Should SC tax prescription drugs, groceries?

Francee Levin has survived being hit by a drunk driver and her heart failing.

The Northeast Richland resident is thankful that insurance covers the cost of the prescriptions — roughly $1,250 in March — that keep her alive. She is also thankful she does not have to pay South Carolina’s 6 percent sales tax on those prescriptions, which would have added $75 a month to her drug bill.

“There’s all kinds of ways the state could make money,” said Levin, who is in her 60s. “But let’s not tax drugs – things that people need to stay alive.”

S.C. lawmakers soon will decide whether to continue exempting prescriptions from the state’s sales tax, an exemption that costs the state $518.9 million a year in revenue. Combined with other items that the state excludes from sales taxes — from groceries to lottery tickets to services — those exemptions cost the Palmetto State about $3 billion a year in lost revenue.

Whether to tax those items in the future will be a decision before S.C. House members when they discuss changes to the state’s tax code.

House members, who could start meeting on tax reform at early as next month, also will decide how to adjust property taxes on homes and lower the state’s top income-tax rate — 7 percent.

The goal is not to raise more tax money for the state, legislators say. Instead, any tax reform proposal that they pass will be revenue neutral — with any tax increases in one area offset by tax cuts in another.

The aim of the committee, they add, is to devise a fairer, lower tax structure that legislators can vote on during their next session, which starts in January.

But passing tax reform will be an uphill battle.

Pressure from the public for tax reform is nearly nonexistent.

Any reform proposal that emerges is sure to offend some powerful group.

And previous tax reform proposals have gone nowhere.

“Taxes have been studied to death,” says S.C. House Speaker Tommy Pope, R-York, the special House panel’s chairman. “We’ve got to have the courage to do something about it.”

Tax drugs at a lower rate?

Repealing some of South Carolina’s sales-tax exemptions — like the exclusion on taxing prescription drugs — is not a new idea.

Seven years ago, the S.C. Taxation Realignment Commission recommended repealing the sales-tax exemption on some prescriptions.

The commission recommended taxing other prescriptions at 1.25 percent of their cost, instead of the state’s full 6 percent sales tax. Drugs bought through Medicaid or Medicare would have remained exempt. In addition, the sales tax on drugs would have been capped at a maximum of $100 a year, or $8.33 a month.

But even a low tax bill faces opposition from Levin and others.

They argue sales taxes are regressive, hitting hardest low-income and poor South Carolinians. “One hundred dollars a year? I could certainly put it to better use,” Levin said.

Pope thinks some of the sales-tax exemptions, including the one for prescriptions, are unlikely to be changed drastically. Other exemptions that benefit large numbers of South Carolinians but cost the state hundreds of millions — the exemption for electricity, which costs the state $309.9 million a year, and groceries — which costs $444.8 million a year — also are unlikely to be changed.

“It’s unlikely that any of those broader ones take a hard hit,” Pope said.

But other sales-tax exemptions only benefit smaller special interests.

For example, the sales-tax exemption on manufacturing machinery costs the state $156 million a year in lost revenue.

But that exemption and others are necessary for South Carolina to remain competitive, said Lewis Gossett, chief executive of the S.C. Manufacturers Alliance. “It would be a devastating blow to manufacturing and the future of manufacturing to lose those exemptions.”

And so it can be argued with virtually every exemption.

But, critics of the current tax system argue, exempting so many goods and services from the state’s sales tax results in any even higher sales tax on items that are taxed. To lower that tax rate — the 16th highest in the nation — some exemptions must be repealed, they contend. Otherwise, legislators cannot devise a tax system that is fairer.

Tax homes for schools?

The special House tax panel also will look at the state’s property tax laws, specifically Act 388.

The controversial law, passed in 2006, exempted homeowners from paying taxes for school operations on their primary residence.

The law unfairly shifted the property tax burden to commercial properties and other properties, including rental homes, critics say.

It also hurts S.C. schools, others say.

Act 388 increased the state’s sales tax by a penny, sending that money to school districts, a move intended to make up for the property-tax revenue that schools lost. However, that extra penny never has raised enough to make up the lost revenue. As a result, S.C. lawmakers have had to budget between $18.7 million and $116.9 million a year from the state’s general-fund budget to make up for the property taxes that schools lost.

“As a Legislature, we make a promise that ends up years later being difficult to keep,” Pope said.

But changing the property tax law will be tough.

In part, that is because any decision that state lawmakers make will affect the revenues of local government, not state government, Pope said.

“It’s very hard to take away a tax break that you’ve given to homeowners,” said state Rep. Tommy Stringer, R-Greenville, who has been on several tax-reform committees. “Going back in and re-taxing primary residences is going to be a hard sell.”

‘There will not be the public pressure’

Passing any tax reforms will be challenging.

“The difficulty is there will not be the public pressure like there was on the roads,” Pope said.

But, Pope adds, any tax reform proposal that emerges will be revenue neutral. “If you start trying to sneak increases in, it looks like you’re just raising taxes in the guise of reform.”

That won’t please some, who contend South Carolina is struggling now to pay for public services and needs to raise taxes.

After almost a decade of spending cuts forced on the state by the Great Recession, the state’s general fund budget only matched pre-Recession levels in 2014. But, after a decade of population growth and inflation, $8 billion does not go as far as it did a decade ago. As a result, many state services — including state aid to local governments and schools — are not fully funded.

But Pope hopes tax reform will help address those needs.

The ripple effect of cutting taxes should yield more revenues for the state, he argues.

“Ultimately, there will be more revenues for the state, through prosperity of having low tax rates and attractive income tax that brings people and brings business here,” he said.

This story was originally published August 11, 2017 at 12:08 PM with the headline "Should SC tax prescription drugs, groceries?."