The most costly piece of the proposed Economic Development Competitiveness Act is the gradual elimination of the state's corporate income tax, a move that would strip hundreds of millions of dollars from already depleted state coffers and fail to provide any relief to more than 95 percent of the state's businesses.
What supporters like about the idea is the potential for luring big-dollar businesses to the state, which could offset the revenue losses with jobs, new income-tax revenue and other perks. The idea that South Carolina would not tax corporate income might capture the interest of other companies that are scouring the country in search of a place to expand, proponents say.
But Frank Knapp of the S.C. Small Business Chamber of Commerce said the proposal wouldn't help most existing small businesses, which don't pay corporate income tax on a technicality. Most small businesses are registered not as corporations but as other entities, such as partnerships or so-called s-corps.
Small businesses with fewer than 100 employees account for as much 97 percent of all businesses in the state, Knapp said. Most of the state's businesses have fewer than 50 employees.
And then there's the issue of reducing state revenue during a crippling budget crisis.
The state's corporate income tax, which is a tax on the profit a business makes, is the smallest component of the state's three-pronged income tax collection strategy. The other two sources are sales tax and individual income taxes.
"We call it the big three and that's No. 3," said John Rainey, the state's chief economic adviser, pointing out that it has generated between $140 million and $312 million in state revenue each year for the last ten years.
That figure is equivalent to roughly a tenth of all sales tax collected within the state each year, but it weighs small against the state's overall $5.6 billion budget.
"In the grand scheme of things, it's a manageable number," Rainey said.
Some in the state have voiced concern that if the Republican-controlled legislature continues to eliminate opportunities to generate tax revenues, the state won't be able to meet its obligations to provide essential public services.
"We cannot give tax relief after tax relief," Ken Kennedy, a Democrat from Greeleyville, has said in reference to past budget cuts. "There is no such thing as running a government on air."
South Carolina would become only the fifth state to eliminate corporate income tax, following behind states like Wyoming, South Dakota, Washington and Nevada. That could catch the attention of consultants who work with companies around the world that are looking to expand their operations, said attorney Burnie Maybank III, former head of the state Revenue Department who helped draft the proposal.
"It's really more of a marketing effort for the state," Maybank said.
The corporate income tax elimination piqued Charlotte-based site selection consultant John Krug when told of the proposal.
"That's quick, and it's certain. There's no guesswork, and that's attractive to businesses," he said. "Businesses don't like taxes... and anything that's offered on a more permanent basis would ultimately be more attractive."
There's nothing in the economic development bill that increases taxes to balance out the loss of corporate income tax revenue. Instead, proponents suggest a more organic solution: that the lower tax rate would attract enough new businesses who pay other taxes in other ways, making up the difference.
"It would have to be balanced by new growth," Maybank said.
Gov. Mark Sanford has called for corporate income tax elimination in the past, but his proposal called for cutting sales tax holidays, sales tax loopholes and other exemptions to balance out the loss. A Sanford spokesman said his office declined to comment on the House's proposal.