The Palmetto Insider

Well, not tax freedom exactly, but it’s the day South Carolinians figuratively stop working for state and federal government, and start working for themselves. According to the Tax Foundation, a national policy group, this year, South Carolina observes Tax Freedom Day on April 3. Through a formula that factors in federal, state, and local taxes, the Tax Foundation annually calculates the day on which the average taxpayer has earned an amount equal to what they pay in all those taxes. The date, both nationally and for each state, fluctuates every year, based on income and taxes.

Nationally, Tax Freedom Day arrives on April 9 this year, which means that South Carolina taxpayers are a few days better off that the national average. This is one day later than last year’s Tax Freedom Day, but more than two weeks earlier than 2007’s date.  However, don’t start celebrating, says the Tax Foundation, because Tax Freedom Day does not count the deficit—even though deficits must eventually be financed. Since 1948, when Tax Freedom Day was first calculated, the difference between what governments are spending, and what they’re collecting, has never been as great as during 2009 and 2010.  If Americans were required to pay for all government spending this year (including the $1.3 trillion federal budget deficit) we would be working until May 17 before we earned enough to pay our taxes—an additional 38 days .

South Carolina has similar obligations that will ultimately come due.  Those include our own state deficit, taxpayer obligations to pay for corporate welfare deals, a billion dollars in debt to the feds for the Employment Insurance Commission, government growth that will persist even after the federal stimulus money disappears next year, and plenty more.   A significant financial burden not included in the Tax Foundation’s calculations for South Carolina is fees and fines, which collectively represent more than $7.7 billion out of the $21 billion state budget. That’s $1,540 for every man, woman, and child in South Carolina—so you’ll still be working just to pay our state government for another couple of weeks—or more.

Last week, the Senate Finance Sales and Income Taxation Subcommittee contemplated a comprehensive strike and insert amendment to H. 4478, the Economic Development Competitiveness Act. One change the amendment would make to the House version of the bill would be to delete the section that eliminates the corporate income tax. Sen. Chip Campsen spoke briefly to the subcommittee, notifying them that if they approve the bill as is (with the elimination of the corporate income tax), he will propose an amendment that gives small businesses tax relief as well. Sen. Campsen noted his concerns with the lack of parity between corporations and small businesses the elimination of the corporate income tax would create. Lawmakers voted to carry the bill over, giving them more time to review both the bill and the amendment.

The subcommittee plans to meet again on Tuesday at 1:30. By all accounts, the House proposal to eliminate the corporate income tax will continue to be a sticking point in the Senate. Of course, the worst case scenario is that H. 4478 passes without any broad based tax cut whatsoever. To learn more, read here.

One year ago, voters in Los Angeles County defeated a measure very similar to what the South Carolina Legislature is now considering in H 4478, “The S.C. Economic Development Competitiveness Act of 2010.” Los Angeles County’s Proposition E would have amended the Los Angeles city charter “to clearly express the authority of the City of Los Angeles to provide incentives to businesses that will encourage economic development and provide public benefits to the City of Los Angeles and its residents.”

Here in the Palmetto State the underlying effect of H 4478 would be to expand the scope of government-driven economic development and, through changes to the tax code and existing economic development statutes, make state-driven economic development a fait accompli.

Opponents of the Los Angeles ballot measure like then mayoral candidate Walter Moore and the Los Angeles County Democratic Party argued that Proposition E would have only helped businesses that have powerful political connections. They pointed out that the measure would not have increased employment overall, but would have simply shifted employment from businesses that don’t have powerful political connections to businesses that do—with no net increase in jobs.

Sounds eerily like the taxpayer-funded incentive deals currently being considered in South Carolina.

Moore, a perennial Los Angeles government gadfly, said the measure “would let the career politicians at City Hall continue to give hundreds of millions of dollars of your tax money each year to politically connected companies. These programs are unfair, and do not increase employment overall. Rather, experience here and in other cities and states shows these programs simply redistribute taxpayers’ money to a chosen few. Simply stated, it’s ‘welfare for the rich.’”

The Los Angeles Daily News editorialized against Proposition H, saying, “This proposal writes some vague language into the city charter that could be terribly abused by politicians.” And the Los Angeles Times said, “Charter Amendment E follows a disturbing and increasingly frequent pattern in ballot measures created by elected officials and placed before voters. It seeks a transfer of power to the political body but fails to enumerate just what that power may be.”

Los Angeles taxpayers were well served by the open debate on government-driven economic development. That’s not happening here, where lawmakers are disguising an economic power grab in the name of “Economic Development Competitiveness.” In reality, it means more of the same failed taxpayer-funded special interest deals, and less transparency in how lawmakers are spending your money. South Carolina has spent more than $1.5 billion on economic development incentives and exemptions over the past 10 years. Thus far, taxpayers have little to show for these efforts—and worse still, little way of even determining their effectiveness.

Unless you’ve had your head in a ditch these past few days, you know by now that President Obama signed a sweeping health care bill. At a grand total of 2,700 pages – with amendments still being debated even after the bill has already passed.

But that does not mean the South Carolina legislature should simply sit on its hands and wait for the federal legislation to fall on our heads.

As the Policy Council detailed in testimony to the Senate Judiciary subcommittee yesterday and the House Constitutional Laws subcommittee today, the federal takeover of 1/6 of the U.S. economy is arguably unconstitutional.

Some states – like Virginia and Idaho – have already passed legislation that would protect the right to opt out of the federal law’s mandate requiring all Americans to purchase health insurance.

But, so the argument goes, won’t these people need health care at some point? And shouldn’t we thus require those who can afford it to buy health insurance and then subsidize coverage for everyone else? What about the uninsured?

The thing to remember here is that many people in America choose not to purchase health insurance, but are still able to afford to purchase discrete health care services on the free market.

According to economist Keith Hennessey, 10.1 million uninsured are members of families that have income of 300 percent of the federal poverty line or greater and so can afford to purchase health care on the free market.

Similarly, a study by former Congressional Budget Office director June O’Neill concluded that “43 percent of the uninsured have incomes higher than 250 percent of the poverty level ($55,125 for a family of four). And slightly more than a third have incomes in excess of $66,000.”

Those numbers are further corroborated by a study in Health Affairs that found 20 percent of the uninsured can afford coverage.

Several pieces of legislation currently before the S.C. General Assembly would protect those individuals and preserve their right to make a choice not to purchase insurance.

Congress would have you believe the new federal law is meant to help people who want insurance – shouldn’t we also try and help people who don’t want insurance?

Last week, we detailed how the House budget will shift $15 million in insurance funds to an airline incentives program – and another $10 million to bail out a private, for-profit golf tournament (the PGA Tour’s Verizon Heritage).

As the Policy Council continues its budget analysis, we want to highlight another instance of raiding state funds to pay for General Fund and other spending. This time it’s transportation dollars.

The proviso in question is 90.17, and it transfers $10 million from the Non-Federal Aid Highways Fund to the General Fund.

What is the purpose of the Non-Federal Aid Highways Fund? Maintenance of roads not eligible for federal grants.  That is about half of the roads in South Carolina.

What will happen if this fund (typically around $39 million) is depleted by $10 million – or 25 percent? Fewer roads will be maintained.

The transfer raises some interesting questions about the potential ramifications of a new bill (4033) recently passed by the House. The proposal would authorize the creation of public-private partnerships (PPPs) to build and maintain roads in South Carolina. The Policy Council explains the pros and cons of the bill in a new legislative fact sheet.

In short, PPPs offer an opportunity to leverage private capital while reducing costs for taxpayers. More than half the states have implemented PPPs, which have functioned as a tool to fund roads that typically go unfunded and unbuilt.

First, under a PPP approach to building and maintaining roads, maintenance will become more of a priority.

The current approach – which seems to de-emphasize maintenance in order to obtain short-term savings – has proven costly to taxpayers.

Private investors, however, see things differently. Private entities that have a lengthy lease on a road – and a profit motive behind the project – will be incentivized to ensure the road is kept in great condition. This maximizes users and tolls.

Second, privatizing the road building process will cost taxpayers less.  But what to do with all that “excess” revenue?

If this year’s House budget is any indication, lawmakers will spend it by using highway dollars to fill budget gaps. But this is not the purpose of PPPs. And it is not the purpose of the Non-Federal Aid Highways Fund.

The Non-Federal Aid Highways Fund is essentially made up of revenue from the gas tax and various fees and licenses. By transferring $10 million out of this fund the General Assembly is assuming the fund can already cover such repairs and other needs. Which means the fund is … well, overfunded.

Put more simply:

The Non-Federal Aid Highway Fund is partially funded through taxes and penalties collected by the DOT. This money is supposed to be used for road maintenance. But if the money is not being used for this purpose, then shouldn’t these taxes and fees be reduced?

Likewise, if the state moves forward with transportation reforms that reduce the cost of building roads, shouldn’t the savings be refunded back to taxpayers?

Whose money is it anyway?

As discussed previously on The Nerve, the proposed House budget raids state highway funds to balance the General Fund budget.

The transfer in question is curious for two reasons. First, it shows how state lawmakers are using federal stimulus dollars to keep spending high on other – non-essential – programs. Thanks to the stimulus, federal funding currently accounts for 55 percent ($800 million) of transportation spending ($1.4 billion for FY09-2010) in South Carolina. This number is about 80 percent higher than usual because federal funds ordinarily account for about 30 percent of overall highway funding.

Second, it raises questions about recent calls to increase the state’s gas tax. As reported today, former SCDOT Commission Chair Henry Taylor believes the tax should be increased. This is hardly newsworthy, though – akin to saying: “Former state bureaucrat thinks his agency needs more money.”

Of more interest are two comments made by Taylor:

1)      That state lawmakers might consider a usage tax based on miles driven.

2)      That Florida has better roads than South Carolina.

As it turns out, these two ideas are connected. A new fact sheet issued today by the Policy Council looks at how public-private partnerships (PPPs) could be used to save millions in road construction costs, as well as complete undone road projects. One of the key reforms envisioned by the program is to shift financing of roads away from the gas tax (forget raising the tax – experts think we should eliminate it) – and rely instead on asking consumers to only pay for the roads they use.

As for Florida, our neighbor to the south (along with 25 other states) is already using such PPPs to great effect – saving millions, reducing time and cost overruns, and completing previously undone projects. The lesson: free market reform beats tax increases any day.

While most South Carolinians were asleep last night, the S.C. House of Representatives worked through the night and passed the state budget. This gives initial approval to the $21.1 billion budget that now heads to the Senate. The total state budget, including federal funds and other funds, is essentially the same amount as last year’s total budget.

Yet, the budget that passed early this morning includes a cigarette tax increase of 30 cents per pack. To learn more, check out the Policy Council’s take on this tax increase.

The Policy Council will provide further analysis of the budget soon and keep you updated as the budget process moves along. Be sure to check out www.scpolicycouncil.com and www.thenerve.org for updates on the budget, as well as our ongoing twitter updates.

It should come as no surprise that the House easily let pass a new budget proviso (89.112) that takes $15 million from the Insurance Reserve Fund to pay for a new economic incentives plan for the airline industry … that is, via regional economic development entities.

After all, the plan (H 4343) has already passed the House – on an unrecorded vote – and is currently awaiting review by the Senate Transportation Committee.

In fact, Ways & Means Committee Chairman Dan Cooper insured passage of the proviso by separating it from a much more controversial proposal to also take $10 million from the Insurance Fund to pay for tourism promotion (read: “The Heritage Golf Tournament”) in Beaufort County.

Legislators hotly debated that giveaway – because, to paraphrase Rep. Ralph Norman, they might not want to see newspaper headlines asking how lawmakers could cut education funding, but still use state insurance funds to back a golf tournament. In the end, though, lawmakers overcame their fear and the proviso passed anyway by a vote of 69 to 43.

No doubt, Norman is right that it’s not the state’s role to bail out a golf tournament.

So how about the airline industry? Why not a peep asking whether it is the state’s role to “provide more flight options, more competition for air travel, and more affordable air fares for the State of South Carolina”?

Consider that 16 percent of South Carolinians live in poverty – that’s about 716,000 people.  Let’s ask these folks – as well as the taxpayers bankrolling the Insurance Reserve Fund – how they’d like to use this money? How about to fund more charter schools? Or to lower taxes on the working poor? Or to lower taxes for everyone?

It is doubtful that many South Carolinians agree with using taxpayer funds to prop up the airline industry.

But if we’re going to pay for a golf tournament, the same logic dictates that we subsidize the airfare for folks to attend.  And that we also subsidize the planes they fly in (Boeing); as well as the places where they shop (Sembler and Bass Pro Shops).

It seems there is no economic activity – and recent legislation passed by the House may well insure that fact – that is not subsidized by the state government.

State government, though, is not an entity unto itself; it’s not a productive enterprise. So, if everything we do is already being subsidized, why not just cut taxes for everyone and take the politicians out of it?

More to the point, a government with the power to subsidize every economic activity also has the power to tax and license every economic activity (more on that, here). In short, it is a government with the power to control all economic activity.

Yesterday, the House continued to move through the budget, this time going through nearly all of the provisos – Section IB.

Debate started early (around 9:30 a.m.) and ran late (until about 10:45 p.m.) with breaks for lunch and dinner in between.

The section on the Department of Education took up most of the day – with a number of amendments sparking lengthy debates – lasting up until about 6 pm.

After being wined and dined by Boeing during a private dinner for the Legislature, the bulk of part IB was passed with only a few amendments taken up. Among the highlights of the day:

• Rep. Nikki Haley (R-Lexington) proposed an amendment, adopted 74-42, that requires 70 percent (up from 65 percent) of school district per pupil expenditures to be allocated to instructional costs, as opposed to administrative and other expenses. Debate over this bill lasted for several hours as members spoke for and against the change.
• Rep. Thad Viers (R-Horry) proposed an amendment that would have banned taxpayer-funded lobbying on behalf of public higher education institutions. The Policy Council has reported previously on this issue. The amendment was tabled by a voice vote.
• Rep. Robert Brown (D-Charleston) proposed an amendment to allow the Department of Disabilities and Special Needs the right to keep 100 percent of revenue raised from the sale of “excess” property. Currently, the agency (and all state agencies for that matter) must give 50 percent of such proceeds to the Budget and Control Board. The amendment was tabled by a vote of 60-48. To read more about how the BCB is charging “rent” to state agencies, click here.
• Reps. Bill Bowers (D-Hampton) and Walton McLeod (D-Newberry) proposed an amendment to allow local governments and schools to receive a percentage of the profit made by the Department of Natural Resources when it sells trees. The proposal was meant to bring DNR sales in line with that of the Forestry Commission – providing language to require a percentage of proceeds to be contributed to local schools and governments. This amendment was tabled by a voice vote.
• Rep. Bakari Sellars (D-Bamberg) proposed an amendment, which was adopted 57-54, to reinstate a coverage mandate under the state insurance plan to require coverage for abortions in instances of rape, incest, or if the life of the mother is threatened.

Today, the House will be going through Sections 89 and 90 of the budget – general provisos and statewide revenue. Already, they have engaged in heated debate over $10 million to be used to prop up the Heritage Golf Tournament in Beaufort County (initially proviso 89.112). The $15 million being used to prop up the airline industry easily passed review.

Stay tuned for ongoing blog updates … and see our real-time coverage on Twitter.

Yesterday, the House passed Part IA of the budget – essentially the appropriations used to fund each agency. While much has been made of the supposed “cuts” to the General Fund, it was clear from the nature of the debate that representatives are not serious about cutting government.

For example, legislators boasted that while General Fund appropriations for the Department of Health and Environmental Control is being cut by 1.5 percent, the cuts will not result in a reduction in agency employment or programming. Why? Because these General Fund cuts are being filled (for now) with federal and “Other Fund” dollars.

Instead of having 2 dimes and a nickel, now there are 3 nickels and 1 dime. We aren’t really cutting the budget, just moving money from one pot to another.

Most sections of part IA were simply adopted without any discussion or debate.

When there was dissent, it was often times over trivial issues. We elect our legislators to make hard decisions about how best to spend our tax dollars – and during a recession those choices should be closely debated. But, by and large, that is not what is happening in the House right now.

Yet, some legislators did argue for targeted cuts.

Early on in yesterday’s session, Rep. Nikki Haley questioned balancing the budget using $200 million in Medicaid match money that has yet to pass Congress. She said that working the money into the budget was akin to funding programs with money that isn’t available yet. Rather, she proposed setting priorities with the money the state already has.

Later that evening, Rep. Garry Smith proposed five amendments to eliminate certain agencies and transfer their funding to the Department of Education. Smith argued that during difficult budgetary times, it is appropriate for the Legislature to prioritize – and therefore to decide whether certain agencies or activities are more important that education. The five agencies he singled out:

• Arts Commission
• Museum Commission
• Sea Grant Consortium
• Human Affairs
• Minority Affairs

Each one of Rep. Smith’s amendments was tabled – following heavily contentious (at least for this Legislature) debate between members. After the amendments were ignored, those sections were simply funded entirely as is.

Given the nature of yesterday’s debate, it is clear the House is not serious about making targeted cuts and will continue to let the Budget & Control Board take the heat for making across the board cuts once revenue drops again. The alternative, as discussed here, is a spending cap that will impose a measure of fiscal discipline and legislative responsibility over the budget process.