By Bill Davis, senior editor | Ideas are percolating on how to reform the South Carolina’s “Frankenstein” tax code within a specially-called bipartisan House committee.
That’s according to chair of the House Tax Policy Review Committee, state Rep. Tommy Pope (R-York), who Speaker Jay Lucas tabbed earlier this year to run a series of off-session meetings to look into how to reform and improve the state’s complicated tax system.
“Our outdated tax code needs a dramatic transformation in order to promote economic competitiveness and increase the size of our citizens’ paychecks,” Lucas said in August. “Achieving this difficult task is long overdue, but necessary to ensure our tax code is fair for our taxpayers.
“A broader and flatter tax code will help continue to spur job growth and provide greater opportunities for South Carolina families.”
Stocked with Republicans and Democrats, the 14-member committee has been tasked with providing the House Ways and Means Committee with a series of recommendations in the coming legislative session that begins in January.
What’s driving tax reform – now and then?
According to multiple sources, there seem to be two main drivers behind the tax reform push: the election cycle and the desire to have the state appear to be more competitive than neighboring states like Georgia and North Carolina.
Tax reform was, as usual, a mainstay of many state politicians’ reelection campaign promises. Holley Ulbrich, an alumni professor emeritus of economics at Clemson University, pointed out that January will be the furthest calendar point for the most number of legislators.
Her point was that with four years before the next election in the Senate and two years for the House, the legislature has the most political cover soon to enact tax reform. In other words, if they make changes, they have time to win back the good graces of tax-hating voters.
Ulbrich pointed to 1990 as an election similar to this years. That year, the legislature was afforded with the required breathing space to pass what she called the state’s last substantive tax reform package.
The state has had two major, but unsuccessful, attempts at tax reform since then. The first and biggest was in 2010 when the blue-ribbon Taxation Realignment Commission, or TRAC, produced an enormous report filled with detailed information and recommendations. The next year, a House GOP tax exemption ad hoc committee led by state Rep. Tommy Stringer (R-Greer) was tasked with addressing the billions of dollars in state sales tax exemptions. Neither effort led to specific, major reforms, but most agree both helped lawmakers better understand South Carolina’s convoluted tax structure.
Pope served on the second committee, which one legislator dubbed legislation that came out of it as “Lobbyist Full-Employment Act.” Why? Because the committee invited affected parties to give testimony about why particular tax loophole shouldn’t be closed. Pope said while the billions in sales tax exemptions looks tempting, the biggest pieces are already benefiting a wide swath of South Carolinians.
Pope said this week the committee had been crafting revenue-neutral recommendations for the Ways and Means Committee that focused on three main areas: state income taxes, the state’s massive amount of sales tax exemptions, and dealing with Act 388 and property taxes. The hope he said, would be to widen the base of what could be taxed while lowering the overall rates.
Looking at income tax brackets
One suggestion Pope said that has received a fair amount of attention is losing the state’s highest income tax bracket, which is 7 percent. North Carolina and Georgia both have lower top rates. This, he said, creates a “press problem” because South Carolina looks more expensive than its neighbors.
But in reality, South Carolina’s top income tax rate is effectively lower because the state bases its rates on the federal tax code – only using a taxpayer’s federal adjusted gross income, not the full yearly income, as the basis for calculating state income taxes. In other words, it’s a higher rate on a smaller amount of money – and the lower adjusted gross income already has federal exemptions removed.
Pope said one new consideration by the committee is for the state to “take a number higher up the 1040 form” – not the adjusted rate – to use as the basis for state income taxes. He added that the House staff is “number crunching” what doing away with the top income tax rates would do.
Some of that crunching has already been completed. A large chunk state taxpayers would have a higher tax liability than before if the state replaced its current, progressive 4 percent-to-7-percent rate brackets with a flat, 5-percent income tax rate.
According to a presentation made to the committee at its Nov. 30 meeting, its legal counsel stated:
- 32.5 percent of state filers would have a higher tax liability with a flat income tax rate. Critics worry this group may be more middle class and be burdened with higher rates, which may offset lower rates on the rich.
- 32.3 percent of filers would have an unchanged tax liability, and
- 36.5 percent would have a lower tax liability.
That means that roughly 65 percent of the state would see no change or a tax increase from a change to a flat income tax.
Dillard: No quick fixes
Rep. Chandra Dillard, a Greenville Democrat who serves on the committee, came into the House in 2008 with Pope. She has seen the same faulty attempts to fix the state’s tax system.
Dillard said she sees no quick fixes.
“This is one of those issues where the more you know, the more you want to know,” she said.
While the committee is bipartisan, Dillard said it only makes recommendations to Ways and Means, and that the legislature is still dominated by Republicans.
“If it’s going to get done, it’s going to be if it can done in [Pope’s] party; just tell us your plan and we’ll respond,” said Dillard.
Dillard said she has liked a proposal that allows taxpayers to choose which package of exemptions they want to invoke, as other states have implemented.
Other ideas
Like Pope, Dillard said Act 388, the 400-pound gorilla in past property tax relief can’t be repealed, can be “tweaked.” That act shifted the brunt of public K-12 funding from primary homeowners to a statewide 1-cent sales tax, and has been blamed for a host of budget woes at the state and local level.
One of the potential “tweaks” that Dillard said is being discussed would be to allow local governments to cap the property tax values for second homes and commercial property.
Clemson’s Ulbrich said she wished the state would add more services to its tax tables, which would broaden the base.
“We need to get rid of the idea that this state doesn’t tax services. It taxes them when it wants to,” she said, pointing to hotel accommodation fees as an example.
Ulbrich said she’d like to see services usually enjoyed by the upper classes taxed, such as lawn maintenance or dog grooming.
Ulbrich added she was more hopeful that a state gas tax would increase with the arrival of Henry McMaster as governor, as his predecessor, Nikki Haley, was resolutely against it.
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