Wednesday, Apr. 16, 2008

Revenue slump illustrates problems with state tax policy

TAX POLICY isn’t officially on the table when lawmakers debate the state budget — nor should it be. But we would be missing the point if we didn’t focus on tax policy in the wake of last week’s dismal downward revenue forecast — and the resulting ripples through the budget that the Senate is debating this week

If ever there was a poster child for the crying need for a smarter approach to taxation, this situation is it.

Senate budget-writers deep-sixed state employee pay raises and new school buses and slashed an industrial recruitment closing fund and even tourism advertising when the state’s financial gurus announced that tax collections were running $90 million behind in the current fiscal year and projected that they’d come in another $90 million less than anticipated next year. These last-minute cuts, while relatively small in a $7.1 billion budget, were extracted from a budget that already included across-the-board cuts in order to make up for slowing tax collections.

The economic slow-down is not unique to South Carolina. But the way our lawmakers have chosen to collect taxes magnifies the impact that slow-down has on state services.

See if you can spot the patterns here:

Two years ago, the Legislature increased our reliance on sales tax collections by raising that tax by a penny on the dollar in return for slashing property taxes for homeowners.

Last year, the Legislature eliminated the grocery tax as part of a $220 million tax cut — the largest in state history.

This year, South Carolinians, like people across the country, are spending significantly more of their paychecks on groceries, as the price for milk, bread, bananas, you name it, has soared.

Sales tax collections alone are off by $66 million in the current fiscal year.

Now, we can’t blame all of that sales tax shortfall on the fact that we’re spending more of our money on groceries, which our state no longer taxes.

We’re also spending a lot more of our money on gasoline — which is exempt from the sales tax as well.

The spike in gas and grocery prices means most of us have a lot less money available to spend on household goods, clothing, DVDs, dinner out and other items that are subject to the 6 percent (or 7 percent or 9 percent, depending on where you live) sales tax. And so even if we don’t spend a dime less than we did last year, sales tax collections — which our Legislature has made our No. 1 source of revenue — are falling.

Let me be clear here: I’m not saying we should still be taxing groceries. We never should have taxed groceries to start with. What I’m saying is that, like just about every tax change the Legislature has made — and declined to make — for at least the last two decades, the grocery tax cut, like the decision to make our state even more dependent on sales tax collections, was done without anticipating its effects.

The shift in our spending from taxable goods to gas and groceries has been quick and dramatic, but it’s certainly not unique. Over the past half-century, Americans have shifted their overall spending away from products and toward services, which now account for 60 percent of every consumer dollar. But South Carolina has left those services largely untaxed. On top of that, the Legislature has passed so many exemptions that for every $2 worth of products we tax, another $1 worth goes untaxed.

And against this backdrop, our legislators decide that schools should get more of their money from the state sales tax, and less from property taxes. They limit how much cities and counties can raise property taxes, and tell them to raise the local sales tax if they want more.

Even as the sales tax collections slow to a trickle, legislators just keep cutting additional taxes. Smaller tax cuts, to be sure, but in some ways that’s worse, because those small, targeted tax cuts get even less scrutiny — and make even more of a mess of our Swiss-cheese tax code.

Married? You get an extra break on your income taxes, under an election-year bill the House passed earlier this month.

Going green? The Senate wants to give you some incentives, although President Pro Tempore Glenn McConnell said last week he’d be willing to hold off on those tax cuts for a year, seeing as how the budget is in such a mess. (Never mind that it’ll likely be in just as bad a shape next year.)

Want to shoot a film in our state? The House wants to cut your taxes even more — and increase the amount of money our state actually pays you to do this.

The House also wants to pull all the auto sales tax money out of the state’s general fund and divert it to road maintenance. Of course, there’s not nearly as much of this as one would expect, since we have a backwards tax policy here: We only charge a sales tax on the first $5,000 of a car’s value. But spending that money on roads instead of schools or prisons, House Speaker Bobby Harrell explains, means we don’t need higher gas taxes. It also means more services get cut.

If there is reason to all these ad hoc tax breaks, it’s that legislators want to promote their favorite activity or endear themselves to their favorite constituency or donor group. It’s not that these changes make our tax collections more stable, or fairer, or simpler, or able to weather economic changes — as the current budget debate makes painfully clear.

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

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