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From Governing’s Supplemental information | Introduction
You’d think that with all this research, the state must either have a hideously flawed system or one that has been honed to perfection. Neither is true. South Carolina has a reasonable balance among its sales, income and property taxes. At the same time, it confronts a structural budgetary imbalance.
The reason is that through the late 1990s, the legislature cut taxes repeatedly, awarded generous tax incentives — and failed to restrain its spending accordingly. “It’s our budget system that is broken,” says Elizabeth Carpentier, former director of the Revenue Department. “Not our tax system.” The tax cuts removed $714 million from the income and sales tax base each year. At the same time, the legislature exempted the first $100,000 of residential property value from the school property tax, and replaced that money with state dollars. This effectively cost the state treasury more than $450 million a year. Meanwhile, to make the Palmetto State sweeter for retirees, the homestead exemption for senior citizens was lifted from $20,000 to $50,000. A referendum passed in 2000 is gradually lowering the property tax on cars from 10 percent to 6 percent. The state’s revenue estimators predicted this could be done without much budgetary stress — and continued to say so after the current recession had begun. Coming into the 2003 fiscal year, the Board of Economic Advisors was projecting total revenues of $5.6 billion — substantially more than the previous year. In fact, revenues for the first two months of fiscal ’03 turned out to be 3.2 percent lower than those of ’02. A case can be made that the aggressive use of tax subsidies for economic development — such as the $130 million in tax credits South Carolina gave BMW 10 years ago — has helped the economy grow. But it also can be argued that the giveaways have spiraled out of control. In this state, decisions about property tax breaks are in the hands of counties, which can negotiate fees with corporations to replace the regular property tax with sometimes dramatic savings over long periods. This directly affects schools, which depend on property tax income but have no say in the matter. “Counties don’t really have the expertise, and it puts them in competition with each other,” says economist Holley Ulbrich. So it turns out that there is quite a bit for the plethora of study groups to study. What have they accomplished? Not much, at least if measured by successful reforms. Most of the work generated little or no action, and some of the piecemeal legislation passed in response to study group conclusions actually made the state’s fiscal situation worse. The 1994 committee on tax structure quickly devolved into a gripe session on property taxes, resulting in the $100,000 residential exemption and the ensuing shortfall in school funds. “There’s a mantra in South Carolina about the need for comprehensive tax reform,” Ulbrich says. “But they don’t take comprehensive action. They’ll take a few patchwork measures, and then we look back and say, ‘Oops. We didn’t realize that a change in one piece of the tax code would have so many impacts elsewhere.’ ” Right now, hopes are pinned on the latest study group — the Senate-originated Joint Committee on Taxation. It’s a standing committee, which has encouraged optimists to believe that it will have greater impact than its many predecessors, whose short lives limited their ability to solve problems. The new committee is focusing on the sales tax, since exemptions are confusing and hard to administer. Books used in the course of study are exempt from taxation, for example, but other books aren’t. Alcohol swabs are exempt, but only if purchased by a diabetic. The exemption list goes on for 10 pages in the revenue code. Services are essentially untaxed, and there are caps on some expensive items. The sales tax for vehicles is limited to $300, so a $6,000 used Toyota Corolla carries the same tax as a $50,000 Mercedes-Benz. Meanwhile, legislators seem hell-bent on disabling South Carolina’s Revenue Department. This is particularly sad since the department has a history of excellent performance. It was the first in the country to have an integrated tax information system, for example. Yet the legislature has cut the department’s budget by 24.5 percent over the past two fiscal years, one of the harshest cuts any revenue agency was forced to endure. The department pulled back on some of its taxpayer assistance efforts, shut down four field offices and acknowledges that compliance has suffered. And although the legislature reinstated a few additional dollars for the department to hire some auditors, another 6.5 percent cut is coming. “I know there’s money out there that we’re not collecting just because we can’t get to it all,” says Carpentier. “It’s almost that there’s this libertarian streak of wanting to reduce government — so not collecting money is a good thing.” NOTE: This version corrects the print version to reflect that South Carolina is known as the Palmetto State. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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outh Carolina is an introspective state, tax-wise. In 1994, the legislature set up an ad hoc committee on tax structure. The next year, a property tax accountability reform group was established. In 2000, there was a steering committee on local government funding. Last year brought a brand-new House Ad Hoc Committee on Taxation and a Joint Committee on Taxation, set up by the Senate. South Carolina has more tax study groups than it has taxes.