Expert: Think broadly when implementing tax system

If South Carolina is going to compete in the global economy it needs a right-sized tax system, said William Fox, director of the center for business and economic research at the University of Tennessee.

“Taxes play a key role in a state that is competitive for the future,” Fox said Monday.

Fox spoke to USC’s 27th Annual Economic Outlook Conference. His keynote luncheon address — “Sound Tax Policy for a Competitive Economy” — followed morning forecasts by USC economists. They believe the state’s economy will likely grow more slowly in the coming year, but fall short of going into a recession.

The goal of tax policy should not be just to be a low tax state, Fox said.

“If you want to be the discount store of the U.S. that certainly is an option. But it is not the way to create a rising income relative to the U.S. and the rest of the world.”

South Carolina’s personal per capita income rose from 1980 to the mid-1990s, Fox said. But since the mid-1990s things have been deteriorating, he said, and “you ought to be asking why and how do I fix this.”

Globalization is certainly a factor, Fox said, and South Carolina needs an increasing share of the world market. But technology is really causing the big shift in incomes, he said.

“What technology does is cost jobs for the least skilled,” Fox said. “Technology means high returns for the people with the best skills and this is what is happening to South Carolina.”

South Carolina, Fox said, needs to put in place a tax system that grows with the need for education and infrastructure, “so that you can invest in yourself.”

Fox and Don Boyd, deputy director of the Center for Policy Research at the Nelson A. Rockefeller College of Public Affairs and Policy, are consulting with the Palmetto Institute on tax structure for South Carolina.

“The reason the Institute has engaged Drs. Fox and Boyd is very simple,” said Joel Smith, former dean of the USC business and chairman of the institute’s tax study committee. “We believe that in order to implement a long-term strategy for the purpose of making South Carolina more competitive in the global, knowledge-based economy requires a stable, equitable and efficient tax structure.”

That tax structure needs to attract both individuals and industries to invest and grow in South Carolina, Smith said, and it also needs to provide for investment in things like work force quality and education.

The institute has asked the researchers to do three things:

• Update the institute’s 2005 evaluation of the state’s tax structure in light of recent legislative changes.

• Review the legislation increasing the state sales tax and eliminating a portion of the property tax to see what effect it will have on the tax system.

• Review the state Bureau of Economic Analysis forecast of a substantial deficit in the state’s general fund if there is an economic downturn in 2008, as is now expected.

South Carolina needs to be careful not to try to push all its taxes out to the rest of the world, Fox said.

“You can’t expect to have a tax system where somebody else is going to pay all the taxes for you,” he said.

You can’t tax businesses too much, because in this mobile, global economy business will go somewhere else.

You can’t tax tourists too much, because they will just vacation somewhere else.

“You must find a right way to tax yourselves, and then charge tourists and businesses for the benefits they receive,” Fox said.

The state also needs to be careful with shifting taxes away from stable sources, such as property taxes to more volatile streams such as sales taxes, he said.

Fox said the approach he recommends is to “follow the strategy of broad tax bases and low tax rates. What you keep doing is forcing up your rates and making yourself increasingly uncompetitive.”