LIKE BOTH of his predecessors, Gov. Henry McMaster wants to hijack any talk of tax reform with promises of slashing income taxes. Like both of his predecessors, he ignores the fact that income taxes aren’t particularly high in South Carolina. And that taxes in general aren’t particularly high in South Carolina.
About the only taxes that are demonstrably high in South Carolina compared to the other 49 states are the excise taxes on alcohol — which a lot of us would argue is a good thing — and the sales tax. House members have been talking a lot about cutting the sales tax, in conjunction with changing the laws that result in more consumer purchases going untaxed than being taxed.
But even before the House’s special tax study committee can settle on a proposal to eliminate some sales tax exemptions and cut the tax rate by a corresponding amount, the governor proposed to cut the top rate in all income tax brackets by 1 percentage point, as part of his first state budget plan. That, he says, would reduce tax revenue by $139 million in the coming year and $750 million a year once it’s phased in five years from now.
That might not sound like a lot — and it’s not nearly as big and irresponsible a cut as then-Govs. Nikki Haley and Mark Sanford had proposed — but cutting the rate on the top income bracket from 7 percent to 6 percent is a 14 percent reduction; cutting the 3 percent bracket to 2 percent is a 33 percent reduction.
The governor also wants to create yet another income tax exemption, this time relieving military veterans and retired police, firefighters and other first responders of the obligation to pay the income taxes that everyone else has to pay on their pensions. If they have pensions. We’ll talk about that in a later column if legislators show any inclination to go along with it.
Mr. McMaster says these cuts are necessary because “the quickest way to stymie South Carolina’s growing economic prosperity is to unduly overtax and overregulate our people.” That might be a logical thing to say if he were trying to stop tax increases, but it isn’t an argument for tax cuts.
I doubt the Legislature will be in a mood to cut taxes this year — just last year, they found it so difficult to pay for even the state’s basic obligations that they abandoned their adamant opposition to tax increases and raised the gasoline tax to fix our roads. But a gubernatorial campaign for income tax cuts has the tendency to drown out any talk about actual tax reform. Which we need and have needed for years and will continue to need until the Legislature finally decides to overhaul our entire antiquated, loophole-riddled, special-interest driven tax system.
The income tax is the tax that people most dislike, and ours looks much higher than it actually is. When politicians complain that our 7 percent top income tax rate is high, they don’t mention that we use a lower starting point than most states (“federal taxable income” instead of “adjusted gross income”) for subtracting out all of our credits and deductions. According to South Carolina’s chief economist, those differences mean the tax that South Carolinians actually pay is on average 3.1 percent of our income — which is lower than what people pay in 32 states.
The problem with cutting the income tax — besides making it even more difficult for the state to protect vulnerable children from abusive parents and keep prisoners securely locked inside of our prisons, and both the prisoners and the guards safe, and provide good teachers for all students — is that it destabilizes our tax system.
Like a good stock portfolio, a good tax system relies on a balance, with different types of taxes behaving differently throughout the economic cycle, and affecting different types of people in different ways. For both stability and fairness, economists agree that the best state tax system relies about equally on the income tax, the sales tax and the property tax. South Carolina already relies less on income taxes than the sales or property tax. Cutting income taxes by more than 15 percent would further unbalance our tax system.
Our sales tax, by contrast, is the 16th highest in the nation. The main reason it’s so high is that it’s all about mollifying special interests by giving them special tax breaks. We exempt more than we tax: We have around 120 exemptions written into law, and on top of that we tax far fewer services than most states. House members say they can cut the state sales tax from 6 percent to 3 percent if they address both of those problems, and technically that’s true. The problem is that they’re not going to tax all goods and services, and they probably shouldn’t, because some prevent taxing the same thing twice, and some of the biggest exemptions (think electricity and groceries) serve primarily to make the sales tax a little less regressive than it otherwise would be.
Still, any effort to eliminate some exemptions and tax more services — and use the additional revenue to cut the tax rate — would be a smart step toward a lower, flatter tax system, one that is less volatile and more fair. Which is the opposite of where cutting the income tax rates — and creating yet another large tax exemption — would take us.
Ms. Scoppe writes editorials and columns for The State. Reach her at email@example.com or (803) 771-8571 or follow her on Twitter or like her on Facebook @CindiScoppe.