The unhealthy obsession among Republicans in the state legislature to cut income taxes is bad tax policy.
From a strategic perspective, it’s unbalanced in the tax structure to diminish the role of income taxes in the revenue stream that the state of South Carolina collects to pay for things like education, roads, health care, green space and government services that civilize our lives.
From an economic perspective, it’s unfair, too. Cutting income taxes for those on the rich end of the income scale means that people who pay a larger share in taxes on sales – poorer and working class South Carolinians – will pick up a larger share of the total tax burden.
For years, South Carolina had a fairly balanced three-legged stool of taxes that generated state revenues through a blend of property, sales and income taxes. There were some fees, but they weren’t a huge chunk of revenue.
But since Republicans took control of the General Assembly in the early 2000s, there’s been a slow burn to cut, cut, cut. First went revenues on personal property taxes in a tax shift that raised sales taxes to cut taxes for property owners (i.e. those with more means). As that third leg of the stool (property taxes) started withering, lawmakers grew a new third leg by raising lots of fees for services, increasing prices on everything from professional licenses to drivers’ licenses.
And now comes the GOP obsession with cutting income taxes. It was designed originally as tax to cost richer people more to balance the regressive burden of sales taxes that hit the poor harder
Twenty years ago, a think tank I ran called the Center for a Better South published a policy book on how legislatures in the South could do better to make taxes fairer.
One of the principles in the book was for legislatures to broaden their sales tax base: “Each Southern state should abolish sales tax holidays and review sales tax exemptions to eliminate those that don’t meet contemporary needs.”
South Carolina lawmakers, however, have taken the path to narrow the income tax base. That might be good for election-year politics, but from a tax structure standpoint, narrowing the base is risky because it assumes (and you know what happens if you do that) that growth will continue. And if it doesn’t? Surpluses go away. And a revenue crisis ensues.
To boost tax fairness, lawmakers shouldn’t fiddle with income taxes, leaving it as a counterbalance to regressive sales taxes. But lawmakers could reduce the burden of sales tax on poorer South Carolina by reducing the sales tax rates. How? By dramatically curbing special-interest sales tax exemptions that lobbyists and interest groups have gotten from the legislature.
Just two years ago, South Carolina lost an estimated $4 billion annually in sales tax revenue because it exempted so many things from the tax. But by getting rid of exemptions and keeping the income tax the same, state lawmakers could actually make a policy decision to lower the sales tax rate, which would help regular people. (The loss in South Carolina from exemptions has tripled in 20 years – in 2007, the exemption revenue loss was $1.34 billion.)
Bottom line: When you read about the GOP slapping itself on the back for cutting income taxes, realize what it really means: they’re celebrating giving their well-to-do buddies another tax break at the expense of the regular taxpayer.
It also means they’re unwilling to do the work to improve tax fairness by reining in billions of special-interest sales tax exemptions like those above that could go a long way to cutting the overall sales tax rate and make the tax code fairer to all – regardless of what they do about income taxes.
Andy Brack is editor and publisher of the Charleston City Paper and Statehouse Report. Have a comment? Send to: feedback@statehousereport.com
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