The Best & Worst to Come: A Review of Tax and Spending Legislation for 2009-2010

As we review thebest and worst tax and spending legislation of 2009,it’s also time to begin to consider what ideas are likely to resurface during the 2010 session.

The big question for 2010 is whether legislators will raise taxes. The answer is yes, but in an election year such increases are likely to be indirect – via inflated brackets, additional fees, and, perhaps, a “broadening” of the sales tax base not accompanied by the elimination of special-interest exemptions that would facilitate lowering the tax overall. That being said, look for a direct tax increase in 2011 (not an election year), when the legislature can no longer rely on federal stimulus funds to balance the budget.

In spite of the “Great Recession,” this year’s FY09-2010 ratified budget was the second-largest in state history. If lawmakers refuse to cut nonessential spending when finances are tight, they are unlikely to do so once the economy improves. Lesson learned? The only way to reduce the growth of big government in South Carolina is to enact a constitutional amendment that effectively caps spending.

Best Ideas for 2010

1)      Enacting a Spending Cap: South Carolina’s constitution already provides for a spending cap – but one that is completely ineffective. Consider that for FY07-2008, the spending cap was $12.03 billion for General Fund, Highway Trust Fund and Education Improvement Act expenditures. Yet General Fund expenditures reached $6.72 billion and could have hit $9 billion under the current spending limit. H 3397 would cap General Fund increases at 6 percent or less, measured by population plus inflation. While this bill is not perfect – a better solution is to amend the constitution to limit state spending to a formula tied to the Consumer Price Index and issue refunds to taxpayers when revenue goes up – it would be a step in the right direction. The bill died in committee in 2009.

2)      Cutting Taxes: South Carolina’s tax burden (in relation to personal income) is just under the national average; although personal income and sales taxes are higher than neighboring North Carolina and Georgia. The following four reforms would make South Carolina more economically competitive:

• ·         Eliminate the corporate income tax. Abolishing South Carolina’s corporate income tax of 5 percent would improve the state’s business tax climate ranking from 26^th to 11^th. During the 2009 session, legislation (S 378/H 3424) was introduced that would have phased out the corporate income tax over 10 years. The best option is to immediately eliminate this inefficient tax.

• ·         Index brackets for inflation. Because South Carolina’s personal income tax brackets are not fully indexed for inflation, most South Carolinians are paying taxes at the top rate of 7 percent – one of the highest in the country. When the state’s top bracket ($13,351) kicks in at just $2,500 above poverty level, there is something wrong. S 145 could save taxpayers at least $5.5 million a year by adjusting tax brackets to 100 percent of inflation.  

• ·         Lower sales taxes for everyone. South Carolina’s combined state and local sales tax rate is 7.04 percent – 16^th highest in the country. The statewide sales tax of 6 percent is also far higher than that of neighboring Georgia (4 percent) and North Carolina (4.25 percent). Eliminating special-interest exemptions would enable legislators to lower the rate for all businesses and consumers.

• ·         Eliminate or lower the manufacturing property tax. South Carolina has the highest industrial property taxes in the Southeast. This tax should be eliminated or, at worst, lowered from an effective rate of 3.73 percent to 1.00 percent. Doing so, however, will require a state constitutional amendment.

3)      Eliminating Inefficient Programs: Along with closing the Teacher and Employee Retention Incentive (TERI) Program (S 242), the state should also implement a sunset review commission dedicated to reviewing programs that have “outlived their usefulness.” H 3192 would do just that, but the bill would be improved by requiring more frequent reviews – every 2 to 4 years, instead of once every 12 years.New for 2010 are two bills introduced by Senate President Pro Tempore Glenn McConnell. The first (S 897) would establish a Commission on Streamlining Government and Reduction of Waste with the stated goal of reducing state spending. The second measure (S 898) would zero-base agency budgets on a four-year rotating basis. This is a great idea, but one that has proven effective in other states only when accompanied by specific performance measures that look at comparable programs in other states and the private sector. 

Worst Ideas for 2010

1)      Increasing Fees and Fines: Fees and fines not only represent a hidden tax increase, but the revenue they provide is often set aside, via the ever growing “Other Funds” section of the budget, for nontransparent uses. Fees and fines increased in 2009 and are likely to go up again in 2010 – precisely because legislators think voters aren’t paying attention. Possible targets for 2010 are homeowners (S 30) and electronics users (H 3200) – i.e., virtually everyone.

2)      Passing More Targeted Tax Breaks/Exemptions: Tax breaks and exemptions cultivate an unfair business environment. Such tax breaks also increase compliance costs and drive up prices for consumers. Worst of all, as we saw with the recent Boeing incentives package, a lack of transparency often accompanies (if not facilitates) these deals. At the top of the list for 2010, is H 3722 (otherwise know as the BAT), a massive tax exemption package that includes a variety of special-interest bills that didn’t pass on their own. The measure could pass as early as January.

3)      Increasing Taxes: If a direct tax increase is unlikely, lawmakers are already starting to look at backdoor methods for raising revenue. One proposal under serious consideration is an expansion of the internet sales tax. The Taxation Realignment Commission (TRAC) has already taken testimony on this idea from officials in North Carolina. Other options that might be considered are a cigarette tax increase, local option tax increases, and an increase in the unemployment trust fund tax (as proposed by state Board of Economic Advisors Chairman John Rainey).

4)      Funding Recurring Spending with Nonrecurring Dollars: As noted by the governor’s veto, the FY09-2010 budget allocated $348 million in nonrecurring federal stimulus funds to pay for recurring services. But that’s just the tip of the iceberg. Such annualizations are expected to increase to $920 million by FY11-2012, after the stimulus money expires. As indicated above, not cutting spending in 2010 will all but guarantee a tax increase in 2011.

To read more about tax and spending legislation, click here.

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation. Copyright 2009. South Carolina Policy Council Education Foundation, 1323 Pendleton Street, Columbia, South Carolina 29201.