How to Raise Taxes (Kansas-Style)
We’ve written before on how at least one state—Rhode Island—managed to slash taxes during the current recession.
On the other end of the spectrum is Kansas, which recently passed a “temporary” one-cent sales tax increase. (Neighboring North Carolina has had a “temporary” sales tax on the books for years.)
Kansas, like South Carolina, has a Republican-controlled legislature. Contrast that with Rhode Island’s Democrat-controlled legislature.
In Kansas, the tax increase was justified as necessary because neither education nor Medicaid could possibly be cut. Apparently, that left only corrections, which also could not be cut. Hence, a tax increase was argued to be imperative.
Yet, like South Carolina, Kansas rapidly increased spending before the start of the recession. As one legislator who objected to the tax increase argued: “It seems that we have a spending crisis, not a budget crisis.”
In South Carolina spending likewise continues to grow, with the legislature passing the largest budget in state history for FY2011.
So, the question is, will South Carolina, like Kansas, also raise taxes?
According to The Nerve, the answer is yes—or at least that’s what the powers that be seem to be planning for 2011.
New sales taxes on groceries, water, electricity, and prescription drugs are in the works. Untouched are special tax breaks for Boeing and other manufacturers.
As for that proposed sales tax cut? … don’t believe it.
Come next year we’ll hear—as taxpayers heard in Kansas—that taxes need to be increased to pay for education, health care and corrections. But in reality, spending is just too high—on everything from education to economic development. The solution: shorten session and institute an effective spending cap. Doing so will force legislators to evaluate what programs are really working and prioritize spending accordingly.
June Employment Numbers: Total Employment Falls, Local Government Hiring Continues to Grow
A shrinking labor force and increased government hiring are making the job numbers look better than they really are, according to a new policy brief from the South Carolina Policy Council.
Despite a decline in the state unemployment rate from May to June (11.1 percent to 10.7 percent)—something typically viewed as a good thing—there were fewer people actually employed in June than in May. As of June 2010, there were 1,919,404 persons employed in South Carolina, compared to 1,920,479 as of May.
Workers who have dropped off the unemployment rolls are not included in unemployment figures. The pool of potential workers (i.e., those looking for work) shrank once again from May to June 2010—from 2,159,200 to 2,149,600—a contraction of 9,600 persons.
While private sector employment is shrinking, total public sector employment in South Carolina increased 2.27 percent from January to June 2010:
- Federal: 15.5 percent increase (31,500 to 36,400)
- State: 1.71 percent decrease (99,000 to 97,300)
- Local: 2.16 percent increase (221,900 to 226,700)
Since the beginning of the recession in December 2007, private sector employment in South Carolina has declined by 124,100 jobs, or 7.71 percent. By comparison, public sector employment has increased by 19,600 jobs, or 5.75 percent.
Harvard Study: Pork Barrel Spending Hurts Private Sector Investment
As we wrote last week, public sector hiring is hindering a private sector recovery. (See here for our recent analysis of why South Carolina’s unemployment rate is declining—even though there are fewer private sector jobs available overall.)
Now, a study from Harvard Business School provides additional evidence that government spending reduces private sector investment. The study looked at what impact increased federal earmarks can have on private sector activity. More specifically, the study investigated what happens when a politician becomes chairman of a committee and thus holds the purse strings over pork barrel spending:
“We focus specifically on the 232 instances over the last 42 years where the senator or representative of a particular state ascends to the chairmanship of a powerful congressional committee. During the year that follows the appointment, the state experiences an increase of 40-50 percent in their share of federal earmark spending, and a 9-10 percent increase in total state-level government transfers. The funding increase persists throughout the chair’s tenure and is gradually reversed upon his departure.”
The results are astounding.
“We find that fiscal spending shocks appear to significantly dampen corporate sector investment activity. Specifically, we find statistically and economically significant evidence that firms respond to government spending shocks by: i) reducing investments in new capital, ii) reducing investments in R&D, and iii) paying out more to shareholders in the face of this reduced investment opportunity set.”
Additionally, the study shows the results appear to flip when a politician is no longer chair of his committee:
“Further, we find that when the spending shocks reverse (through a relinquishing of chairmanship), most all of these behaviors reverse.”
It gets worse.
“Finally, we also find some evidence that firms scale back their employment, and experience a decline in sales growth. Our findings demonstrate that new considerations may limit the stimulative capabilities of government spending.”
In short: more government money means less private sector production.
Although this report is specific to earmarks, the same logic can be applied to all manner of government spending. It creates a crowd-out effect in the private sector. Here in South Carolina, crowd-out from the federal stimulus alone will cost an estimated 24,000 to 35,000 lost private sector jobs.
Government Jobs Are Not the Solution
A job is a job. That’s what you sometimes hear. And it’s marginally better for an unemployed worker to get a job with the government, or paid for by government, than to have no job at all. After all, a government worker is earning wages—and not drawing unemployment. And government employees pay taxes—in effect, subsidizing their own jobs.
Right?
Except that the rest of a government worker’s salary is paid for by taxpayers working in the private sector.
And, as government grows, and demands more tax dollars—now and in the future—you need more and more private sector dollars to pay for those government workers and government spending. Some government spending finds its way to the private sector, but once again, those funds must be paid for with tax dollars.
You might call it “robbing Peter to pay Paul.” Of course, the more you take from Peter, the less he has to pay whoever is working for him. Eventually, Peter has nothing to spend on investment in the community or paying someone’s salary.
And that’s the end of the free market and its ability to generate wealth for everyone. Government does not, and cannot, generate wealth—except for itself. At the point where government pays for everything, and everything Peter earns goes to government, you call it “socialism.” Not hyperbole, just a fact.
Here in South Carolina, the public sector is growing faster than the private sector, and the private sector is shrinking in relation to the public sector. In terms of state hiring alone (recall that federal and local hiring is expanding even faster than state-level employment), the ratio of private sector employment to state employment went from 15.74 in January 2005 to 14.46 in January 2010. In practical terms, instead of having almost 16 workers subsidizing each government employee, we’re down to 14 and a half.
In fact, since the start of the recession, private sector employment in South Carolina has declined by 8 percent. Meanwhile, public sector employment increased by 7 percent. Put another way, the private sector has shed 5.3 jobs for every public sector job created—a 12.5 percent decline in the relative size of the private sector compared to government.
We’re all looking for signs of an economic recovery, but more jobs paid for with tax dollars and a shrinking private sector labor force is bad news for South Carolina.
TRAC Strategy Clear: Bait with Tax Cut, Switch with Tax Hike
By now it’s become clear what TRAC is about.
Not fundamental tax reform, but a tax hike on fundamentals—that is, the bare necessities like food, water and fuel.
Meeting this week, the Tax Realignment Commission unanimously approved a plan to lower the state’s overall sales tax rate from 6 percent to 4.96 percent: a reduction of 1.04 percent. At nearly 5 percent, the reduced rate would still be higher than neighboring Georgia’s (4 percent) and potentially North Carolina’s (5.75 percent, scheduled to fall back to 4.75 percent as of July 1, 2011).
The price for lowering the rate, however, is steep. In fact, it translates into a tax increase, predicted to increase revenue for the state once the economy recovers.
To begin with, the commission is recommending a 2.5 percent tax on such essentials as: groceries, prescription drugs, electricity, natural gas, and water sold by utilities.
The commission also wants to eliminate sales tax exemptions on:
- Internet purchases: otherwise known as an Amazon tax. As we’ve written before, this tax raises significant constitutional issues. Up next: SC, like NC, may demand back taxes on Amazon purchases.
- Vehicle purchases: Currently, the state caps sales taxes at $300 on a wide array of vehicle purchases, including cars, boats and airplanes. TRAC recommends eliminating this cap. The tax would increase by 100 percent per year over three years, reaching $1,200 in year 3. That’s a 300 percent increase. For cars and motorcycles the cap disappears in year 4. Those wanting to buy a boat or a plane fare much better. Their cap stays at $1,200 in year 4 and beyond.
- And a variety of other goods and services, ranging from guns to music downloads to hearing aids to concession sales at charitable events.
To see the full list of targets, see here and here.
To see the amount of revenue the state hopes to raise, see here.
Of course, the Policy Council supports the elimination of all targeted tax exemptions (which is what we told TRAC back in November), with the understanding that eliminating exemptions should facilitate an overall tax cut for everyone.
But TRAC wants to have it both ways. They want to eliminate exemptions and increase taxes. And unless the people of South Carolina demand otherwise, that’s what will happen.
This is one way it may play out:
First, the powers that be have no intention of lowering the sales tax. The state is facing a billion dollar-plus shortfall for FY2012. If lawmakers chose not to cut the corporate income tax this session—a tax that brings in only about 6 percent of General Fund revenue—there is no way they are going to vote for a sales tax cut.
Second, this is about laying the groundwork for a wide array of tax increases – but not necessarily the high profile increases mentioned above. The game works like this:
a) Propose a radical tax increase on food, water, etc.
b) Back away from this tax increase in exchange for what seems to be a more moderate increase. Say, a 0.25 percent sales tax increase; or a 12 cent increase in the gas tax.
c) Result: Those with short memories feel fortunate they at least didn’t get smacked with a new grocery or water tax and decide they can live with the other tax hike.
Don’t believe me? Look at the fate of H 4478, signed by the governor a few weeks ago.
(Coincidentally, Burnie Maybank was instrumental in writing this same law, which is filled with a variety of new targeted tax cuts. Yet, Maybank denies that chairing TRAC poses any conflict of interest.)
a) The bill featured a corporate income tax, used as sweetener for increasing legislative control over the state’s economy.
b) The tax cut was killed.
c) H 4478 became a “Christmas tree” of corporate giveaways.
In other words, H 4478 started out as a bad idea and only got worse. Expect the same from any legislative proposals that come out of TRAC.
State Hiring Increases While Private Sector Shrinks
Over on the Policy Council site, we’ve just released a report questioning the notion that a decreasing unemployment rate means the economy is improving.
As indicated in our analysis, there are two factors that can magically make a state’s employment rate improve. (For instance, from a high of 12.5 percent in January 2010 to the current 10.7 percent rate for South Carolina.) These factors are:
1) A drop-off in the number of people actually seeking employment
2) A spike in public sector hiring
Both of these factors are what are causing South Carolina’s apparent increase in employment.
Consider the following:
- From January to June 2010, the state’s labor force shrunk by 24,796 jobs—contracting by 9,618 persons in the last month alone.
- The number of people actually employed in South Carolina fell by 1,009 from May to June 2010.
- Private sector employment in South Carolina has declined by 130,100 jobs, or 8.09 percent, since the beginning of the recession.
- Public sector employment has increased by 24,500 jobs, or 7.19 percent, since the beginning of the recession.
- If public sector employment were excluded from the state’s labor picture, the unemployment rate would be 28 percent.
As our report illustrates, the private sector is being crowded out by a rapidly expanding public sector.
What is even more disturbing is that this trend doesn’t just go back to the start of the recession in December 2008, but is symptomatic of most of the decade. The 2000s started off with a promising economic outlook, as the technology boom was in full force. But then the 2001 recession hit after 9/11; and the housing bubble burst in 2008.
All in all, the first decade of the new century didn’t bode well for free enterprise in the Palmetto State:
- From 2000 to 2010, South Carolina’s private sector lost 4.73 percent of its jobs.
- Meanwhile, total public sector hiring increased by 10.3 percent.
- By comparison, state government lost 2.46 percent of its jobs.
- During the same period, state spending increased by 60 percent ($13.004 billion in FY2000 to $20.994 billion for FY2010).
Moreover, the last five years, in particular, have seen a massive increase in public sector—including state-level—hiring:
- Total public sector hiring in South Carolina increased by 8.33 percent.
- State government employment increased by 4.32 percent (94,900 to 99,000) from January 2005 to January 2010.
- Private sector employment declined by 4.16 percent (1,493,500 to 1,431,400) during the same period: a loss of 62,000 jobs.
- During the same period, total state spending increased by 23 percent, or $3.876 billion.
In short, the public sector is not only growing faster than the private sector, the private sector is shrinking in relation to the public sector. In terms of state hiring alone, the ratio of private sector employment to state employment went from 15.74 in January 2005 to 14.46 in January 2010.
- This represents an 8 percent contraction of the private sector in relation to state government.
Likewise, the overall ratio of private sector employment to public sector employment shrunk from 4.59 in January 2005 to 4.06 in January 2010.
- This represents a 12 percent contraction of the private sector in relation to the size of government.
Government Jobs and Shrinking Labor Pool Hide Unemployment Reality
New government unemployment statistics paint a misleading picture of an economic recovery for South Carolina.
The U.S. Bureau of Labor Statistics says unemployment in South Carolina fell to 10.7 percent for June—down from a record 12.5 percent in January. But the way government counts unemployment figures fails to account for tens of thousands of workers who have simply fallen off the unemployment rolls, says a new report from the South Carolina Policy Council. What’s more, these employment figures are inflated by a dramatic increase in public sector employment in the state, including temporary positions as census takers. (During the 1930s, the government did not include government relief jobs in employment statistics.)
Here’s the real employment story in South Carolina:
- Since June 2009, more than 34,000 workers have withdrawn from South Carolina’s job market.
- From January to June 2010, the state’s labor force shrunk by 24,376 jobs.
- From January to May 2010, total public sector employment in South Carolina increased 3.66 percent.
- Since December 2007, private sector employment in South Carolina has declined by 130,100 jobs, or 8.09 percent.
- By comparison, since December 2007 public sector employment has increased by 24,500 jobs, or 7.19 percent.
Put another way, the private sector has shed 5.3 jobs for every public sector job created.
In the long run, increased government spending will ultimately have a detrimental impact on private sector job growth in South Carolina. Not only will the federal stimulus package likely lead to a state tax increase, it will also result in 24,000 to 35,000 lost private sector jobs.
These job losses will occur because government spending does not stimulate private sector growth, but limits it—precisely because government spending is fueled by taxes imposed on the private sector.
How Big Is Big Government in Your County?
As part of its ongoing commitment to help small, independent businesses in South Carolina, the Policy Council is examining the impact of big government, state and local tax burdens, the regulatory environment and other policy issues in counties statewide.
Recent reports include:
Federal Spending in South Carolina: How Does Your County Rank?
County Tax Burdens on Local Business: Where Does Your County Rank?
Even in Recession Local Governments Keep Growing
City of Aiken: Local Businesses Paying the Price for High Government Spending
Oconee County: Economic Development Spending Hurts South Carolina’s Economy
We are now examining government spending—from all sources—in S.C. counties in a new report.
When times are tough, the government dole seems attractive—but economically it’s a deal with the devil. Higher government expenditures must be financed through higher taxes today or more borrowing that will result in higher taxes tomorrow. Moreover, government spending crowds out private sector spending, diminishing the private economy’s rate of growth.
Total government spending in 2008 varied from a high of $4,156 in Jasper County to a low of $1,854 in Saluda County. Between 2002 and 2008 the counties with the highest growth in government spending were Newberry, Jasper, Calhoun and Greenwood. Saluda, Bamberg, Berkeley, Greenville, Spartanburg, Abbeville and Chesterfield saw per capita government spending decline over the same period.
Many factors drive government spending in counties, but it’s clear that population alone doesn’t explain changes in per capita spending.
Copyright SC Policy Council
Rhode Island Bucks Trend by Cutting Taxes
Having just passed the largest budget in state history—$20.887 billion—after the governor’s budget vetoes trimmed $261 million, it seems certain that lawmakers will raise taxes and fines/fees once they reconvene in 2011.
And so the cycle begins anew: higher spending fuels tax increases when revenue drops, while economic boom times fuel ever higher spending.
In fact, a majority of states have already raised taxes or fines/fees in the midst of the worst recession since the Great Depression. South Carolina, for one, raised its cigarette tax by 700 percent to 57 cents per pack. We also raised several fines and fees. According to the liberal-leaning Center on Budget Policy and Priorities, “more than 30 states have raised taxes or tax-like fees” since the beginning of the recession in 2008.
One notable exception is Rhode Island.
In an effort to create jobs and attract new business, the state just slashed its top income tax bracket by 40 percent. Rhode Island also reduced its income tax brackets from five to three (5.99 percent, 4.75 percent, 3.75 percent) and increased the standard income deduction. At the same time, lawmakers eliminated several targeted tax exemptions/deductions.
All in all, the reforms, according to the Tax Foundation, will improve Rhode Island’s business tax climate by 3 spots, from 44 to 41.
When asked how they managed to cut taxes during a recession, Governor Donald Carcieri responded, “We’ve had good revenue. It’s been a spending problem until recently when the revenue collapsed.… Both sides in a bipartisan fashion have understood that we’ve got to control spending and doing that you can make some of these tax policy changes.” In particular, noted the governor, the state cut spending by reforming its employee pension plan and eliminating overly generous state employee retirement benefits.
All of these issues sound strangely familiar.
As indicated above, South Carolina just passed its largest budget in state history. The state is also facing serious problems with its pension plan and needs to look at cutting state retiree benefits – TERI, in particular.
To learn more about Rhode Island’s success, listen to this podcast from the Tax Foundation.
And to learn more about why cutting taxes would be good for South Carolina’s economy as well, check out Unleashing Capitalism.
