The average person spent close to $251 just on gifts during the long Thanksgiving weekend, according to a retailing group. In South Carolina, that $251 tab included $15.06 in sales taxes.
However, some S.C. legislators are looking at cutting that tax bill in half.
Cutting the state’s sales tax to 3 percent from 6 percent — 16th highest in the nation — is one of several proposals the S.C. House’s Tax Policy Review Committee is considering to reform the state’s current tax code.
Committee chairman Rep. Tommy Pope, R-York, said House Speaker Jay Lucas. R-Darlington, has asked lawmakers to make the tax code broader, flatter and fairer.
A smaller sales tax — which, with the little-known use tax, brings in nearly $3 billion a year in revenues for the state — could save South Carolinians hundreds of millions at the cash register.
But there is a catch.
Lawmakers will have to find money to offset the revenue lost if the state cuts its sales tax.
One option? Start charging a new, lower sales tax on purchases now exempted from that tax. Those exemptions now cost the state about $3 billion a year in lost revenue.
For example, groceries are now exempt from the sales tax — costing the state about $444.8 million a year in lost revenue.
While lawmakers say cutting the state’s 6 percent sales tax in half likely would include removing several existing sales tax exemptions, that move undoubtedly would ruffle consumers and some powerful lobbying groups.
Removing the sales tax exemption for groceries, for example, would cost South Carolinians more in taxes, even if they saved on other purchases.
“When we say lower sales tax, it doesn’t mean cut revenue in half,” Pope said. “By removing exemptions it would come to a sort of equilibrium.”
Changing SC’s sales tax
The devil is in the details on any tax reform, said Ashley Landess, president of the S.C. Policy Council think tank, which advocates for smaller government and lower taxes.
“The reality of the (tax) code is there are so many exemptions in place, so many incentives and targeted breaks woven into the code,” she said.
For example, prescription drugs, lottery tickets and electricity now are exempt from the state sales tax.
But some exemptions are necessary for the state to remain competitive, various groups argue.
Machinery for manufacturing is not subject to the sales tax, for example, resulting in about $156 million in lost revenue for the state. If machinery were taxed, it would be a “devastating blow to manufacturing,” Lewis Gossett, chief executive of the S.C. Manufacturers Alliance, said in August.
In September, state lawmakers heard from consultant Rebecca Gunnlaugsson, the S.C. Commerce Department’s former chief economist, on how to reform the state’s taxes on individuals and businesses.
Lowering the state sales tax to 3 percent from 6 percent and reducing more than $70 billion worth of sales-tax exemptions on untaxed goods and services were just two scenarios that Gunnlaugsson suggested.
“Since early 2000, we’ve seen the number of goods that are actually subject to the sales tax go from 48 percent (of sales) to about 34 percent,” she said. “We are eroding the sales tax base over and over.”
Putting SC on ‘track for fiscal stability’
An across-the-board sales tax cut would be a good first step in tax reform, Landess said. But, she added, “I don’t doubt for a minute that when (lawmakers) are finished with this some people will pay more.”
Pope said broadening the state’s tax base is not about picking winners or losers. “Every one would benefit from a much lower rate.”
Lowering the state’s sales tax already has the approval of the S.C. Retail Association, which supports more than 421,000 jobs.
Lindsey Kueffner, the association’s executive director, said lowering the tax would allow for more competition between brick-and-mortar retailers and online sellers that do not collect sales tax.
“It’s the type of thing the longer you ignore it the worse of a problem it becomes,” economist Gunnlaugsson said. “The sooner we start developing a plan, the sooner we can put the state on track for fiscal stability.”
Sales tax exemptions cost SC
S.C. lawmakers are considering whether to eliminate the sales tax exemption for some goods and services that are not now taxed. Those exemptions cost the state about $3 billion a year in lost revenue. A look at some of those exemptions and what they cost the state:
▪ Exemption for prescription drugs: $518.9 million in lost revenue
▪ Exemption for groceries: $444.8 million in lost revenue
▪ Exemption for electricity for residential use: $309.9 million in lost revenue
▪ Exemption for lottery tickets: $86 million in lost revenue
SOURCE: S.C. Revenue and Fiscal Affairs Office