taxpayers, ensuring South Carolina remains a beacon of opportunity.