COMMITTEE REPORT

April 23, 2015

H. 3147

Introduced by Reps. G.M. Smith, G.R. Smith, Huggins, Weeks, Taylor, Pope, Collins, Johnson, Stavrinakis and Yow

S. Printed 4/23/15--H.

Read the first time January 13, 2015.

To whom was referred a Bill (H. 3147) to amend Section 12-6-1140, as amended, Code of Laws of South Carolina, 1976, relating to deductions from South Carolina taxable income of individuals for purposes, etc., respectfully

That they have duly and carefully considered the same and recommend that the same do pass:

W. BRIAN WHITE for Committee.

Fiscal Impact Summary

This legislation will have a minimal expenditure impact from revising forms and instructions. The Department of Revenue will have some additional general fund expenditures that can be absorbed within their current funding.

This bill would reduce general fund individual income tax revenue by an estimated $9,442,160 in FY 2015-16, the first year of the three year phase-in. In FY 2016-17 when the deduction increases to 66.66 percent, the additional revenue reduction is an estimated $10,256,119. In the final year with the 100 percent deduction, the additional revenue reduction is an estimated $11,133,974 in FY 2017-18 for an estimated total reduction in general fund individual income tax revenue of $30,832,254 over the three-year phase-in.

State Expenditure

A bill relating to deductions from South Carolina taxable income of individuals so as to allow a deduction of retirement benefits attributable to service on active duty in the armed forces of the United States.

The Department of Revenue estimates that this legislation will have a minimal expenditure impact on the department from revising forms and instructions. The department will have some additional general fund expenditures that can be absorbed within their current funding.

State Revenue

This bill allows a deduction of military retirement benefits attributable to service on active duty in the armed forces of the United States for taxable years beginning after 2014 from South Carolina individual income tax. This deduction is phased-in over three years with the deduction being 33.33 percent in tax year 2015. The deduction rises to 66.66 percent in tax year 2016 and reaches 100 percent in tax year 2017. This proposal would also amend Section 12-6-1170(A)(2) to modify the definition of "retirement income" that is subject to the $3,000 or $15,000 exclusion, depending on the age of the taxpayer, to not include military retirement income for taxable years beginning after 2016. This ensures that taxpayers cannot deduct military retirement benefits twice.

Based on the latest data from the U.S. Department of Defense, Office of the Actuary, there were 57,755 military retirees in South Carolina as of September 2013 receiving $1,361,388,000 in annual military retirement benefits. This equates to an average annual retirement benefit of $23,572 for each retiree in South Carolina.

Since Section 12-6-1170 allows different amounts of retirement income deductions by taxpayers depending on their age, we use Department of Defense data to segregate these taxpayers into two categories: age 65 and older, and under age 65. Taxpayers age 65 and older may deduct retirement income of up to $15,000 per year, while taxpayers under age 65 may deduct retirement income up to $3,000 per year.

Adjusting the number of South Carolina military retirees and their retirement income in tax year 2013 to tax year 2015, or FY 2015-16, we anticipate 30,450 taxpayers age 65 or older with military retirement income totaling $798,214,000. This results in an average $26,214 annual military retirement benefit. After accounting for the current $15,000 deduction and any non-taxable retirement income such as disability payments, we estimate that the remaining $323,210,000 in taxable retirement benefits at an average tax rate of 2.9% would generate $9,373,090 in individual income tax revenue in FY 2015-16. Adjusting this amount for the 33.33 percent deduction allowed in tax year 2015 results in an estimated $3,124,051 reduction in general fund individual income tax revenue in FY 2015-16.

We also anticipate 28,717 taxpayers under age 65 with military retirement income totaling $665,618,000, resulting in an average $23,179 annual military retirement benefit. After accounting for the current $3,000 deduction and any non-taxable retirement income such as disability payments, we estimate that the remaining $557,536,000 in taxable retirement benefits multiplied by an average tax rate of 3.4% will generate $18,956,224 in individual income tax revenue in FY 2015-16. Adjusting this amount for the 33.33 percent deduction allowed in tax year 2015 results in an estimated $6,318,109 reduction in general fund individual income tax revenue in FY 2015-16.

The average tax rates used in this analysis are based on a re-calculation of the income tax for each return after the proposed deduction is applied. This method takes into account the large number of returns that have zero taxable income, returns that are reduced to zero taxable income by the deduction, and returns that do not benefit from the full amount of the proposed deduction. The tax rates for the two age groups are different because the larger deduction for age 65 and older further reduces remaining South Carolina income subject to tax.

Combining the revenue impact for these two age groups results in an estimated $9,442,160 total reduction in general fund individual income tax revenue in FY 2015-16, the first year of the three year phase-in. The total reduction in general fund individual income tax revenue in FY 2016-17 with the 66.66 percent deduction is an estimated $19,698,280. In the final year with the 100 percent deduction, the total reduction in general fund individual income tax revenue is an estimated $30,832,254 for FY 2017-18. The attached tables report the total revenue reduction by fiscal year for all military retirees and by the two age groups, age 65 and older and below age 65, discussed above.

Individual Income Tax Deduction for All Military Retirement Benefits

Department

of Defense,

Office of the

Actuary                                    Growth                        Growth        Average

Retirement                    Total        in            Total Annual    in            Annual

Statistical                    Number        Number        Military            Military        Military

Report                        of Military    of            Retirement        Retirement    Retirement

Date        Fiscal Year        Retirees        Military        Payments        Payments    Payments

Sep-08        FY 2008-09        54,718        Retirees        1,142,088,000                20,872

Sep-09        FY 2009-10        55,433        1.31%        1,235,712,000    8.20%        22,292

Sep-10        FY 2010-11        55,878        0.80%        1,249,632,000    1.13%        22,364

Sep-11        FY 2011-12        56,486         1.09%        1,266,108,000     1.32%        22,415

Sep-12        FY 2012-13        57,118         1.12%        1,323,996,000     4.57%        23,180

Sep-13        FY 2013-14        57,755         1.12%        1,361,388,000     2.82%        23,572

Estimate        FY 2014-15        58,446         1.20%        1,411,450,000     3.68%        24,150

Estimate        FY 2015-16        59,167         1.23%        1,463,832,000     3.71%        24,741

Estimate        FY 2016-17        59,918         1.27%        1,518,651,000     3.74%        25,345

Estimate        FY 2017-18        60,702         1.31%        1,576,034,000     3.78%        25,964

Annual

Retirement

Payments

Deducted                                                                Total Tax        Annual Tax

Under                                                                    Revenue        Revenue

Current                                                        Current        Reduction        Reduction

Law,                                                        Tax on        for Three Year    for Three Year

Maximum                                    Remaining        Remaining    Phase-in         Phase-in

$3,000 or                        Growth        Taxable            Taxable        to 100%            to 100%

$15,000            Disability        in            Military            Military        Military            Military

Depending        Payments        Disability    Retirement        Retirement    Retirement        Retirement

on Age            (Not Taxable)    Payments    Income            Income        Reduction        Reduction

458,358,000        35,004,000                     648,726,000        21,235,179            

466,455,000        37,020,000         5.76%        732,237,000        23,855,793            

474,306,000        36,912,000         -0.29%        738,414,000        24,039,156            

484,278,000        37,260,000        0.94%        744,570,000        24,220,305            

502,206,000        37,248,000         -0.03%        784,542,000        25,420,833            

516,729,000        38,544,000         3.48%        806,115,000        26,056,980            

529,602,000        39,345,000         2.08%        842,503,000        27,165,882            

542,906,000        40,180,000         2.12%        880,746,000        28,329,314    9,442,160        9,442,160

556,650,500        41,050,000        2.17%        920,950,500        29,550,375    19,698,280        10,256,119

570,852,000        41,956,000         2.21%        963,226,000         30,832,254    30,832,254        11,133,974

Individual Income Tax Deduction for Military Retirement Benefits for Retirees Age 65 and Older

Growth

Department                                in

of Defense,                                Number

Office of the                    Number        of                                        Average

Actuary                        of Military    Military                        Growth        Annual

Retirement                    Retirees        Retirees                        in            Retirement

Statistical                    Age 65        Age 65        Annual            Military        Payments

Report                        and            and            Retirement        Retirement    Age 65 and

Date        Fiscal Year        Older        Older        Payments        Payments    Older

Sep-08        FY 2008-09        24,517                     550,488,000                     22,453

Sep-09        FY 2009-10        25,013         2.02%        602,592,000        9.47%        24,091

Sep-10        FY 2010-11        25,556         2.17%        616,116,000        2.24%        24,108

Sep-11        FY 2011-12        26,235         2.66%        630,888,000        2.40%        24,048

Sep-12        FY 2012-13        27,571         5.09%        683,064,000         8.27%        24,775

Sep-13        FY 2013-14        28,622         3.81%        717,816,000         5.09%        25,079

Estimate        FY 2014-15        29,522         3.14%        756,948,000         5.45%        25,640

Estimate        FY 2015-16        30,450         3.14%        798,214,000         5.45%        26,214

Estimate        FY 2016-17        31,408         3.14%        841,729,000         5.45%        26,800

Estimate        FY 2017-18        32,396         3.14%        887,616,000         5.45%        27,399

Annual                                                                    Total Tax        Annual Tax

Retirement                                                                Revenue        Revenue

Payments                                                    Current        Reduction        Reduction

Deducted                                                    Tax on        for Three Year    for Three Year

Under                                        Remaining        Remaining    Phase-in         Phase-in

Current                            Growth        Taxable            Taxable        to 100%            to 100%

Law,            Disability        in            Military            Military        Military            Military

Maximum        Payments        Disability    Retirement        Retirement    Retirement        Retirement

$15,000            (Not Taxable)    Payments    Income            Income        Reduction        Reduction

367,755,000        18,432,000                     164,301,000        4,764,729        

375,195,000        19,344,000         4.95%        208,053,000        6,033,537        

383,340,000        19,392,000         0.25%        213,384,000        6,188,136        

393,525,000        18,348,000         -5.38%        219,015,000        6,351,435        

413,565,000        18,780,000         2.35%        250,719,000        7,270,851        

429,330,000        18,300,000         -2.56%        270,186,000        7,835,394        

442,830,000        18,274,000         -0.14%        295,844,000        8,579,476        

456,756,000        18,248,000         -0.14%        323,210,000        9,373,090    3,124,051        3,124,051

471,118,500        18,222,000         -0.14%        352,388,500        10,219,267    6,812,163        3,688,112

485,934,000        18,196,000         -0.14%        383,486,000        11,121,094    11,121,094        4,308,931

The number of military retirees, annual retirement payments, and disability payments growth rates for FY 2014-15 to FY 2017-18 are estimated using the compound average growth rates from FY 2008-09 to FY 2013-14.

Individual Income Tax Deduction for Military Retirement Benefits for Retirees Below Age 65

Department                                Growth

of Defense,                                in

Office of the                                Number                                    Average

Actuary                        Number        of                            Growth        Annual

Retirement                    of Military    Military                        in            Retirement

Statistical                    Retirees        Retirees        Annual            Military        Payments

Report                        Below        Below        Retirement        Retirement    Below

Date        Fiscal Year        Age 65        Age 65        Payments        Payments    Age 65

Sep-08        FY 2008-09        30,201                     591,600,000                     19,589

Sep-09        FY 2009-10        30,420         0.73%        633,120,000         7.02%        20,813

Sep-10        FY 2010-11        30,322         -0.32%        633,516,000         0.06%        20,893

Sep-11        FY 2011-12        30,251         -0.23%        635,220,000         0.27%        20,998

Sep-12        FY 2012-13        29,547         -2.33%        640,932,000         0.90%        21,692

Sep-13        FY 2013-14        29,133         -1.40%        643,572,000        0.41%        22,091

Estimate        FY 2014-15        28,924         -0.72%        654,502,000         1.70%        22,628

Estimate        FY 2015-16        28,717         -0.72%        665,618,000         1.70%        23,179

Estimate        FY 2016-17        28,511         -0.72%        676,922,000         1.70%        23,743

Estimate        FY 2017-18        28,306         -0.72%        688,418,000         1.70%        24,321

Annual                                                                    Total Tax        Annual Tax

Retirement                                                                Revenue        Revenue

Payments                                                    Current        Reduction        Reduction

Deducted                                                    Tax on        for Three Year    for Three Year

Under                                        Remaining        Remaining    Phase-in         Phase-in

Current                            Growth        Taxable            Taxable        to 100%            to 100%

Law,            Disability        in            Military            Military        Military            Military

Maximum        Payments        Disability    Retirement        Retirement    Retirement        Retirement

$15,000            (Not Taxable)    Payments    Income            Income        Reduction        Reduction

90,603,000        16,572,000                     484,425,000        16,470,450        

91,260,000        17,676,000         6.66%        524,184,000        17,822,256        

90,966,000        17,520,000         -0.88%        525,030,000        17,851,020        

90,753,000        18,912,000         7.95%        525,555,000        17,868,870        

88,641,000        18,468,000         -2.35%        533,823,000        18,149,982        

87,399,000        20,244,000         9.62%        535,929,000        18,221,586        

86,772,000        21,071,000         4.08%        546,659,000        18,586,406        

86,150,000        21,932,000         4.08%        557,536,000        18,956,224    6,318,109        6,318,109

85,532,000        22,828,000         4.08%        568,562,000        19,331,108    12,886,117        6,568,007

84,918,000        23,760,000         4.08%        579,740,000        19,711,160    19,711,160        6,825,043

The number of military retirees, annual retirement payments, and disability payments growth rates for FY 2014-15 to FY 2017-18 are estimated using the compound average growth rates from FY 2008-09 to FY 2013-14.

Frank A. Rainwater, Executive Director

Revenue and Fiscal Affairs Office

TO AMEND SECTION 12-6-1140, AS AMENDED, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO DEDUCTIONS FROM SOUTH CAROLINA TAXABLE INCOME OF INDIVIDUALS FOR PURPOSES OF THE SOUTH CAROLINA INCOME TAX ACT, SO AS TO ALLOW THE DEDUCTION OF RETIREMENT BENEFITS ATTRIBUTABLE TO SERVICE ON ACTIVE DUTY IN THE ARMED FORCES OF THE UNITED STATES; AND TO AMEND SECTION 12-6-1170, AS AMENDED, RELATING TO THE RETIREMENT INCOME DEDUCTION, SO AS TO CONFORM THIS DEDUCTION TO THE MILITARY RETIREMENT DEDUCTION ALLOWED BY THIS ACT.

Be it enacted by the General Assembly of the State of South Carolina:

SECTION    1.    This act may be cited as the "South Carolina Giving Back to Our Veterans Act".

SECTION    2.    Section 12-6-1140 of the 1976 Code is amended by adding a new item at the end to read:

"(12)    for taxable years beginning after 2016, military retirement benefits attributable to service on active duty in the armed forces of the United States."

SECTION    3.    Section 12-6-1170(A)(2) of the 1976 Code is amended to read:

"(2)    The term 'retirement income', as used in this subsection, means the total of all otherwise taxable income not subject to a penalty for premature distribution received by the taxpayer or the taxpayer's surviving spouse in a taxable year from qualified retirement plans which include those plans defined in Internal Revenue Code Sections 401, 403, 408, and 457, and all public employee retirement plans of the federal, state, and local governments, including military retirement. After taxable year 2016, military retirement is not included as retirement income for purposes of the deduction allowed by this section."

SECTION    4.    In addition to amounts allowed as a deduction pursuant to Section 12-6-1170 of the 1976 Code, there is allowed as a deduction from South Carolina taxable income of individuals for purposes of the South Carolina Income Tax Act a portion of otherwise taxable military retirement benefits attributable to service on active duty in the armed forces of the United States according to the following schedule:

Taxable Year            Deduction Percentage

2015                                33.33 percent

2016                                66.67 percent.

SECTION    5.    This act takes effect upon approval by the Governor and applies for taxable years beginning after 2014.