Photo by Kelly Sikkema on Unsplash

The monkeyshines about income taxes are on full display again at the Statehouse. But anti-tax advocates are playing with fire, selling a dangerous brew that could hurt regular people, increase risk and help wealthier people who already get pretty favorable tax treatment.

Brack

Of the $10.9 billion in general tax revenue projected for 2022-23, just over half — $5.53 billion — comes from one source, individual income taxes. Combined with sales taxes, which generate about $3.7 billion, 84% of the state’s overall general fund revenues are based on these two state taxes.

Most tax-obsessed politicos ignore how South Carolinians have a comparatively low tax burden, ranking 42nd in the country, according to the Tax Foundation. Most ignore there are too many exemptions for sales and income taxes, costing billions in unrealized revenues to the state. Most ignore the tax bases are too narrow, which means lots of stuff just isn’t subject to taxes.  

And because of the narrow tax bases for many state taxes, our rates are comparatively high. What Republicans in the Statehouse want to do is lower the rates without broadening the bases. If successful, that will mean the amount of money in always poor South Carolina would likely go down or stagnate, when billions are needed to catch up on education, health care and boosting opportunities for small businesses. (Republicans often argue that “growth” will make up for lowering tax rates, but what if they’re wrong and there’s another downturn? Then a bad situation gets worse.)

“Every time the state’s economy is healthy and growing, which is never a permanent state, the tax-haters are out with their knives ready to make permanent cuts in taxes,” said retired Clemson University economist Holley Ulbrich, who has researched and written about state and local tax policies for years. “And always income taxes, because those are the taxes paid by their favorite constituents, the ones who contribute to their campaigns and hang out in the same social circles.”

She said South Carolina ranked 40th in taxes as a percent of income. And in per capita revenue, the state is poor, ranked 48th among the 50 states. People don’t want to hear it, but look at the schools, roads, bridges and other infrastructure.

We are undertaxed and underserved relative to our peers,” Ulbrich said. “The income tax specifically takes 1.94% of personal income and yields $972 per capita. In Georgia, it is 2.37% of income  and $1,108 per capita. In North Carolina, it is 2.78% or $1,215.  

“You would think our very low income taxes would have given us a comparative advantage by now in attracting economic development compared to our two neighboring states, but not so.”

State Sen. Mike Fanning, D-Fairfield, believes the tax system needs to be fairer, but supports a drop of the top income bracket from 7% to 6% over five years, which the GOP has proposed. 

“The goal should be to tax everybody and everyone but do it at the lowest rate possible,” he told Statehouse Report. But the smarter and fairer way to deal with taxes, he said, is to reform the whole taxing structure at one time, not make targeted cuts hither and yon.  

For example, South Carolina loses more than $3 billion a year because it has about 100 special-interest exemptions for sales taxes. And state law provides the taxing of about three dozen types of services of the 175 that could be taxed. Example: You pay sales taxes on dry cleaning services, but not on legal services.

“We’ve got to start saying no to piecemeal tax policy,” Fanning said.

State lawmakers would do better to invest significant time in making comprehensive tax reform instead of risking unintended consequences from wantonly cutting income tax rates, our largest and most reliable revenue source.

Andy Brack is publisher of Charleston City Paper. Have a comment? Send to: feedback@charlestoncitypaper.com.


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