SC’s Tax Structure: Good, Bad, or Just Plain Awful?

In recent months, some of our state lawmakers have spoken of South Carolina’s tax structure as if it’s the lowest, most business-friendly in the world. Some, indeed, have claimed we have the “lowest taxes in the nation.” But before you take the hype at face value, consider:

1) South Carolina does not have the “lowest taxes in the nation.”

We have the lowest tax collections in the nation. Why? Because we’re one of the poorest states in the nation. In other words: The government collects fewer dollars because there are fewer dollars to collect.

Not only is the “lowest taxes in the nation” boast untrue. It’s the reverse of reality. We have the 15th highest sales tax rate in the country, we have 7 percent income tax on nearly everyone, we have the highest manufacturing property tax in the country, and we have a huge debt load – ensuring high taxes for the foreseeable future.

2) No assessment of South Carolina’s tax structure can ignore our fines and fees – among the highest in the nation.

South Carolina’s state budget now relies heavily on fines and fees: revenue from them, categories as “Other Funds,” represents a full third of our state budget.  The troubling thing about fines and fees is that they’re hidden taxes. When lawmakers raise them or allow state agencies to raise them, there are generally very few political consequences. Hikes in fines and fees frequently aren’t debated on the floors of the House and Senate. The process is so murky, in fact, that in 2011 the legislature authorized (via proviso 70.27) the creation of an Other Funds Oversight Committee – because not even legislators understand just how burdensome these hidden taxes have become.

3) The high sales tax fosters a culture of favoritism in Columbia.

As long as lawmakers keep the sales tax high, they have the power to dispense exemptions to well-connected friends and political allies in the corporate world. For this reason, many companies and industry groups with a presence in South Carolina have invested heavily in what economists call “rent seeking” or “unproductive entrepreneurship”: that is, rather than investing in their own products or services, companies devote more and more resources persuading lawmakers to grant them tax favors. Our publication Unleashing Capitalism (chapter 3, page 65) found that South Carolina has the 19th highest rate of unproductive entrepreneurial activity among states, while only the 29th highest rate of productive entrepreneurship.

A lawsuit currently before the state Supreme Court brings the issue to life in a particularly striking way. The suit alleges that the state’s sales tax law is so full of exemptions as to be unconstitutional – requiring nothing from favored companies and industries, and hefty sums from everyone else. An unbiased observer might think the current sales tax regime would be difficult to defend. Yet legislative leaders are defending it as if their livelihoods depended on it: because, in a sense, they do. Two powerful lawmakers went so far as to characterize the suit as a crass partisan attempt to raise taxes. Whatever the merits of the lawsuit, these critics’ over-the-top partisan rancor illustrates this simple point: that South Carolina’s high sales tax has nothing to do with fostering a healthy business climate and nothing to do with revenue. It has everything to do with protecting political careers.

4) The state’s corporate income tax is an economic drag.

In 1995, the Tax Foundation published a powerful study in which they demonstrated businesses spent $38.70 per hour (roughly $54 per hour today) complying with federal corporate income tax laws. Every dollar spent on compliance costs means fewer dollars available for job creation and private investment. Given that the state corporate income tax makes up only 4.5 percent of General Fund revenue (in part because of the many exemptions – see above), it’s easy to see that the tax is an impediment to economic growth.

5) Lawmakers continue to consider tax increases over spending cuts.

In 2010, for example, lawmakers justified a 50-cent increase in the cigarette tax by saying the revenue would go to shore up Medicaid. Leave aside the fact that any cigarette tax increase is a decline source of revenue – indeed one of the arguments in its favor was that it would discourage smoking – while Medicaid is a constantly expanding burden on state resources. The telling fact is that lawmakers never even considered cutting, say, economic development or tourism marketing programs in order to pay for any shortfalls in Medicaid.

Far from praising or boasting on our state’s tax structure, we’re better off describing it as it is: Too high, too complex, too reliant on hidden taxes, and riddled with politically motivated exemptions.