Sunday, Nov. 30, 2008

Budget crisis demands overhaul of state tax system

WITH EACH NEW month’s state tax collection figures, it becomes more apparent what a horrible mistake it was to make our state so dependent on the volatile sales tax to run our government.

Perhaps this is self-evident, since sales tax collections are plummeting further and faster than income, property, alcohol, cigarette or just about any other taxes. But tax policy experts have long known it’s dangerous to rely too heavily on any one tax, and particularly dangerous for that one tax to be the sales tax. Our lawmakers have been warned of this — repeatedly — yet they still voted two years ago to trade the most stable tax (the property tax) for one of the least stable.

South Carolina is far from alone in suffering revenue shortfalls this year; even a tax system that meets all the rules for stability would likely be generating less money than projected. But because we count on the sales tax to generate nearly half the money the state spends, and because we leave so many things untaxed, revenue is coming in even further below projections than it normally would, resulting in painful cuts to state agencies that will mean service reduction and employee furloughs, pay cuts and layoffs.

Even if you think our government needs to be downsized, this is not a good situation to be in. Laying off employees increases our unemployment rate, which further destabilizes the economy; even those pay cut/furloughs have detrimental ripple effects.

There’s nothing much that can be done to eliminate the pain of the immediate problem. But there’s something that can and should be done to help our state weather future economic storms — and this one if it drags on: Overhaul our out-of-balance, cobbled-together tax system, which was designed in and for an economy that no longer exists.

Like a smart investment portfolio, a smart tax system combines a good mix — taxes that track the economic cycle closely and that are little affected by it; taxes that are progressive, regressive and flat; taxes on income, property and wealth, on luxuries and necessities.

Our tax system, by contrast, is riddled with loopholes that have been carved out over the decades with little regard for how they affect the distribution of the tax burden, much less whose values they reflect. It asks proportionately more of the poor than the wealthy. It rewards people who buy expensive cars and punishes those who can’t afford to buy their homes. It discourages people from starting small manufacturing companies and encourages them to buy cigarettes. And, as we are becoming more painfully aware each day, it tracks the economy much too closely — producing less revenue at the very time that more is needed.

Legislators — from the most powerful leaders to the rank and file — have talked for years about overhauling this system. They have pledged that next year will be the time it happens. But next year never comes. All the grand talk evaporates when lawmakers — each of whom has a different idea of what a perfect tax system looks like — start trying to write a plan that can pass. And so they throw up their hands in despair before they even come up with a proposal.

We cannot afford for this to continue. Yes, it will be difficult, but our Legislature must replace our unstable, antiquated, Swiss-cheese tax system with a broad-based and fair one that is designed to produce a predictable, reliable amount of revenue, year in and year out, to meet our state’s needs. Not in some mythical “next year,” but in the real one that starts in 32 days.