Furman economist: How SC House, Haley road plans stack up

The poor condition of South Carolina’s roads makes traveling more hazardous and costly, and hurts the state economically. But how do the competing road plans stack up economically?

To answer that, let’s compare the plan proposed by Gov. Nikki Haley and the one passed by the House for their effects on transportation infrastructure, other government programs, economic growth and tax burdens.

The Transportation Department has said the state needs an additional $1.5 billion annually. The governor’s plan generates $3.5 billion in the next 10 years from a 10-cent per gallon tax increase that is phased in over three years. The House plan is similar but generates several hundred million dollars more in the first two years as it does not have a phase-in period. Both cut other taxes in addition to raising them.

Transportation infrastructure

The House plan initially provides more funds to repair the roads, which is the main objective.

Other government programs

The House plan would require fewer cuts in other government services to balance the budget than the governor’s plan. The House plan includes a small income tax cut, but when fully applied, in 2025, the governor’s plan would cut state income tax revenues by about a third. This large tax reduction would have substantial negative effects on other government services.

Economic growth

Spending on infrastructure under the House plan is likely to generate more economic growth than the governor’s plan due to its faster implementation and greater funding of the roads.

Studies raise doubts about whether income tax cuts they stimulate economic growth. In part, the outcome depends on how the tax cuts are financed. Under the governor’s plan, this will be through spending reductions to offset the lower revenues from the tax cuts. Beyond that, any benefit of the tax cut could be diluted, because the tax savings could be spent in other states.

However, the governor is concerned that lower taxes in other states might put South Carolina at a disadvantage. South Carolina’s business tax climate is neither among the 10 best nor the 10 worst. Also, the benefits of the tax cut would have to be considered with the effects of cutbacks in government services. Business location decisions are complex, and taxes are only one of many aspects businesses consider. In my opinion, neither plan’s tax cuts are likely to significantly stimulate economic growth.

Tax burdens

South Carolina’s state and local tax system for non-elderly residents is proportional for 95 percent but not for the top 5 percent. The top 5 percent pay about 5.5 percent of their income in state and local taxes -- while the other 95 percent pay 7.5 percent. That’s right: Those with the highest income pay the lowest percent of their income in taxes. Both the governor’s and the House’s proposals are likely to shift more of the tax burden to the middle and low income households and away from high-income households due to the regressive nature of the gasoline tax and the largely neutral effect of the income tax cuts.

Overall

In my opinion, the House plan ranks higher on its infrastructure spending.

The question is not whether the government is too big or too small but what makes for smart government. If the government is spending tax dollars on programs that have outlived their usefulness, they should be identified and cut. Then and only then should the savings be returned to South Carolinians in the form of tax cuts. That would be intelligent governance.

Let’s fix the roads first and deal with tax cuts later.

This story was originally published May 4, 2015 at 12:39 PM with the headline "Furman economist: How SC House, Haley road plans stack up."