The Palmetto Insider

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.

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.

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.

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.

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.

Great article from NRO on the South Carolina political scene. Here’s a snippet:

South Carolina is deemed a heavily Republican state … But it is not a conservative’s paradise; state politics are often dominated by a powerful political establishment that likes to take care of its own and dish out favors to its friends. The governorship is relatively weak and the legislature is strong; Michael Barone’s Almanac of American Politics cites the anecdote of Sanford, a true fiscal conservative, issuing 106 vetoes on spending he deemed excessive and the legislature overriding 105 of them.

To take another example, South Carolina has a sales tax of 6 percent — but numerous exemptions have been written into the law over the years, reflecting the whims of state lawmakers, meaning there is a sales tax on clothing, cars, and computers, but not on services such as haircuts or car repairs. The exemptions are estimated to amount to $2.65 billion annually. On paper, you have the unusual circumstance of conservative activists calling for the end of special exemptions and thus, technically, a tax increase, but the sense is that the current Byzantine system of exemptions amounts to a tax on the politically powerless. According to state senator Tom Davis, a reform-minded Republican from Beaufort County, removing all of the exemptions and applying the tax evenly could lower the rate to 2.4 percent.

Finally, someone at the national level has done a little bit of homework on just how the game is played here in South Carolina. As for lowering that sales tax, read more here.

According to S.C. Supreme Court Chief Justice Jean Toal, the Judicial Department will need to lay off “clerks and court reporters” if the Senate and House don’t agree to raise court fines/fees by $20 million. “Without those employees,” adds Toal, “the court system would have difficulty operating.”

Assuming Toal is right, why not make cuts elsewhere, starting with senior staff? At the very least, a mix of cuts – beginning at the top – would be the most “just.”

Note the top earners (including one clerk) in the Judicial Department:

• Chief Justice Jean Toal: $144,029.00
• Four Associate Supreme Court Justices: $137,171.00 each
• Chief Appeals Court Judge: $135,798.00
• Eight Associate Appeals Court Judges: $133,741.00 each

 Top Judicial Staff:

• Joan Assey, Dir. Technology Management: $123,453.00
• Lesley Coggiola, Disciplinary Counsel: $123,453.00
• Rosalyn Frierson, Dir. Court Administration: $123,453.00
• Daniel Shearouse, Clerk, Supreme Court: $123,453.00
• Thomas Timberlake, Dir. Finance & Personnel: $123,453.00
• Marjorie Goodale, Chief Staff Atty., Supreme Court: $100,431.00
• Timothy Hayes, Info. Technology Manager: $96,412.00
• Christopher Rogers, Info. Technology Manager: $90,006.00
• Carolyn Cracraft, Finance Manager: $89,845.00
• Mark Crenshaw, Senior Applications Analyst: $89,526.00

Putting things into perspective, Governor Mark Sanford earns $106,078 a year. Moreover, per capita income in South Carolina is among the lowest (47^th) in the nation – $31,799 for 2009. Meanwhile, public sector spending and hiring keeps growing.

Instead of increasing South Carolina’s hidden tax burden by raising fines/fees, why not cut spending at the top?

All salaries as of 8/10/09, Source: The State

For the third time in as many years, the General Assembly is attempting to push through a cigarette tax increase. As related by a new fact sheet from the Policy Council, here are five things you need to know about this tax increase:

This is a Tax Increase

Lawmakers don’t really want to highlight that fact, but that’s what it is. Similar proposals has been referred to as “health care user fees.” Also, under the current proviso, should the funds going to the Medicaid Reserve Fund reach a certain level, remaining revenue will go to the General Reserve Fund, and then General Fund expenditures.

The Cigarette Tax is a Job Killer

Last session, the Policy Council demonstrated that raising the cigarette tax by 50 cents would cost 4,100 jobs. Increasing the cigarette tax will also reduce income for mom-and-pop retailers and others.

The Cigarette Tax is Unfair

A tax increase is not a good strategy for making smokers subsidize their own public health care costs. A better solution is to provide incentives for smokers to quit Another option is to require smokers who are on Medicaid to contribute to the additional cost of their coverage, as opposed to passing a tax increase that brings about job and investment losses.

Spending is Already Too High

This is more of the same for South Carolina. Rather than making government smaller and leaner—and in spite of budget cuts caused by the recession—tax and spend remains the most creative policy lawmakers can come up with. Spending remains high for core services, such as education, and also for dubious spending like economic development.

The Cigarette Tax is an Unreliable Revenue Source

Given that increasing the cigarette tax is going to destroy jobs and private investment, increased revenue from the tax will likely be exaggerated. In particular, increasing South Carolina’s cigarette tax will lead to reduced sales, especially for retailers in border counties.

Read the full Policy Council report on the proposed cigarette tax increase.