The Palmetto Insider

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.

As The Nerve reported earlier this week, the Legislature recently passed a measure forcing Richland County taxpayers to continue to pay for a botched land deal that was supposed to bring a new farmer’s market to Pineview Road.

In essence, the joint resolution (S 1190) allows the county to use local hospitality tax revenue to pay for the land. The revenue is derived from a 2 percent tax on all prepared meals and beverages sold in Richland County. The tax went into effect on October 1, 2003.

According to long-standing state law, such tax revenue is only to be used on tourism-related endeavors—the Columbia Museum of Art, Riverbanks Zoo and the EdVenture Museum all benefit from the tax.  But under the joint resolution passed by the Legislature, these tax dollars will be going to pay for land now under control of the S.C. Research Authority (SCRA).

A deal between the county and the state ceded 109 acres of the tract to SCRA while the county kept about 85 acres. But whatever SCRA is—they claim not even to be a state agency—their work certainly has nothing to do with tourism.

At best, SCRA can be described as a research and development firm with a public mission. Started with seed capital/land paid for by state taxpayers, the authority’s work is subject to legislative direction, as evinced by a 2005 law requiring SCRA to establish 3 (failing) “Innovation Centers.”

As the governor’s veto of S 1190 argued, a better solution would be to require SCRA to pay for the land it now owns. In any case, such failed deals show why government should stay out of the economic development/tourism business. They also demonstrate why taxpayers must demand total transparency and accountability regarding economic incentives deals – whether related to farmer’s markets, retail developments or billion-dollar aircraft manufacturers.

The House adjourned Sine Die today after overriding 3 vetoes and sustaining 1. These are the 4 bills they took up today:

S 288: This law requires that a special code be placed on the driver’s license of persons convicted of a violent crime. The law also charges a $50 fee to cover the process. As the governor’s veto noted, this law is the first of its kind in the United States. The measure obviously tries to balance public safety issues against privacy concerns – concerns that a potential legal challenge may end up settling one way or another. The House overrode this veto 78 to 33.

S 1372: The governor vetoed this bill, as well as several others like it, because it permits school districts to issue general obligation bonds to cover school operating expenses. Thanks to rules created by the legislative leadership, the veto was easily overridden by Sumter County’s legislative delegation – by a vote of 2 to 0 in the Senate and 3 to 1 in the House.

H 3541: This bill seems to presume that every wild bear is somehow under the authority of the state of South Carolina. Thus, “For the privilege of taking bear, in addition to the required hunting license and big game permit a hunter must obtain a bear tag issued in his name” and pay a fee ranging from $25 (resident) to $100 (nonresident). The governor’s veto rightly argued that this is just another fee increase. The House overrode this veto by a vote of 108 to 2.

H 3975: This bill would have exempted military personnel who have completed rifle marksmanship training from taking the state’s hunter’s education program. The governor did not oppose this provision. He did, however, question a Senate amendment that created a special lifetime hunting license for select nonresidents. As the governor observed, “The qualifications for obtaining the license are so irregular that” this bill seemed to have been drafted by “one senator trying to do a favor for one of his out-of-state friends.” The House apparently agreed and sustained the veto by a vote of 1 to 104.

The Senate is still in session. But stay tuned for coverage of their remaining budget vetoes.

In a move that surprised even lawmakers who were prepping for a veto override of H 4478, Governor Mark Sanford has chosen to sign the “Economic Development Competitiveness Act of 2010,” H 4478 drafted by House Speaker Bobby Harrell and a team of consultants. Sanford will  join Harrell, with whom the governor is generally at odds, and Department of Commerce Secretary Joe Taylor for a H.4478 signing ceremony today in Greenville.

H 4478 became flypaper for all sorts of narrowly drawn special interest deals (so much so that senators voting against the measure questioned its constitutionality).  But its real purpose is to empower the Legislature to grant more special interest deals

In caving in to special interests on the bill, government leaders are ignoring not only the will of the people, but ample evidence that government manipulated, taxpayer funded economic development does not work—and is a bad investment of tax dollars.

• Government driven economic deals don’t work, and government is a poor economic investment planner.
• Special interest economic development deals hurt South Carolina’s economy.
• Special interest deals lack transparency and accountability.
• Mega-deals like Boeing end up costing taxpayers more, and more.
• Lobbying by special interests (as well as government funded organizations) creates conflicts of interests and wastes tax dollars.

Those messages continue to be lost on South Carolina’s politicians.

The legislation is the General Assembly’s version of a “jobs bill,” and we all know how well federal efforts at that have been working: In spite of having spent more than $1.5 billion on economic incentives over the last few years, South Carolina’s employment and income levels continue to be among the worst in the nation.

Louisiana has become the first state with a Democrat-controlled legislature to pass the Freedom of Choice in Health Care Act. The law makes it the public policy of Louisiana, “consistent with our constitutionally recognized and inalienable right of liberty, that every person … is and shall be free from governmental intrusion in choosing or declining to choose any mode of securing health insurance coverage without penalty.” The law also prohibits the state from imposing a penalty on persons who choose not to purchase health insurance.

As reported by the Pelican Institute, however, the legislation was amended such that it should not be read to supersede the federal Patient Protection and Affordable Care Act of 2010. That said, the statute bolsters the state’s current lawsuit challenging the constitutionality of ObamaCare. Along with South Carolina, Louisiana is 1 of 20 states suing the federal government over the constitutionality of a new federal law requiring all Americans to purchase health insurance.  

In a recent poll, a majority of Louisiana voters gave George W. Bush higher marks (50 percent) for his handling of Hurricane Katrina than they did Obama’s response (35 percent) to the recent BP oil spill. These numbers may explain why even La. Democrats are wary of opposing voters who are also unhappy about federal health care legislation. 

Here in South Carolina, the state’s Republican-led legislature failed to pass similar legislation. Although lawmakers introduced a variety of measures aimed at protecting the right to purchase health care services, none of these received a vote on the floor of either chamber. (One joint resolution (H 4181) was read on the floor of the House and then contested, with the result that debate was repeatedly adjourned.)

Meanwhile, the law has passed in 4 states, including Georgia and Virginia.

To read more about this legislation, see the testimony the Policy Council provided to the Senate and House subcommittees in March:

Five Things You Need to Know About the S.C. Freedom of Choice in Health Care Act

VIDEO: Policy Council Senate Judiciary Subcommittee Testimony

One of the most frustrating aspects of monitoring the veto process in the Legislature is that even once a veto is sustained, a vote may be retaken on the same veto, resulting in an override. As The Nerve reported regarding last year’s veto process:

Last year, for example, the governor issued 47 line-item budget vetoes. In the end, the House sustained 17 of those vetoes, and the Senate sustained another four. But the first time around, the House sustained 24 and the Senate sustained 12, only to go back and reconsider seven and eight vetoes, respectively.

This year, legislators followed the same strategy – if on a more modest level. Out of 107 vetoes, the House sustained 51. However, this number does not include 3 vetoes that were initially sustained and then overridden: 

1)      Veto 1: The governor argued here that two nonmandatory student assessment programs administered by the Department of Education duplicate assessment tools currently in use. The veto was initially sustained by a vote of 70 to 48; and then overridden by a vote of 78 to 33. This was the first budget veto taken up by the House. Subsequently, the chamber sustained all but 1 of the governor’s first 13 vetoes, perhaps seeming to bolster observations that legislators are running scared.

2)      Veto 39: This veto pertained to S.C. State University’s Community Leadership and Economic Development program, funded at roughly $369,000. In our recent analysis of the governor’s vetoes, this veto was described as one of several that aimed to transfer economic development initiatives from higher educational institutions to the Department of Commerce. The governor noted that “this program … is not consistent with S.C. State’s PSA’s core function of enhancing our state’s agricultural and natural resources.” The veto was initially sustained by a vote of 56 to 54; then overridden by a vote of 85 to 28.

3)      Veto 94: This veto concerned $200,000 appropriated to the Department of Agriculture as part of the American Recovery and Reinvestment Act – i.e., the two-year federal stimulus. Generally, the governor vetoed expenditures on programs not related to education and law enforcement. (After all, that’s why we accepted the money in the first place … right?) This veto was sustained by a vote of 70 to 44; then overridden by a vote of 87 to 25. A handful of other vetoes regarding the use of stimulus funding on noncore services were sustained, but the majority were not.

Several vetoes were also sustained upon a revote apparently intended to bring about an overturn. These include vetoes 40, 43, 74 and 89. In one case – veto 6, regarding consultant fees within the Commission on Higher Education – the veto was overridden, sustained upon a revote, and then overridden again.

Meeting on June 17, the Senate overrode 29 of 56 of the remaining vetoes already overridden by the House. The Senate will reconvene on June 29 to take up the final 27 vetoes.

In an unusual twist, the governor has asked the Senate for a do-over on its vote to increase its own operating budget by $4.3 million. By contrast, the House upheld the governor’s veto of its own $1.2 million staffing/operating budget increase. Will the Senate do the same? If so, it’ll be one do-over that finally goes the governor’s way.

CLICK HERE to download the Policy Council’s exclusive, vote-by-vote breakdown showing how the House voted on each veto. 

CLICK HERE to download the Policy Council’s exclusive, vote-by-vote breakdown showing how the Senate has voted so far on each veto.

Halfway through June, and the General Assembly still couldn’t get it done. Even with one of the longest state legislative sessions in the nation, the Senate didn’t get through voting on budget vetoes. (A new Policy Council Issue Brief examines how a shorter legislative session would cut costs and streamline government.)

So, the Legislature will be back, again, on June 29, to take up the remaining 27 vetoes.

Here are the Policy Council’s exclusive summaries of House and Senate votes on gubernatorial budget vetoes.

Remarkably, the House voted to sustain 51 of 107 of Governor Sanford’s vetoes. Over the history of Sanford’s term, 88 percent of his vetoes have been overridden, so this is regarded as a victory for the governor, and perhaps for taxpayers hoping for an indication from lawmakers that this year’s budget can’t be just politics as usual.

But the most striking difference between the budget as debated by the Legislature and the rationale for the governor’s budget vetoes is that the governor actually offered a rationale, as explained in our latest policy piece.

Broadly speaking, the governor used the following criteria in issuing his vetoes:

• Eliminate duplication
• Set budget priorities
• Balance the budget (as required by the state constitution)
• Encourage privatization and private investment
• Use existing resources more efficiently
• Save money for future Medicaid expenses
• Reduce administrative expenses
• Eliminate waste

South Carolina legislators enjoy a monopoly of power, so they don’t behave as if they have to give taxpayers reasons for what they do. They just do it and dare the governor—and taxpayers—to tell them otherwise.

It seems, though, that that is precisely what is beginning to happen.

Are lawmakers afraid to override the governor’s budget vetoes? That, at least, is the message one gets from reading Cindi Scoppe’s latest editorial. Apparently, the cause is a “tea party tsunami” being ridden by the presumptive gubernatorial favorite, Nikki Haley. According to Scoppe, legislators need to overcome their fears and override the governor’s vetoes.

Let’s take a look at her reasons:

Not doing so “would be irresponsible at best.” A moral failing, in other words. Or, to use, Brad Warthen’s even more righteous plea, legislators must overcome the “fear to do the right thing.” Odd language considering that one veto the House had no problem overriding yesterday was an ethics disclosure bill (H 4542) that includes the governor – but not legislators.

State agencies would suffer “serious damage” if the governor’s vetoes are allowed to stand. This is “because [of] all the cuts state agencies have sustained.” What cuts? This year’s budget is the largest in state history.

Granted, General Fund spending is down, but Other Funds and Federal Fund revenue is way up, accounting for 37 percent and 39 percent of the total budget, respectively.

Rick Brundrett’s analysis of the governor’s vetoes ably dispatches Scoppe’s arguments – anticipating many of them on a point-by-point basis. As Brundrett notes, 10 agencies (including the House and Senate themselves) are in line for budget increases. These agencies account for many core functions of government and include the Department of Public Safety, the Judicial Department, and the Department of Social Services, as well as 10 public colleges and universities.

Scoppe mentions, in particular, the State Museum and the Budget & Control Board (BCB) as two agencies that would be “damaged” by the governor’s vetoes. (Never mind that the museum wants more money for a questionable new expansion project.) The governor is asking for a cut of $1.64 million from the museum’s operating budget. But consider that legislators are also docking the State Museum $ 1.8 million (proviso 31.11) in rent payments to the BCB. Eliminate the rent payments and the museum can easily make up its operating budget. As for the BCB, the governor pointed out that they are currently sitting on $1 billion in carry-forward funds, including about $60 million in unrestricted accounts.

Moreover, the budget permits agencies to supplement General Fund cuts with Other Funds revenue. Thus, proviso 89.87 authorizes agencies to use earmarked/restricted accounts funded with fine and fee revenue to increase spending to FY08-2009 levels (i.e., $6.736 billion). That’s a potential increase of $1.621 billion.

Finally, Scoppe questions the governor’s “insidious … repeated implication that by vetoing what he considers frills, he will cause the money to be spent on ‘core services’ of government.” Here, Scoppe might have a point, if it were actually true, that any of the governor’s vetoes would reduce core government services. But that’s not the case, as demonstrated above.

No doubt, Scoppe is right that the Legislature should implement strategic, targeted cuts. But this point ignores the fact that lawmakers have purposely crafted the budget so as to prevent making such cuts.  For example, they are appropriating federal FMAP dollars to fund health services and agency operating expenses. It’s the old strategy of complaining about cuts for the elderly and the blind, while using the money to fund wasteful and ineffective programs, like hydrogen and Innovista.

If the Legislature were truly afraid of the “tea party tsunami,” they wouldn’t have included these items in the budget in the first place, or approved a budget that increases spending at record levels while again neglecting to pass commonsense reforms, such as an effective spending cap, zero-based budgeting and indexing tax brackets for inflation. They also wouldn’t have voted themselves a $4 million-plus agency pay raise.

Thus, regardless of what happens with the governor’s vetoes, Scoppe will likely get her wish for a tax increase. (Already, hidden taxes from fines and fees are on the rise.) Increasing taxes, though, won’t lead to more responsible budgeting … just more waste, higher business costs and a lower standing of living for South Carolinians. We truly wish lawmakers were afraid of these consequences, but clearly they are not.

The Nerve is running an excellent piece that explains the significance of the governor’s veto of Part IV of the budget – which uses $213.5 million in federal funding to balance the state budget. Except Congress has not – and may not – approve this funding.

Currently, the federal money is only available until the end of calendar year 2010. Absent Congressional approval, the budget will become unbalanced for the second part of the fiscal year – that is, the first six months of 2011.

As the governor’s veto notes, several states have balanced their budgets without using this money. Other states, such as Mississippi, plan to place some of the money (if it materializes) in a reserve fund; or, in the case of Vermont, use it on non-core functions.

Here in South Carolina, lawmakers did the opposite, using the federal (FMAP) dollars to fund health services and agency operating expenses. “It seems this budget’s priorities are reversed,” wrote the governor. “It funds core requirements of government with speculative money, while it funds supplementary or speculative programs with money that is certain.”

Some of the programs the governor might have in mind here are:

• $3 million in funding for I-95 Corridor to promote vaguely defined “health-related issues”
• $558,573 in funding for hydrogen research
• Bonus rebates for Hollywood producers

The governor has vetoed all three of these items.

The larger problem is that spending is too high in South Carolina.

If we compare the Legislature’s spending habits to the average household, it’s like running through your monthly paycheck to throw a big party for your friends (and the Legislature seems to have a lot of “friends”); and then using your federal tax refund to pay your rent. But suppose the refund is late? Or doesn’t come at all?

We can talk about how the Legislature needs to change its attitude toward budgeting, reset its priorities and be more fiscally disciplined. But, in reality, only one thing is going to cure South Carolina lawmakers from their spend-and-tax (via hidden fines and fees) ways. And that’s an effective spending cap.

Yet, legislation (H 4232) that would limit spending increases to population, plus inflation, died in committee this session.

Indeed, in spite of having apparently made passing a spending cap a top priority for 2010, Senator Glenn McConnell seems unable to persuade his fellow senators to take a concurring vote on S 2 – a much weaker reform that would limit General Fund spending to a 6 percent annual increase. (Recall that General Fund appropriations currently account for less than ¼ of the total budget.)

The bill passed the Senate in March; and then an amended version passed the House in late May.

Only when limiting spending becomes a priority will legislators find the will to actually prioritize their spending.