JULY 10, 2009 -- Will fiscally conservative South Carolina be forced to raise taxes to overcome its revenue shortfalls?
That’s one of the tough questions members of the Tax Realignment Commission (TRAC) will have to answer when it begins meeting this fall. The commission came into being after legislation was passed in the eleventh hour of this year’s legislative session, and later signed into law by Gov. Mark Sanford.
The commission has been charged with presenting recommendations to the legislature in the coming years that would comprehensively address the state’s tax system, but without touching the issue of Act 388, the state law that shifted public K-12 education funding from owner-occupied homes to an increase in the statewide sales tax.
While raising taxes has normally been a third-rail issue in South Carolina, especially in an upcoming election year for the House, the idea may be gaining traction, according to some in Columbia, because of the state’s grim economic climate and forecasts.
Consider that for the past few years, the state’s budgeted spending has outpaced its revenues, as tax cuts on groceries, gas and owner-occupied homes have gutted the state’s General Fund. Coupled with a faltering economy, that led to over $1.33 billion in mid-year cuts in the last fiscal year.
The state has found some relief with increased fees, tuition and the like. This year, big chunks of missing state funds were, at least temporarily, offset by hundreds of millions of dollars in stimulus funds.
Tax revenues down
Comptroller General Richard Eckstrom’s office reported this week that tax revenues were down this year, even worse than last year. According to Eckstrom:
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Revenues for June 2009 were 10 percent ($71.7 million) lower than revenues for June 2008, and off 12.5 percent ($828 million) for the last 12 months.
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Individual income tax revenues in June were down 10.1 percent ($36.8 million) compared to corresponding revenues for the previous June, and off 15.4 percent ($512.6 million) for the year.
But now, as Eckstrom questioned whether the Obama stimulus package would work nationwide and here in South Carolina, there was worry that a faltering economy could lead to an uncomfortable choice: raise basic taxes or have more kids in classrooms and a gutted Medicaid program.
Looking at North Carolina's idea
Adding to the debate this week was N.C. Gov. Beverly Perdue asking her state’s legislature for a wish-list of increased taxation that would bring in more than $1.6 billion to offset shortfalls. The cornerstone request was for a “temporary” 1-cent sales tax increase.
Reaction from within the N.C. legislature has been lukewarm, at best, as that state passed a similar request in the early part of the decade for similar reasons, that is still on the books.
“It’s amazing how those ‘temporary’ taxes become permanent,” said Otis Rawl, president and CEO of the S.C. Chamber of Commerce.
Even though increased taxes could eat into corporate profits, Rawl did not outright call for tax cuts to spur the state economy.
Instead, he said the legislature needed to go through the TRAC process to come up with a “dynamic, flexible” tax system that funded state government’s core services, like education, yet kept South Carolina competitive with other states when it came to attracting new industry.
“The old tax code was based on a state economy driven by manufacturing, agriculture,” said Rawl. “But we’ve changed.”
Look at government spending
Sen. Kevin Bryant’s (R-Anderson) opinion on new taxes was unchanged. In the last week of the legislative session, he proffered a TRAC amendment that would make any tax increase “revenue neutral” by offsetting it with corresponding tax cuts.
“Any money taken out of the economy and put into the government hurts the economy,” said Bryant, who also offered an amendment in the eleventh hour of the session for those who wanted to pay more taxes. “Any time the government spends money, they are taking it out of the public’s wallet.”
Bryant said a better fix would be to address the bigger issue: government spending.
Eckstrom agreed, and said the state’s priority of growing the economy and getting people working again would be hindered by a tax increase.
“The best way to offset revenue reductions is through eliminating spending on non-essential programs,” said Eckstrom. “If you and I sat down together and looked over the state budget, I'm fairly confident we could identify common-sense ways to pare back costs. So I'd certainly think we'd take that approach before we increase taxes."
Bryan Cox, spokesperson for the S.C. Policy Council, agreed. Cox pointed out that too many times Republicans talk tough on spending on the campaign trail, only to throw election rhetoric out the window once they are reelected.
Cox said another place the commission should look is in the roughly $7 billion “other” category -- fines, fees, tuition and the like – that funds close to a third of the state’s overall budget. The other two thirds come from the state taxes fed into the General Fund and federal pass-through dollars.
Cox said the Council did some research and uncovered a $13 million annual program to build senior citizen centers around the state. Even though the centers have been built and the enabling legislation has timed-out, Cox said the program still received money this year.
“It may not seem like a lot of money, but what if the TRAC commission uncovered 10, 20, 30 similar programs? Then we’re talking some big money,” said Cox.
Rex has doubts
State Superintendent of Education Jim Rex, who has pushed for comprehensive tax reform since taking office, doubted the commission would find much of anything, much less success.
Rex was discouraged that Act 388, which has taken hundreds of millions of dollars out of public K-12 education, was taken off the table. He even wondered “if the process was worth going through at all.”
Rex, a rumored gubernatorial candidate ever since he came into office two years ago, said a potential source of new income would be lifting the $300 cap on sales taxes for cars, planes and boats in the state.
“I think that might be seen in South Carolina as defensible,” said Rex.
Fellow educator Ashley Woodiwiss, a political science professor at Erskine College, was less enthusiastic, and pointed to Gov. Perdue’s tax package’s blah reception in North Carolina.
“But already her proposals are encountering real difficulty in the North Carolina legislature -- with Democratic majorities in both houses,” said Woodiwiss. “So, what are the prospects for such in South Carolina? About as likely as getting the Confederate flag off the grounds of the State Capitol.
“To get where we need to be economically will require creative and courageous public leadership. In the current Columbia political climate, I think prospects for such are quite dim,” he said.
Crystal ball: More shortfalls, more gutting, more rhetoric. How bad will it get before legislators think about doing the unthinkable? We’ll see.