FEB. 6, 2009 -- Responding to the chorus of voices within and without the General Assembly calling for a comprehensive overhaul of the state’s tax system, the Senate and House are working on plans to do just that.
In two years. Maybe.
Every few years, the desire for tax overhaul crescendos in the Statehouse, and leaders rush forward to proffer plans that, on balance, either get watered down or shelved.
This year’s push, Sen. Hugh Leatherman’s Tax Realignment Commission (TRAC), would create a blue-ribbon panel of 11 non-legislators to review the state’s daunting tax code. After two years of study, it would deliver a report and blueprint for a new system.
Critics, including the state Chamber of Commerce and think-tanks like the S.C. Policy Council and the Palmetto Institute, have been calling for a new system that would be equitable, business-friendly and transparent.
Reasons reform fires being stoked
Beyond the outcry, there are three main issues stoking the reform fires this year.
The first is the economy. Whenever tax revenues are down, there generally is increased scrutiny of how state funds are gathered and how that affects families and businesses.
Second, there’s a growing awareness that something has to be done about the huge hit to tax coffers created by property tax reform. A couple of years ago, lawmakers agreed to a tax swap that zapped local school operating property taxes and eliminated grocery taxes in favor of a big boost to sales taxes.
And third is the emerging desire to do something about the state’s long list of items exempt from its sales tax. One of the big-ticket items on the tax-free list is power generation, but some of the state’s five dozen sales tax exemptions seem silly in a modern economy.
Example: “All plants and animals sold to any publicly supported zoological park” are tax-exempt, as are “seventy percent of the gross proceeds of the rental or lease of portable toilets.” That’s according to Section 12-36-2120 of the state code.
Senate plan to hit floor soon
Leatherman (R-Florence), who chairs the powerful Finance Committee, likes to point to the sales tax exemption that sellers of twine enjoy as a perfect example of an exemption that has outlived its political and fiscal usefulness. His plan, S. 1242, has been fast-tracked, and will hit the floor of the Senate next week.
In the House, Speaker Bobby Harrell (R-Charleston) is sponsoring a similar plan, but it would include several legislators that would infuse the discussion with “what’s politically realistic,” said Greg Foster, Harrell’s press officer.
Foster argued that there is nothing silly about the amount of money the exemptions represent: approximately $2 billion. That kind of money, or any part of it, would be very welcome in this current year’s budget, which has been cut, so far, by just over $1 billion since last summer.
The House bill would also differ from the Senate version in the percentage of legislators need to amend the eventual plan in hopes, Foster said, of avoiding the appearance of a “fatal flaw” in the legislation too late in the process to correct.
Some say reform won’t happen
That’s all well and good. But, according to a legislator privy to back-room discussions about both plans, it doesn’t matter how they’re structured.
“Because they’re never going to happen,” said the legislator. Why?
Two reasons, according to the legislator:
“One, the forces, the lobbyists, who first got their industries or products protected are going to come out of the woodwork, and they were successful the first time.”
Two, any time a tax exemption is done away with, it is, in essence, a tax increase. That’s often a political no-no in most years in South Carolina, but certain death in a down economy.
“Let’s say, we get rid of the tax exemption for power generation, electricity for homes and industry, and we start charging the utilities for that,” said the legislator. “The utilities are just going to pass that cost along to the consumers.”
And consumers are going to unleash a deluge of angry constituent voter calls to their representatives and senators, said the legislator, especially when the state’s trundling toward a double-digit unemployment rate. “They’re going to be yelling, ‘Why are you raising my power bill?’”
Foster tried to answer that criticism, saying that Harrell would insist that any removed tax exemption would be met with corresponding tax cuts, rendering it revenue neutral.
But does that really solve the problem? Conventional wisdom says that to reach a balanced and fair tax system, a state must widen the base of categories that can be taxed, but at the same time lower the rate.
South Carolina, with cuts to grocery taxes and others, seems to have given itself a bad case of fiscal asthma, where the windpipe is slowly closing, making each passing item more and more dear.
One Statehouse wonk said the state’s exemptions have led to a situation where, should the economy grow at a 5-percent clip, taxation would lag behind at 4.7 percent, and become permanently hamstrung.
Crystal ball: Everyone interviewed for this article said that who is named to the commission(s) and their credentials would be of paramount importance. If the commission is stocked with savvy, realistic and far-sight public servants, elected or not, then their recommendations will become unassailable. But, if too much “politicking” or special interests (like the powerful twine lobby) are present on the commission, then the state will be doomed to hear the from the chorus for tax change again in a few years, albeit with a slightly different tune. Maybe.
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