Wednesday, Oct. 24, 2007

Ticking tax time bombs threaten S.C. economy, government

THE FIRST property tax bills with no charges to run the schools will land in mailboxes any day now. The state grocery tax disappears on Nov. 1. Even state income taxes are on their way down.

But storm clouds are gathering. Not just a slowing economy, which already has lawmakers talking of coming budget cuts. No, we’re also facing a field of ticking tax time bombs that threaten to further undermine the economy and to further hinder the ability of our state to provide the services most of us agree we need. In no particular order:

• The reassessment cap that voters approved in 2006, which says the taxable value of homes and businesses can’t go up more than 15 percent every five years.

This cap will result in the owners of the two-thirds of real property that doesn’t appreciate more than 15 percent paying higher tax rates to subsidize the tax break for the lucky third. But the time bomb is how it affects that lucky third: It discourages them from selling their homes, because once they buy a new home, they have to pay their full tax share.

• The new point-of-sale assessment system that came with that 15 percent cap. We’ve grown used to the tax assessor setting the taxable value of our homes below market value. No more.

Now when you purchase a home, the taxable value is whatever you paid for it. This makes some sense, but the shock to the system gives everybody a reason to hesitate about buying a new home — which is not exactly what we need in this economy.

• The cap on city, county and school taxes, which limits tax rate increases to a percentage equal to the rate of inflation plus population growth.

The problem is what happens when Blythewood decides it needs a police department. It’s out of luck, because Blythewood doesn’t collect a property tax, and any number you multiply by zero is still zero. The problem isn’t as drastic everywhere, but it means that a community has to live forever with the level of services it now has.

• Economic incentives. Used to be, only major manufacturers promising hundreds or thousands of high-wage jobs could hope for incentives. But the incentives arms race has changed all that.

Last year, the Legislature offered tax breaks to retail businesses. And not just property and income tax breaks. If a big-box sporting goods store moves to the right location, it can pocket half the sales tax money it collects.

This year, lawmakers gave new tax breaks to Michelin so it wouldn’t leave the state. And the way they wrote the law, the company could lay off S.C. workers and still collect the tax breaks.

• A sales-tax-heavy system. Tax Policy 101 says that a tax code needs to be balanced by taxes on consumption, wealth and productivity. This idea is referred to as “the three-legged stool.”

Our stool is teetering. Rather than collecting roughly the same amount from the sales, income and property taxes, we collect a lot more from the sales tax and a lot less from the income tax. If your legs are going to be uneven, this is the worst way, because the sales tax fluctuates the most as we move through economic cycles.

• A sales tax that’s too high. Our sales tax is 6 percent statewide and 8 percent in some counties.

That’s among the highest in the nation, and the Internet and being a small state make avoiding the S.C. tax extremely easy. The result: People stop shopping at stores located in South Carolina, reducing sales tax collections, hurting local businesses and reducing income and property tax collections.

• Finally, sales tax erosion. Another economic truth is that the best tax is one that’s wide and thin. That is, you want to tax as many people or activities as possible, at the lowest rate possible.

But our sales tax base is shrinking. In 1979, 51 percent of all U.S. consumer spending was covered by state and local sales taxes. By 2000, it was 42 percent. And the trend is continuing.

One reason is the growth of Internet purchases, which federal law prohibits us from taxing. But our lawmakers exacerbate the problem, in two ways.

First, the Legislature keeps exempting more tangible goods from sales taxes. At last count, more than 70. Many of the exemptions make sense, but many don’t. And those 70 exemptions mean that for every $2 worth of products that we tax, $1 worth of products are sold without tax.

The second problem has to do with what the Legislature isn’t doing: responding to the shift from a product economy to a service economy.

The problem is, we tax just 34 of the 168 categories of services — fewer than 30 states tax.

If we taxed all 168 categories of services, we could double our sales tax collections. Better yet, we could cut our sales tax rate in half and keep generating at least the same amount of money.

Taxing all services would lead to pyramiding, or double taxation (your attorney purchases accounting services as part of her representation and pays a tax on that, then includes it in her taxed bill, so you pay a tax on a tax). And it would cause people to take their business out of state, to avoid the tax; this probably wouldn’t affect dry cleaning or delivery services, but it could determine who your accountant is. So we need to identify the services that people need to purchase locally, and tax them.

These are by no means the only problems with our tax system. We need to raise our lowest-in-the-nation cigarette tax, reduce our reliance on fees, examine the property and income tax exemptions, and there’s a handful of small taxes that are among the highest in the nation, for no apparent reason — all of which underline our need for comprehensive tax reform. But these are the ones that will wreak havoc on our economy and on our state’s ability to provide the services we need. And the longer we ignore them, the more damage they will do, and the more painful it will be to fix the problems.

Ms. Scoppe can be reached at cscoppe@thestate.com or at (803) 771-8571.

Get The State newspaper delivered to your home. Click here to subscribe.