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HOT ISSUE
The continuing bonus
that is hurting the state
By Andy Brack
SC Statehouse Report
FEB. 16, 2003 - - There's an easy way to solve the big budget crisis
the state's having: repeal multi-million dollar property tax and
other relief measures approved when times were flush.
Nice idea. But it will never happen. Why? Restoring a tax giveaway
to seniors, homeowners, businesses and manufacturers would be considered
a tax hike - - even though the very same taxes were generally acceptable
a few years back.
In the mid 1990s, the state collected about $5 billion in total
revenue a year. Lots of programs got funding and the politically
popular idea of refunding property tax money rolled like a locomotive
through the Statehouse.
In part because the state had more tax revenues than it knew what
to do with, legislators decided to establish a trust fund for tax
relief. It required them to make annual refunds for homestead exemptions,
residential property taxes, manufacturers' depreciations and taxes
on merchants' inventories. All totaled, the state committed in 1996
to refund $305.4 million to taxpayers.
But it wasn't a one-year commitment. It was a continuing commitment
- - an annual spending refund that rose in price ever year. In the
proposed budget, for example, the state projects it will spend $490.8
million on tax rebates passed in the mid-1990s.
Essentially what happened, therefore, was the state created a giant
new commitment when times were good that had to be paid every year.
What lawmakers basically didn't take into account was that the
refund would have to also be paid in bad times - - and that it would
be hard politically to cut. And that meant if there had to be any
cuts, they would have to come from places they could cut - - government
programs, employees and services.
The mistake state lawmakers made, economists say, is they annualized
the refunds.
Think about it in terms of the Christmas bonus. It is not guaranteed
every year. In a down year, you may not get a bonus - - even though
you hope to. In an up year, you expect you'll get one.
What state lawmakers did was give the Christmas bonus to taxpayers
every year, regardless of how the state's revenues were doing. That
commitment has left the state, in part, in the hole it's in.
Analysts say lawmakers should have treated the surpluses from the
roaring 1990s as one-time extras. Instead of hog-tying future spending
with mandated relief, they should have given an annual bonus - -
a one-time expenditure - - every year there was a little extra.
Here's how a pair of Clemson economists summarized the situation
in August 2001:
"The fact that most tax relief given by the State of South
Carolina has not been contingent upon availability of surplus revenue
has indeed contributed to the current budget situation."
A cynic might say tax refunds started in the mid-1990s were part
of a two-prong strategy to reduce the size of government dramatically
to accomplish political goals:
- Part One: Give tax breaks when times are flush.
- Part Two: When times aren't as good, make government smaller
by cutting programs, services and people because the budget has
to be balanced - - and there's no way anybody is going to settle
for a tax hike.
In general, this strategy is transforming government from a subsidized
method of delivering programs and services into a system that will
require individuals to fund services at the delivery level when
they interact with them
So when you're looking at your local tax bill this year and see
a refund for property taxes for schools that you paid a few years
ago, you're generally looking at the amount it would cost to pay
your share of keeping state government the same size.
You might want to keep that refund in mind in the near future when
you try to get a state government service and find your cost has
increased.
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