A news analysis by Bill Davis | South Carolina politicians, like country doctors, seem to have a limited number of remedies in their bag.
Bad roads? Cut taxes. Failing schools? Cut taxes. Economy faltering? Cut taxes. Crumbling infrastructure? Cut taxes.
Now in the final week of this year’s regularly scheduled legislative session, the General Assembly is stalled on a deal to increase the state’s lowly 16.75-cents-per-gallon gas tax to pay toward $40 billion in identified roads projects.
The proposed increase might need to be offset by a decrease in the state’s income tax for political reasons. This proposition became more contentious this week when it was revealed that the state took in $400 million more than it budgeted in the current fiscal year.
That could mean scuttling the ongoing backroom chatter about how to solve the impasse, despite this year perhaps offering the best opportunity for Columbia to tackle tax reform as there are no state elections and campaigns for office this year.
The only cure?
But is cutting, or revenue-neutral tax moves the only cure? Consider what’s been called the “Minnesota Miracle” in some quarters, where the governor there pushed for raising taxes and has since been rewarded with a robust state recovery from the Great Recession.
While some economists question whether the “miracle” was the result of properly fertilizing that state’s economy because market cycles and national forces were more to blame, could South Carolina, with its bad roads, lagging public schools and paltry health care numbers need a similar miracle?
And if a tax increase is in order, which ones and how much before the economy got hurt?
Frank Hefner, an economics professor at the College of Charleston, says that “nobody actually knows the answer to that question. The problem with going that route is when you’ve gone too far, that’s when you find out you went too far.”
Lost opportunities, such as landing a Boeing plant or parking a Volvo plant, take a long time to identify, and by that time, it’s too late, says Hefner. “For example, if taxes are raised in a way that inhibits new industries to move in, you won’t have found out until no one comes, and in that case you’ve lost out on a lot of potential economic growth.”
There are no tricks to tax reform, says Holley Ulbrich, a longtime economist focusing on state and local public finance at the Strom Thurmond Institute at Clemson. She points out that the governor of Kansas fought for lower taxes and was rewarded with a significant dip in that state’s economy.
Ulbrich says success in raising taxes “would depend on what taxes you raised. It’s not that simple. Some taxes are more significant than others and increasing them could result in companies and customers to locate or shop elsewhere – especially in a state where 20 of our 46 counties border another state.”
Ulbrich says South Carolina should follow the public finance mantra of broadening its tax base and lowering its rates. Every year, South Carolina leaves billions of dollars of its economy untaxed because of widespread exemptions in it sales tax laws and that it doesn’t tax most services.
“Broadening the base makes it fairer and with fewer negative impacts on the marketplace,” says Ulbrich. Once the base is broader, then she says to drop the rates, which would improve the state’s national taxation rankings.
Palmetto State has low comparative tax burden
According to Tax Foundation, a national taxation watchdog, America has a lower overall tax burden than so-called “welfare states” of Norway, Sweden and Denmark.
According to its numbers, South Carolina ranks 42nd nationally for its state-local tax burden. The state also has the 18th highest sales tax rate in the nation when combining state and local sales taxes.
Hefner says there are real world consequences on businesses that come from any monkeying with the state’s already complicated tax code “unless you’re a Boeing or a Volvo” because the state cuts sweetheart deals that relieve much of their potential tax burdens.
Public education doesn’t benefit from those kind of deals, says Hefner, because even though most of the employees buy houses, taxes from those purchases no longer go toward schools, thanks to Act 388, a now maligned swap of property taxes for sales taxes.
“The real problem is that taxes are so complicated and so important and so political, people from both sides of the issue are forced into saying ridiculous things, and that doesn’t help anybody, much less South Carolina,” concludes Ulbrich.
We Can Do Better, South Carolina!