Cindi Ross Scoppe

Scoppe: Why SC revenue remains below pre-recession peak, and what it means

THE GOOD news is that even adjusted for inflation, states’ revenue collections have recovered to 2.2 percent above their pre-recession peaks.

The bad news is that this is not a universal experience. It’s an average. And it should not be a surprise to learn that South Carolina is not one of the 24 states that have recovered.

According to the latest state revenue report from the Pew Charitable Trusts, released last month, South Carolina collected 11.2 percent less in inflation-adjusted dollars in the first quarter of this year than it did when we reached our peak, in the fourth quarter of 2007.

Only seven states — Alaska, Wyoming, Florida, New Mexico, Michigan, Louisiana and Georgia — are farther away from recovery than South Carolina. And the report noted that Alaska’s 2008 peak was due to a short-lived windfall from a new oil tax combined with high crude prices; without those, Alaska might well look closer to recovery than South Carolina.

So it also should not be a surprise to learn that while total state revenue collections in actual, unadjusted dollars were up 10.2 percent across the states, South Carolina is among the 14 states that still aren’t collecting as many actual, unadjusted-for-inflation dollars as before the recession. At the end of the first quarter of 2014, S.C. revenue collections were still 2.4 percent below the pre-recession peak.

I’m not using Pew’s dollar figures because most people would quit reading before I finished explaining why they look so different than the ones we use in our state budget. The short but incomplete explanation is that Pew’s numbers are based on the Census Bureau’s definition of total state revenue, defined as “taxes plus licensing and compulsory fees collected by states.” This includes revenue that isn’t part of the state’s general fund, but not all of the revenue that’s part of the much larger total state budget, which also includes federal funds and transfers between government agencies.

From a budgetary perspective, what our unrecovered status means is that the Legislature has 10 percent less spending power today than it did at the end of 2007. That underscores how unrealistic it is to think that either Sen. Vincent Sheheen’s proposal to use “revenue growth” or Gov. Nikki Haley’s unannounced plan that certainly will be in some way based on the same idea will even begin to address our highway infrastructure backlog.

It underscores how unrealistic it is for either of them or anyone else is to promise major new investments in any area, unless they also include new taxes or even deeper spending cuts to already-emasculated budgets.

That problem isn’t unique to South Carolina. The Pew analysts note that policymakers across the nation “face pressure to catch up on investments and spending postponed due to the downturn” and that this “may be more difficult in states where tax revenue remains below its previous peak.” But it certainly is a problem we need to be aware of.

From a tax perspective, the report is yet another reminder that our tax system does not reflect South Carolina’s economy in the 21st century. If it did, our state government revenue would have rebounded as our economy rebounded. But according to the Federal Reserve Bank of St. Louis, South Carolina’s gross domestic product had returned nearly to its pre-recession peak in 2011 and was well past it in 2012.

Lots of things contribute to our tax/economy mismatch, but none is larger, or more damaging to both our state revenue collections and the health of our economy, than the holes in our sales tax.

The problem isn’t unique to South Carolina either — tax experts the nation over have been fretting over the shrinking sales tax base for years — but it’s worse here, because our Legislature has been so much more promiscuous than most about doling out tax exemptions and so much less willing than most to tax services, on which we spend an ever-larger share of each consumer dollar.

The last time I counted, the Legislature had passed 110 product exemptions to the sales tax. That’s in addition to exempting 133 of the 168 categories of services.

Add in the growth of online purchases, on which most consumers refuse to pay the required use tax, and the result is that for every consumer dollar that is taxed by our state, two dollars go untaxed. That means that as our consumer-driven economy recovers, only a third of that recovery is reflected in the state budget.

There are also mismatches in our income tax and other taxes and fees (a favorite: the gasoline tax, which is collected on a per-gallon basis, regardless of the cost per gallon of gas), but they’re not as big. And of course the sales tax is by far the state’s top revenue source.

We could help close the tax-economy divide by either eliminating some of those sales tax exemptions or relying less on the sales tax and more on other taxes, or both. And we should. Do both, I mean.

That wouldn’t suddenly enable us to put a serious dent in that $42 billion backlog of road and bridge needs, but it could mean that the next time we drop into a recession, the state government’s buying power will return to pre-recession levels about the same time the economy recovers — rather than two years later.

Ms. Scoppe can be reached at cscoppe@thestate.com or at (803) 771-8571. Follow her on Twitter @CindiScoppe.

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