The Palmetto Insider

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 “Economic Development Competitiveness Act of 2010” (H 4478) passed out of conference committee today. The bill passed in spite of lawmakers’ concerns about there not being caps – or accountability – regarding how tax credits authorized by the bill will be awarded. That speaks volumes about the state’s economic development polices – and reminds us why we need transparency for taxpayer-funded economic development deals.

As we’ve written, H 4478 contains millions in incentives for various special interests, ranging from alternative energy producers to start-ups to waste-grease biodiesel producers. Left out are independent business owners seeking broad-based tax relief.

Next up, both chambers will vote whether to concur with the conference committee version of the bill. Then, all eyes will be on the governor. Will he veto a bill that even Senate leaders have called a “Christmas tree”?

Meanwhile, keep watching to see what the Legislature does with the governor’s budget vetoes, as well as retail incentive legislation that seems headed toward conference committee.

A recent article in The Nerve  reveals that the S.C. Joint Bond Review Committee has authorized another $4.1 million in taxpayer dollars to prop up Innovista, a ghost town of office space in downtown Columbia. The request will be taken up for final approval when the Budget & Control Board meets later this week on Thursday.

On top of that, Innovista may also be one of the special interests benefitting from a proposed new tax credit (H 4778) for developers of incubator buildings for start-ups. You can track the progress of such legislation on South Carolina Votes.

Innovista is the University of South Carolina’s 500-acre research campus, rolled out in 2005. It was going to be a surefire driving force for the area’s economy. Five years and more than $140 million later, it is mostly unoccupied, and has failed to attract the private sector investment upon which the project was sold to taxpayers.

Innovista was billed as a center for research and technology—the government’s attempt to artificially create a technology “cluster” in the state capital. Unfortunately, but predictably, building office space and dubbing it a “research campus” doesn’t mean private sector tech companies are going to flock to Innovista. State governments have previously used cluster theory to rationalize taxpayer funded incentives for a variety of questionable technologies, such as hydrogen-fuel vehicles.

But the empty offices of Innovista offer stark testimony to the fact that industry clusters, like Silicon Valley in California, arise organically, not because lawmakers want them to.

Note to politicians: Government’s proper role in the free market is to stay out of the way.

Apparently, that message can’t be repeated enough. Case in point: The “Economic Development Competitiveness Act of 2010” (H 4478). This massive piece of government overreaching provides an array of targeted credits and subsidies to special interests.

If you are experimenting with hydrogen vehicles or making wind turbines, for example, you win. Same for companies that turn waste grease into fuel, manufacture lithium ion batteries, or operate a nuclear plant. If, instead, you are like most of  the ninety-seven percent of South Carolina’s employers who run small businesses and account for 50 percent of private sector jobs, you will not be benefitting from this legislation—you will be paying for it.

When H 4478 was introduced, it appears politicians knew it was going to be controversial. That’s because the original bill offered a carrot—the gradual elimination of the corporate income tax—to horse-trade for the expansion in government-manipulated economic development. But that broad-based tax break was cut from the bill. The rationale? Lawmakers said it was too expensive—even though the incremental tax cut would not have been implimented until FY13-2014—at an initial cost of only $16.8 million. A drop in the bucket in budget terms.

But what they left in the bill was hundreds of millions of dollars in tax breaks that will ultimately come out of the pockets of taxpayers and Main Street South Carolina businesses.

The larger purpose of H 4478 is to solidify government’s role in using tax dollars to manipulate the state’s economy via tax credits and subsidies. The legislation is the General Assembly’s version of a “jobs bill” or stimulus package for South Carolina.  … And, we all know how well federal efforts at that have been working.

Simply put, taxpayer funded economic incentives don’t work, and there’s little accountability for how the Legislature doles out this money. Thus, 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.

The question is: If billions of dollars for special interests isn’t buying economic prosperity, what is it buying?

As the House considers whether to concur with the Senate budget, one of the sticking points concerns just how large a tax break the state is going to continue to give the film industry (read: Army Wives, which films in Charleston).

If the House has its way, the incentives will reach 20 percent of aggregate payroll costs for film production companies. This is a 30 percent increase over and above what the state currently provides.

By comparison, the Senate budget directs (proviso 89.145) the state Department of Revenue to transfer $1.5 million from motion picture wage rebates to the South Carolina Conservation Bank. Additionally, the Senate version of the budget reduces proviso-based film incentives of 20 percent for wages and 30 percent on other expenditures to 15 percent for both.

In other words, state law already grants film companies an income tax break on up to 15 percent of aggregate payroll costs for persons subject to S.C. income tax (§ 12-62-50).The Senate budget does not nullify this handout – just nullifies the increase over and above what already exists.

Who pays for this rebate? Other taxpayers. The rebates are taken from the state’s General Fund.

Moreover, state law grants film companies a 100 percent state and local sales and use tax exemption.

As indicated, the House – via proviso 39.8 – also wants to double a separate tax break currently available to film producers. Under current law, the S.C. Film Commission may rebate up to 15 percent of total expenditures (excepting payroll) to qualified film producers. Proviso 39.8 would double this tax break to 30 percent.

Who pays for this? Again, other taxpayers. The rebate comes from an admissions tax of 5 percent applied to theatres, golf courses, and similar venues.

Now, if things were as simple as all that, we would point out that film incentives simply don’t work. As we’ve written here, here, here and here. As demonstrated in Unleashing Capitalism, handing out rebates to the film industry does not lead to long-term economic growth. In fact, these incentives “generate a net loss in revenue equal to 81 percent of expenditures on rebates.”

What does that mean? Well, if the state provides $1 to a film company, that $1 must be taken from the General Fund. But the state’s return on that $1 is only 19 cents. Several other states have made similar estimates that show the government/taxpayers suffer a net loss on film incentives.

Now, whether the General Assembly realizes film incentives don’t work is an interesting question. In any event, they seem intent on using money set aside for film incentives on other things — thus, tacitly acknowledging that these film incentives aren’t all they’re being made out to be.

As House leaders balk at the Senate lowering tax breaks for film producers, both the House and Senate plan to raid the Motion Picture Rebate Fund to use on the Destination Specific Tourism Program.

Thus reads proviso 39.12, which remains intact in both budgets:

39.12.      (PRT: Destination Specific Tourism Transfer)  From the funds set aside pursuant to the Motion Picture Incentive Wage Rebate, for Fiscal Year 2010-11 unexpended funds carried forward from the prior fiscal year shall be transferred from the Department of Revenue to the Department of Parks, Recreation and Tourism and utilized for the Destination Specific Tourism Program.  These funds shall be carried forward from the prior fiscal year into the current fiscal year and be expended for the same purpose.

The Motion Picture Rebate Fund is set to receive $10 million for FY10-2011 – the same amount allocated to the tourism marketing program last year.

Again, who pays? You do – via that 5 percent admissions tax.

Such budget games illustrate why we need real budget reform – especially regarding the use of Other Funds.

They also show that not only taxpayers, but even special interests, need to be vigilant when it comes to deciphering the state budget. It truly is a shell game.

In case you have been asleep at the computer today and missed it, Southwest Airlines announced plans to open service to Greenville and Charleston in 2011.

The dates are left uncertain, but the press release from the company was quite clear on one thing:

No government subsidies are needed to make this decision.

The airline included this disclaimer in the opening sentence of its release – likely in response to the controversy surrounding a proposed $15 million subsidy for the airline industry under consideration by the legislature.

It is great to see that a new business is relocating to South Carolina. Private investment = more jobs = more wealth.

But what is even more promising is Southwest’s candor that it’s coming to South Carolina because it makes good business sense – not because of a political handout.

Typically, this should not be a newsworthy event. But in light of the Boeing deal, and the attention that Sembler has received – economic subsidies are a hot topic these days. Of course, as we predicted, Boeing would have come to South Carolina even without the almost-$1 billion in incentives it is receiving.

Still, legislators refuse to believe that lowering taxes and reducing regulatory burdens are better public policy than handing out targeted tax breaks. So, Midlands legislators raised a fight last week in the legislature about incentives being given to Greenville/Charleston – and not their airport in Columbia.

That battle raises the point – government should not be involved in paying off businesses to locate to one location versus another.

The fact that Southwest has chosen to expand into South Carolina will hopefully dispel the notion that the government must give out incentives to businesses in order to attract new firms. This has been the modus operandi of the legislature in recent years — evidenced by the growth in economic incentives spending from $32 million in 1994 to more than $500 million in 2008.

With luck, the legislature will take notice of the message Southwest has heard – people don’t want to see their tax dollars being used to pick winners and losers in the market.

Don’t believe everything you hear in the media about the budget. The Senate officially took up the budget yesterday, and there have already been many proclamations about the dire state of revenue.

In reality, as the Policy Council reported yesterday, the Senate budget is actually higher than the House version. And both budgets are higher than last year’s appropriation bill. The only part of the proposed FY10-2011 budget that’s smaller is the General Fund, and the cuts are more than offset by increases in federal money and revenues from fines and fees in the fast-growing Other Funds budget.

The Total Senate budget ($21.161 billion) increases spending by $60 million from the House version ($21.101 billion):

• General Fund: Increases from $5.068 billion in the House-passed bill to $5.086 billion — a net change of about $18 million.
• Other Fund: Increases from $7.765 billion to $7.807 billion – an increase of $42 million.
• Federal Funds: Remain the same at $8.268 billion

Let that sink in.

Lawmakers are talking about budget cuts, but the total budget bill allows for more government spending than last year’s budget bill.

This is because Senators are only talking about the General Fund – the “$5 billion spending bill. But the General Fund is the smallest slice of the budget pie. The total budget includes more than $15 billion in supplemental funding to the budget in the form of Other Funds and Federal Funds budgets. A large portion of that money comes from fee and fine increases – which have been driving increased government spending for years.

The focus on the General Funds budget creates misleading impressions about state spending. “We’re going to be living on a 1995 standard when we should be living on 2010 standard,” said Clarendon Sen. John Land in a statement to the media.

One assertion made by a local media outlet is that, “The deepest cuts will come to education, not just to K-12, but to higher education as well, which will see funding levels at their lowest in 25 years.”

Perhaps some digging should be done on the true state of those budgets. Here are the facts:

Higher ed funding — as portrayed in the Summary Control document – is $664 million. The General Fund will then reduce $91 million in funding. But that is more than offset by $117 million in additional funding from the federal stimulus program, and increased enforcement of tax collections.

Add it up, and higher ed spending increases by $26 million.

The K-12 budget is a similar story: Using last year’s agency base of $1.9 billion, the Senate budget would increase K-12 spending by $90 million. This number comes from a $103 million General Fund cut, $13 million increase from Department of Revenue enforcement, $176 million from the stimulus, and $3 million from increased Federal Medical Assistance Percentages.

The General Fund is indeed down, but the total budget – the numbers that we should be talking about – are up.

Several amendments were introduced yesterday that would start prioritizing spending – an important step toward greater budget transparency and accountability.

Time will tell as to whether Senators can follow through on prioritizing spending – like getting out of the golf course ownership business – and ensuring funding goes to core functions of government.

Read The Palmetto Insider, The Nerve and SC Policy Council for updates on the budget debate.

A new report from the Policy Council highlights how Other Funds transfers are being used to keep state spending high – in fact, at pre-recession levels. Consider the following four facts about the proposed FY10-2011 budget:

The proposed FY10-2011 House budget is $21.10 billion. This includes: $8.26 billion in Federal Funds; $7.77 billion in Other Funds; and $5.07 billion in General Funds.

The budget increases Federal Funds by $450 million (6 percent) and Other Funds by $600 million (8 percent). These increases are only partially offset by a General Fund cut of $640 million.

Other Funds, or fine and fee, revenue is the fastest growing funding source in the FY10-2011 budget.

Other Funds revenue and expenditures are consistently being underreported and then (via flexibility provisos) used to supplement General Fund spending. For the FY10-2011 budget, such transfers could exceed $1.6 billion.

The SCPC report includes five recommendations that would bring transparency to the budget debate and accountability to the use of Other Funds.

In addition to reforming the Other Funds budget, however, the state needs wholesale budget reform. According to a report by the National Association of State Budget Officers (NASBO), South Carolina lags behind other states in terms of budget transparency.

The report includes 30 tables listing each state’s status for things like the budget calendar, debt limits, and budget agency functions. While the report does not “rank” each state for each category, it indicates which states use specific good budget practices.

Here are the results:

49 states use multiple budget reporting formats – e.g., by lump sum or organizational unit or object classification – at various stage of the budget process. South Carolina is the only state that uses just one format at every stage.

44 states have a state-federal liaison to analyze federal legislation. South Carolina does not.

43 states include program description narratives in their state budgets. S.C. does not.

37 states appropriate all non-federal funds. S.C. does not.

34 states include all programs in revenue estimates. S.C. does not.

24 states formally review or edit performance measures on a regular basis. S.C. does not.

Most notable in this list is the “budget format” section. In short, budgets are generally formatted in four different ways: by lump sum appropriations; organizational unit; program budget; or object classification/line-item. South Carolina only uses two of these budgeting formats – program budget (agency request, governor’s budget) and object classification (appropriation bill, accounting records).

More formats = more data for taxpayers = greater transparency of government.

Not in South Carolina.

You’ve got to wonder just what’s going on at the state capital. Yesterday the Senate gave final approval to a 50 cent cigarette tax increase, generating an estimated $136 million—but costing thousands jobs according to warnings from economists.

At the same time, the Economic Development Competitiveness Act, quietly giving the General Assembly a free ride to …

1. Pass out more taxpayer money to buy political power.
2. Line the pockets of special interests.
3. Perpetuate a failed policy of state-driven economic development.
4. All of the above.

… passed the Senate Finance Committee.

Then we learned that our state government, due to an accounting error, is nearly $60 million further in the hole than they thought. That means more budget cuts in the last quarter of this fiscal year and in next year’s budget as well. More motivation to enact all manner of tax increases and new fees and fines.

At least we can look back as how our lawmakers voted … just kidding.  Only 14 percent of House and Senate votes have been recorded this session. So forget trying to find out how your elected representatives stand on these issues.

To recap:

• More taxes
• More Lost Jobs
• More Government Control Over the Economy
• More Fuzzy Accounting
• Less Transparency

A banner day for the Big Government powerbrokers running our state.

As you finish up your taxes for tomorrow’s federal deadline, consider this: state spending is on the rise – and if lawmakers don’t cut spending now, we are looking at a guaranteed tax increase next year. Already, fines and fees are on the rise.

In fact, Other Funds revenue, which is derived from fines and fees, is the fastest growing revenue source in the proposed FY10-2011 House budget.

Check out these spending increases in the new budget:

$21.10 billion: proposed FY10-2011 budget

$400 million: increase in previous year’s total budget

$450 million: increase in Federal Funds

$600 million: increase in Other Funds

All in all, the total budget has increased by 1 percent since the beginning of the current recession, fueled by a 17 percent increase in Federal Funds and an 11 percent increase in Other Funds. By comparison, per capita income in South Carolina has declined by 2.1 percent, going from $32,495 to $31,799 in 2009.

But if you think that’s bad, wait until next year.