End corporate income tax? Senators weigh bill

Eliminating South Carolina's 5 percent corporate income tax was a big priority in the House this year, but its passage in the Senate is uncertain..

The bill, which phases out the taxes corporations pay on profits over 10 years, must first pass a big test today to even get past a Senate committee.

"It won't with my vote," declared Sen. Billy O'Dell, an Abbeville Republican. "We would not be able to take the 5 percent off the table at this time in my view."

That "5 percent" O'Dell speaks of translates into roughly $167 million a year flowing into the state general fund - monies used to run state agencies and programs that serve S.C. residents.

O'Dell, who chairs the Senate Finance Subcommittee on Sales and Income Tax, said his committee is one of possibly two critical tests today for the House-passed S.C. Economic Development Competitiveness Act of 2010.

If the measure, which stalled in hearings last week, passes out of O'Dell's subcommittee this afternoon, it will go immediately to the full Senate Finance Committee for consideration later in the day.

The 104-page bill has a number of provisions in it, from endowed chairs to the green economy, but by all accounts, the most important provision is the one that eliminates the corporate income tax.

The bill was amended in the House so that the corporate tax phase-out doesn't begin for two years, amid hopes the economy will rebound. A tax credit for small businesses also was added, giving the break to businesses with as few as five employees, if they add workers.

Sponsored by House Speaker Bobby Harrell, and co-signed by more than 100 other House members - Democrats and Republicans - the bill is promoted by supporters as a job creator that will lure large businesses to the state.

Experts, however, warn that the handful of states that have eliminated corporate income taxes, thinking it to be a game-changer in luring industry and creating jobs, have found the incentives to be severe under-performers.

"It's been anything but a game-changer," said Michael Mazerov, a policy analyst for the Center on Budget and Policy Priorities in Washington, a nonpartisan research and policy institute concentrating on federal and state fiscal policy and public programs affecting low- and moderate-income Americans.

"There's just way too much emphasis and hype on cutting business taxes as a panacea for state income growth," Mazerov said, when study after study disputes that claim.

More importantly, Mazerov said South Carolina would be the only state in the nation to eliminate the corporate income tax without replacing it with some other revenue stream.

Right now, according to the center, only two states - Nevada and Wyoming - do not have a major, state-level corporate income tax or a broad-based substitute for it.

Nevada relies on its gambling appeal to fill that void, Maserov said, and Wyoming relies on its rich oil and gas reserves.

South Dakota, often mentioned as a state with no corporate taxes, has a broad-based agricultural substitute for corporate taxes, Maserov said. Washington state has a gross receipts tax to replace its corporate taxes, in which businesses pay taxes on gross receipt sales rather than net profits.

Ohio has a similar substitute for its corporate taxes, Maserov said.

If other states aren't signing on to the corporate-tax elimination move, Sen. Glenn Reese, D-Spartanburg, who also is a member of the Senate Finance Subcommittee, said he wonders why South Carolina, which is facing a $500 million budget shortfall this year alone, is so anxious.

Reese said the bill's key sponsors "are trying to please somebody," probably from out of state. "We just don't know exactly who yet," Reese said.

"I think there are many, many rabbits throughout this whole bill," Reese said. "I think we need to slow down and make sure it's not giving away the farm."