Fast Facts: South Carolina’s Sales Tax

Fast Facts: South Carolina’s Sales Tax

South Carolina needs sales tax reform that is equitable and encourages economic growth. The best way to achieve this goal is to lower the sales tax for everyone – both businesses and consumers – and eliminate all exemptions.

Why does South Carolina need sales tax reform?

With a combined state and local rate of 7.04 percent, South Carolina has the 16^th highest sales tax in the nation. Numerous exemptions also complicate the code and increase compliance and lobbying costs.

What should the rate be?

Sales tax reform must be a part of comprehensive tax reform. In order to simplify the tax code, the state should pursue a tax strategy that relies primarily on one or two revenue streams: either a flat-rate income tax or a flat-rate sales tax or a combination of the two that provides for very low rates with very few exemptions. A competitive flat income tax rate would be 3.5 percent while a competitive sales tax rate would be about 3 percent.

Aren’t exemptions a good thing?

At first glance, exempting certain items from taxes may seem to lower costs for businesses and prices for consumers. In reality, tax exemptions shift costs from one class of taxpayers to all other taxpayers, resulting in a higher overall rate. Here are four reasons exemptions don’t make good economic sense:

They distort the market. Some companies benefit from exemptions more than others. Exempting some business inputs – like flour – but not others – like office equipment – results in government picking winners and losers in the marketplace.

They are unfair. South Carolina collects a sales tax of 6 percent on cars, boats and planes, but caps the total amount due at $300. While this tax break helps out many car buyers (the cap kicks in on any purchase over $5,000), it is also a boon to millionaires buying planes and yachts. A better solution is to lower the tax rate for everyone and treat all purchases equally.

They hurt South Carolina businesses. Sales tax exemptions are often provided to businesses expanding or locating from out-of-state. This policy penalizes homegrown, independent businesses. One example of particular relevance to South Carolina is Cabela’s Sporting Goods, which moved to Michigan in 1999 (but almost came here instead). Michigan gave the company $27 million in exemptions and incentives to open a new store. But another company – Jay’s Sporting Goods, which had been operating in Michigan since 1968 – did not receive a comparable tax break. In effect, Jay’s was forced to subsidize its out-of-state competition.

They increase lobbying and compliance costs. Given the opportunity to obtain special exemptions, businesses will try to obtain the maximum level of taxpayer funded assistance. But every dollar spent on lobbying is a dollar not spent on more productive endeavors that generate long-term wealth. According to Unleashing Capitalism, South Carolina ranks 33^rd in the nation in terms of net entrepreneurial productivity and has “higher levels of unproductive activity than fast-growth states with better scores on economic freedom such as Georgia, North Carolina, Delaware, Nevada, and Texas.”

How do you simplify the tax code?

The sales tax section of the state tax code is 306 pages. Fifty-two pages alone are dedicated to FAQs. A shorter, simpler tax code would free businesses to do what they do best – create jobs, wealth, and value in the economy – rather than sifting through obscure tax regulations. Simplifying the code is easy – eliminate all special-interest exemptions and require all businesses and consumers to pay the same low rate.

What do other states do?

Five states have no general statewide sales tax – Alaska, Delaware, Montana, New Hampshire and Oregon. Among the other states, Colorado has the lowest statewide sales tax (2.9 percent) and Hawaii has the lowest state/local combined tax (4.38 percent.) Including Hawaii, seven states have a 4 percent statewide rate. It’s also worth mentioning here that Colorado has a flat-rate individual income tax set at 4.63 percent, with the result that the state’s “tax environment for small businesses is competitive compared to other states,”  according to an analysis by The Tax Foundation.

Conclusion

Rather than placing businesses at the mercy of government – and creating incentives to waste resources on lobbying – the state should apply a low, uniform sales tax to everyone. But eliminating sales tax exemptions must be accompanied by a sizeable tax reduction. After all, broadening the base without also lowering the tax is nothing more than a tax increase.

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.