Scoppe: The truth about taxes

Associate EditorOctober 15, 2010 

THERE’S A LOT of room for improvement in the way the General Assembly handles money.

It spends it on the wrong things, through a process of incrementalism that gives us a little more or less of the same thing every year, regardless of what we need. It spends it in the wrong way, by overcommitting in good times and avoiding difficult choices in bad.

It sets taxes too high in some areas and too low in others, relies too heavily on fees and constantly expands a grab-bag of loopholes that don’t make sense to anyone except the direct beneficiaries — and then only if they have a myopic view of society.

The one thing it doesn’t do wrong is overtax us.

I haven’t worried too much about Rep. Nikki Haley’s promise to cut taxes even as lawmakers struggle to keep the lights on, because there’s no reason to think she will succeed. We have a Legislature that loves few things more than to cut taxes, but that also understands that there are limits to how far it can go, because even a shrunken government costs money to run.

The fact is that if the economy recovers enough in the next four years, the Legislature will resume its tax-cutting behavior, whether the governor is Ms. Haley or Sen. Vincent Sheheen. And if the economy stays in this slump, the Legislature won’t make any significant tax cuts, whether the governor is Ms. Haley or Mr. Sheheen. Although it shouldn’t be this way, the governor of South Carolina can’t do a lot of anything. The governor can stop others from doing things, or with the right personality persuade legislators do to things, and that’s about it.

It’s true that Ms. Haley has pledged to veto any tax increases, just as Gov. Mark Sanford did, and Mr. Sheheen has made no such pledge. But that’s really not relevant, because the question in South Carolina isn’t whether the Legislature is going to raise taxes. It has done that precisely once in the 23 years I’ve covered the Legislature — increasing the nation’s lowest cigarette tax this year — and as many anti-tax stalwarts will quickly tell you, this was not the start of a new trend, but an acknowledgment of the voluminous evidence that raising this tax decreases illegal youth smoking. (The idea that a Gov. Sheheen would raise taxes ignores the facts that 1) Mr. Sheheen has said he will not propose higher taxes and 2) even if he did, the Republican Legislature would ignore him, just as it ignores quixotic attempts by some Democratic legislators to raise taxes.)

By contrast, legislators can’t stop cutting taxes. Even in the recession, they keep adding new loopholes every year. The House even tried this year to eliminate the corporate income tax, but the Senate refused to go along. (Ms. Haley has taken to saying she wants to eliminate “the small business, or corporate, income tax,” but those are two different things. What she actually has proposed is to eliminate the corporate income tax, which would benefit the state’s largest businesses but reduce state revenue by much less than extending that tax cut to small businesses that file as individuals.)

In good times, the cuts are significant: Earlier this week, House Speaker Bobby Harrell sent out a list of $2.3 billion in annual tax cuts the Legislature has passed since Republicans took control of the House in 1995. In the past five years alone, the Legislature has eliminated the state tax on groceries ($354 million per year) and the bottom income tax bracket ($86 million per year) and reduced the top tax on small businesses from 7 percent to 5 percent ($129 million per year). That’s a total reduction of $569 million per year, or 8 percent of state tax collections.

Some states could cut their total tax collections by 8 percent and still be overtaxed. South Carolina is not one of those states.

The most recent figures available from the anti-tax Tax Foundation (taxfoundation.org) show that residents of 39 states pay more of their income in total federal, state and local taxes than South Carolinians. That’s according to the foundation’s quick-and-dirty calculation of “Tax Freedom Day,” which it defines as the day people stop working for the government and start working for themselves (April 3 this year in South Carolina).

The foundation’s more detailed analyses use 2008 figures. Those numbers show that our taxes are 1) lower as a percentage of income than in most states, 2) lower per capita than in most states and 3) falling. The foundation cares less about what individual governments charge than how much individuals pay, so it uses a convoluted formula that shows not only what we paid directly in taxes to our own state but also what we paid indirectly in taxes to other states, primarily through higher product costs for goods manufactured in those states. Our bill was $2,048 per person to S.C. governments, and $1,079 to other states. That was less per capita than what residents paid in 36 states, and it was down about $50 from 2007. It amounts to 8.8 percent of total S.C. income, which is the lowest that measure has been since the Tax Foundation started doing its calculations in 1977 and well below the national average of 9.7 percent.

Some may consider that too high; that’s a matter of opinion. But there’s no credible reason to believe that Ms. Haley’s election will result in lower taxes, or that Mr. Sheheen’s election will result in higher taxes.

Ms. Scoppe can be reached at cscoppe@thestate.com or at (803) 771-8571.

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