Scoppe: The sales tax slouch, or How S.C. burns away its tax base

Associate EditorSeptember 16, 2012 

SINCE 2000, South Carolina’s sales tax has:

A. Increased from 6 percent to 7 percent — or 8 percent, or 9 percent, and more on some items.

B. Increased from 5 percent to 6 percent.

C. Decreased from 2.5 percent to 2 percent.

If you answered A, you’ve forgotten that part of what we pay at the cash register is a local sales tax, which varies from county to county but is either 1 percent or 2 percent in nearly every county, with an extra 1 percent or 2 percent added to restaurant sales in some areas.

If you answered B, you are technically correct: The state sales tax was 5 percent from 1984 until 2006, when it was raised to 6 percent in a tax swap that eliminated homeowners’ school operating taxes.

If you answered C, you have a sophisticated understanding of state tax policy, and you think outside the box: You realize that the tax we pay averages out to only a third of the sticker price, because for every dollar of sales that are taxed, $2 worth go untaxed.

Or thereabouts. New figures from the Revenue Department show that in the fiscal year that ended June 31, just 34.8 percent of gross sales were taxed.

Put another way, if all $156 billion worth of goods and services that were sold in South Carolina last year had been taxed, we could have cut the tax rate to 2.1 percent and still collected the same amount of money to pay for schools and other governmental services.

None of this would matter — what difference does it make whether you pay 2 percent on every dollar you spend or 6 percent on every third dollar?— if the exemptions were spread out evenly. If everyone got the same benefit from them. But of course we don’t. The very purpose of tax exemptions is to give some people, some products, some businesses an advantage over others.

So people who spend most of their money on groceries and gasoline and electricity — usually the poorest among us — effectively pay a lower sales tax, because those items aren’t taxed. So do wealthier people who spend most of their money on services — from lawn care to attorney fees — which also are untaxed. People who spend more of their money on clothing or electronics or restaurant meals or most consumer goods pay a higher effective tax rate because those items are taxed.

Now, there are perfectly legitimate reasons to write exemptions into the tax code. It can make the code more equitable: A sales tax is regressive, because poor people must spend a larger portion of their income than wealthier people, who are able to save or invest more; exempting groceries is one way to make the tax less regressive. Exemptions also can discourage those activities that we as a society want to discourage and encourage activities that we want to encourage; hence, a higher tax on cigarettes, and tax breaks for creating jobs in low-income counties.

The problem comes when the loopholes swallow the whole — as they clearly have when twice as many sales are exempted as taxed. The problem comes when the tax exemptions do not reflect generally agreed-upon values, but instead reflect the lobbying power of the favored interests. Or inertia.

The problem isn’t unique to South Carolina — tax-policy analysts across the nation have been fretting over the shrinking sales-tax base for years — but it’s worse here, because our Legislature has been so much more promiscuous than most about doling out exemptions and so much less willing than most to tax services, on which we spend an ever-larger share of each consumer dollar.

A report published this spring by the wonkish TaxAnalysts website compared “tax coverage” by state, based on the portion of personal income that is subject to the sales tax. That’s not necessarily a better measurement than comparing taxable to untaxable sales, just a different approach. It found that our tax “breadth” was lower, at 31 percent, than all but 13 other states. The national average was 34 percent.

Not surprisingly, given how our loopholes are created, the report showed that businesses pay a smaller portion of the sales taxes in South Carolina than in all but six states: 33 percent, compared to a national average of 41 percent.

By this time last year, our Legislature had passed a total of 110 product exemptions to the sales tax. That’s in addition to exempting 133 of the 168 categories of services.

And then there was this year, the year that House Republicans couldn’t stop patting themselves on the back for finally, courageously tackling our orgy of special-interest sales tax exemptions. The bill they finally managed to pass eliminated just two dozen small exemptions, enough to lower the tax rate from 6 percent to … 5.98 percent. The Senate ignored the bill, and the Legislature as a whole (this is what actually counts) added at least one new exemption, on biologics administered by a physician.

That rush by our legislators to exempt more products every year, even while they’re claiming to clamp down, helps explain why last year’s 65.2 percent exemption rate is up from 63.5 percent in 2011 and from 52.1 percent in 2000. And there’s no reason to think the trend will abate, because untaxed sales are growing twice as fast as taxed sales.

The good news is that at some point the tax base will stop shrinking. After all, if the Legislature exempted everything, no one would get a preference. And what would be the point of that?

Ms. Scoppe can be reached at cscoppe@thestate.com.

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