Overhaul budget, taxes, government

EVERYWHERE you look, people are reacting in dramatic ways to the Great Recession. Families are settling for smaller homes, individuals are opting for safer careers, businesses are slashing payrolls and benefits, lopping off tangential operations and even realigning their core missions.

Everywhere, that is, except in government. In government, especially South Carolina's state government, we're still nibbling around the edges. Still making incremental cuts as revenue streams dry up. Still trying to do everything and be everything we've always done and been. Still acting as if this is a temporary blip, and any day now, tax revenues will start gushing back in, and all those agencies and programs that have been running on fumes will find themselves awash in money.

It's always worked in the past. Play accounting tricks, raid trust funds, hold your breath, and before long everything returns to normal. The Legislature "restores" all those cuts, and we go on, just like before.

That has never been a good way of doing things, in no small part because "just like before" never has been a great way of doing things in South Carolina, but it still could work ... if this were a normal recession, where recovery ignites a bonfire of new jobs. If South Carolina didn't come late to recessions and leave even later. If we didn't have an antiquated tax system that slows recovery. If we weren't relying so heavily on federal funds that run out next year. If we hadn't gone into this recession with essential state services already woefully underfunded.

But it will be years - perhaps a decade - before there is enough revenue to even try to return to the old normal.

We are so far in the hole, and won't recover for so long, that we as a state must establish a new normal. This must be Job 1 - and 2 through 10 - when lawmakers return to Columbia Tuesday for the 2010 General Assembly.

This will be painful, but it could be the best thing that has ever happened to our state. At the risk of sounding trite, the problems our state faces present us with enormous opportunities - to make long-needed changes that our lawmakers didn't have the political will to make and the public didn't demand.

Lawmakers must define exactly what it is that our government must do, figure out the smartest, most efficient way to do it, eliminate everything else - and provide the funding to make sure it does those things well.

We are not convinced that the simple route of raising taxes right now is the answer. Aside from the cigarette tax, which should be increased regardless of the circumstances, it's irresponsible to raise taxes absent a comprehensive overhaul of the tax system, and it's risky to raise them in such a fragile economy. But if the Legislature will not make the difficult choices needed to maintain essential services, it will have no responsible choice but to raise taxes.

These reforms will not save money immediately, but that's no reason to put off the work. The Legislature will be back in a year looking for even deeper cuts, and more after that. If lawmakers have not made changes that will pay off over time, more damaging and dangerous cuts will have to be made. If anything, the delayed pay-off of our best solutions makes it all the more essential to begin immediately.

Efficiency first

Any fat left in state government is buried so deeply or protected so well by powerful interests that it's not going away. But there are good and useful programs and services that are not essential. There are inefficiencies - many of them mandated by state law.

We have more than 70 separate agencies in the executive branch of government: six that deliver health care services; five responsible for natural resources and environmental programs; four that handle jobs and economic development. Each has its own director, many their own legal office, personnel office, procurement and IT departments.

We have 33 separate colleges, with overlapping degree programs and, in one case, adjacent campuses. And in a state with just 46 counties, we have 85 school districts, some with fewer than 1,000 students, each with its own superintendent and school board and administrative office.

We maintain the office of secretary of state even though the last officeholder lobbied to transfer all of its duties into other agencies. We provide a staff for the part-time lieutenant governor - complete with a security detail - even though the only reason to have a lieutenant governor is so someone is available to take over if something happens to the governor. (Lawmakers put the Office on Aging under the lieutenant governor a couple of years ago to give him something to do - further fracturing the government by taking it out of the agency where it fit naturally.)

The tiny state library and archives department operate as independent agencies despite closely related missions, and the University of South Carolina runs an Institute of Archeology and Anthropology. Other agencies have created programs to deal with the same type of work that state university programs specialize in.

Any merger, in the public or private sector, is difficult. It's even more difficult in our state because consolidation has been conflated with efforts to give the governor more power. And particularly now, after seven years of Mark Sanford, that idea is radioactive.

We need to do both, for reasons that have nothing to do with saving money. But the fact is that we can do one without the other. We could save money by merging agencies with related functions, no matter who is in charge of them. And we should.

Examine, change policies

Every dollar saved through increased efficiency is a dollar that doesn't have to be slashed from services. But merging agencies and school districts won't save as much money as some advocates claim. Even if we combined every similar agency and eliminated the 50 smallest agencies, we still couldn't afford to do everything else that government is doing, in the same way it's doing it.

A third of state spending goes to public education; another quarter to health and social rehabilitation. There's simply no way to avoid cuts in even these crucial areas. That makes it essential that we examine policies to make sure they're worth spending money on - and change or eliminate those that aren't.

That means getting rid of the rules that force schools to spend money on programs they don't need while programs they do need go lacking.

It could mean steering students away from four-year colleges and toward the technical colleges that cost less to operate and provide better training for the 21st century job market.

It means incarcerating fewer people, putting them through intensive supervision programs, fitting more with electronic monitoring devices.

It means turning such local responsibilities as maintaining local roads over to counties and cities - and removing restrictions on how they can raise money and how much they can raise.

Of course, the best way to save money is to reduce the need to spend it. When people have good jobs, they're less likely to commit crimes, which cuts down on the amount of money we have to spend on police and courts and prisons; tension at home is less likely to turn into the sort of trouble that requires child protective services to intervene; good jobs reduce the need for unemployment benefits and Medicaid and food stamps.

And the key to good jobs is a good education, which we don't do as good a job of providing as we should - and which we will have an even harder time providing if we don't find smarter ways to save money than merely slashing school budgets.

Make the tax system work for us

The way we spend money isn't our only problem. And we're not in the mess we're in just because of the economy. Bad tax policy left our state with fewer resources than other states to muddle through. Bad tax policy will make it harder for us to recover.

Our government traditionally relied about equally on the sales, income and property taxes, with user fees rounding out the mix. But lawmakers have been leaning more heavily on the sales tax, starting in 1995 when they replaced $200 million in local property taxes with state funds and more recently through the reviled Act 388 of 2006, which eliminated all remaining homeowner property taxes for schools and replaced them with an additional 1 percent sales tax.

This would create problems at the close of the consumer boom even if we had the broad-based sales tax that economists recommend. We once did, but the economy has changed, and our tax system didn't. Services now account for 60 percent of every consumer dollar, and South Carolina doesn't tax most services.

Worse, our sales tax is so riddled with exemptions that for every $2 worth of products we tax, another $1 worth goes untaxed. Actually, the ratio is worse since the recession ground discretionary spending to a halt and what money people still had to spend went mostly to two untaxed commodities: gas and groceries. (The grocery exemption makes sense by itself, but because of the way the rest of the tax system is configured, it plays a significant role in revenue shortfall.)

The income and property taxes are similarly shot through with exemptions - most added on to please a vocal or deep-pocketed constituency. Giving special tax breaks to special people skews the economy, often in ways we don't want, discouraging such good things as economic development while effectively rewarding behaviors that hurt us (think of our nation's-lowest cigarette tax, and our high teen smoking rate). But even more significantly today, because it reduces the portion of economic activity that is subject to taxation, thus requiring higher rates than would be needed for broader-based taxes, this makes the tax system more susceptible to economic changes.

We have long needed to overhaul this cobbled-together tax system, to make it more rational, fairer, more stable and more reflective of our goals as a state. But it's politically difficult, because every special little exemption, exclusion and loophole has a constituency. And it's conceptually difficult, because the tax code has been tacked on and subtracted from so many times that just about any change can create unanticipated consequences. But the problems we face today make it impossible to avoid any longer.

This is where that problem-equals-opportunity paradigm fully flowers: As much as we have needed to overhaul our tax system and overhaul our spending, what we have really needed to do is overhaul both at once.

We need to decide what programs we want and need for state and local governments to provide, figure out the best, most efficient way to provide them and determine how much money that takes.

We need to decide which programs should be provided by state government, which by local government and which by a combination.

We need to create a stable mix of taxes adequate to pay for our needs, taking into account such things as which ones the public prefers, which can be collected most efficiently and which have no effect on the economy or else promote our state's goals.

When we have done all of that, our lawmakers will have built a tax system and a budget - indeed, a government - that will serve our needs now and into the future. We deserve no less.