The New South Carolina Gas Tax

By Erik Doerring
from McNair’s Tax Law Insights Blog

South Carolina’s gas tax is one of the lowest in the country. The result is the deplorable condition of the state’s highway system and roads. South Carolina is a conservative state, politically, and any tax increase, gas or otherwise, is often seen as political suicide for our state’s elected officials.

Due to a groundswell of outcry, however, from residents, businesses, and even now from public officials, the state is about to pass major legislation to fund much-needed road improvements, and with the funding to be from a variety of new “fees” (note the aversion to referencing anything as a new “tax”).

The South Carolina General Assembly has adopted House Bill 3516 (H 3516), which was the result of compromise negotiations between the state’s Senate and House. The Bill was presented to Governor Henry McMaster, who promptly vetoed the Bill, as expected. Governor McMaster was adamant in his public statements that he would not sign the Bill, viewing it as a “tax increase”. Governor McMaster rose to his position when then Governor Nikki Haley was appointed by President Trump as the U.S. Ambassador to the United Nations, and then Lieutenant Governor McMaster became the Governor of the state. Governor McMaster now faces election in 2 years. Both the South Carolina House and Senate have now over-ridden the Governor’s veto by substantial majorities, and the Bill will then be law effective July 1, 2017.

The main tax aspects of the new law are:

• The present 16.75 cents/gallon gas tax will be increased by a 12 cent/gallon “motor vehicle user fee,” with the increase phased-in at a 2 cent/gallon rate over the next 6 years.
• The state’s biennial vehicle registration fee will be increased from $26 to $40 for most people.
• The state’s sales tax on the purchase of a vehicle will be increased from $300 to $500 (an “infrastructure maintenance fee” now), but if a vehicle is bought out of state and then later registered in South Carolina, the fee is reduced to $250.
• Electric vehicle owners (e.g. Tesla) must pay a special “road use fee” of $120 every 2 years, but with the fee being reduced to $60 every 2 years for hybrids.
• A separate “road use fee” is imposed on commercial vehicles, and property tax rates change for commercial vehicles as well.
• South Carolina residents are now provided a refundable state income tax credit for the lessor of the (1) additional “motor vehicle user fee” paid, or (2) the costs of maintenance for a vehicle, including tires, oil changes, and regular maintenance. The credit may be claimed on up to 2 private passenger vehicles. SCDOR is given authority to adopt rules and regulations for claiming the credit.
• The new gas tax bill also provides other tax breaks, unrelated to raising funds to repair the states roads, and which include (A) an earned income tax credit; (B) two-wage earner income tax credit; (C) a college tuition tax credit; (D) and an important 15% property tax reduction for the value of manufacturing property in the state (phased in over 6 years). These credits and other tax reductions were added as part of the “legislative process”, to reach agreement and compromise among the legislators to pass the Bill.