MARCH 5, 2010 -- A dust up this week in the Senate Judiciary Committee over the seemingly small issue of whether state courts will get to keep the fees and fines they charge could serve as a Statehouse weathervane, telling which way the state’s tax structure may be headed. 
Two years ago, S.C. Supreme Court Chief Justice Jean Toal began warning legislators about the state court system’s financial woes -- that drooping funding was resulting in a growing case backlog and the loss of key staff.
Last year, the House moved to give the courts more money, and early this session, the Senate began taking up the issue. Spurring the fight in the Senate committee was the shift in funding sources feeding the courts. According to 1997-98 numbers provided by Senate Finance staff, the courts received just short of 40 percent of its funding from the state’s General Fund budget.
But by 2007-08, that General Revenue had dropped to 34 percent. Tax cuts led to fewer dedicated state dollars. Then a series of mid-year tax cuts hit the courts hard, just as cuts impacted dozens of other state agencies and services. In the end, relying less on General Fund money forced the courts to rely more on fines and fees.
Courts argue to keep fines, fees
Toal came and spoke before legislators on Tuesday, and further made her case.
“As I began my tenure as your chief justice 10 years ago, it took about $46.5 million to run the state court system and almost all of it was raised by regular general appropriations funds,” said Toal, a former House member. “There were no federal funds and very little in the way of state fees.”
The House Ways and Means general revenue budget for the Judicial Department for 2010-11 is $22.6 million. Toal told senators that the courts system is in reality down $11.5 million, thanks to end-of-the-year budget cuts and rapidly evaporating federal stimulus funds. “We can't continue to operate like this.”
Back in committee, with Toal’s remonstrance still in their ears, the full Judiciary tackled the issue. And that’s when the fight over fees and fines started.
Several members of Judiciary, including its chairman, Senate President Pro Tempore Glenn McConnell (R-Charleston) dug in their heels about keeping all fines and fees at home in the court system.
The rhetoric that popped up, according to several sources, was that there was no way Judiciary was going to turn over the fines and fees to the Finance Committee to squirrel away into the General Fund and then distribute the money to other agencies.
This got to the philosophical heart of the issue.
Library approach vs. Netflix approach
In the past, South Carolina state government budgeting has been more like a library, where resources are put in collectively, and then drawn out by priority.
But now with fines and fees becoming more prevalent as an “other funding source” in budgeting nomenclature, will the state process become more like Netflix and force citizens to pay for services they use through fees, fines and special charges?
Fines and fees have been a comfortable lightning rod for state government’s critics. The S.C. Policy Council released a report last year that said that a full third of the state’s overall budget, approximately $7 billion, was from fines and fees.
That may be an oversimplification, as Budget and Control Board spokesperson Michael Sponhour pointed out, that the $7 billion could also include categories of funding like tuition.
McConnell said that, because of the current ongoing tax revenue downturn, he saw no reasonable option but to let the courts keep their fines and fees. But, he added, he would look for a different solution in two years or so, when tax revenues have likely rebounded.
Finance Chair Hugh Leatherman (R-Florence) said he was also “OK” with allowing the courts to keep them, too. He said it will likely be three to four years before the state’s economy “gets back to what it was.”
Leatherman likened the situation with the courts to DHEC, which generates a large amount of its budget through permitting fees and fines.
Shortfalls of Netflix approach
Critics, such as Sen. Robert Ford (D-Charleston), say fines and fees are “shadow taxes.” Ford, seated in the antechamber of the Senate this week, said “a tax is a tax is a tax, and fines and fees are taxes.”
Charging fees may be good for the courts, but Ford said it was tough luck for innocent people hauled into court who still had to pay them.
Holley Ulbrich, a senior scholar at the Strom Thurmond Institute at Clemson University, said fines and fees have an extra marketing value to legislators.
“They are easier to sell than a tax, because if it’s earmarked, then it’s easier for [voters] to see it going for something specific, versus just being poured into the General Fund,” said Ulbrich.
But there are downsides to this kind of budgeting, she said. “This is like a teenager just asking money from their parents for one thing,” said Ulbrich.
South Carolina is far from the only state struggling with making its budget and striking the balance between taxes and fines and fees. North Carolina had a similar situation last year, but responded with income and sales tax increases to offset roughly half the funding gap.
North Carolina, a hotter hotbed of progressive politics than conservative South Carolina, has a longer history in raising taxes and investing in the state, as evidenced by the success of the Research Triangle in that state.
Some watchers are now concerned that with North Carolina increasing taxes and South Carolina, where the House passed a measure this week to cut all corporate income taxes, could fall behind again because of its aversion to tax increases.
“It’s short-sighted,” said Ulbrich, commenting on what she sees as the state falling behind funding its “educational infrastructure.”
McConnell disagreed, saying the success of hydrogen research at Clemson, the institute’s home, and the landing of Boeing expansion in the Charleston area, the state can keep up with its neighbors.
Crystal ball: With Judiciary voting to keep fines and fees in the hands of the court system, the Netflix “pay-as-you-go” funding approach will likely continue -- at least until more money arrives in state coffers via an improving economy or (gasp!) a tax hike. And with economic forecasts predicting a flat revenue curve until at least 2013, it could get more serious.