Ready, fire, aim!—Tax reform frenzy trumps thoughtful approach
By Bill Settlemyer
Executive Publisher
The idea of cutting, limiting or shifting local and state tax burdens continues to be the hot topic in Columbia. Various interest groups are lining up to promote or oppose a basketful of proposals that would profoundly, and perhaps permanently, change the state’s tax structure.
How burdensome are taxes in South Carolina?
Each year The Tax Foundation, a policy research group, estimates the state and local tax burden in each state and ranks them from highest to lowest as a percentage of per capita income.
In 2005, South Carolina ranked 33rd at 9.7% as compared to the national average of 10.1%.
To put this in perspective, a South Carolina resident with a $30,000 annual income would (based on the average) have paid $2,910 in state and local taxes compared to $3,030 based on the national average, a difference of $120.
This example is for illustration only because actual taxes for a South Carolina resident with a $30,000 annual income will vary from person to person.
Some of our tax rates are progressive, such as the income tax, some regressive (sales taxes) and some (property taxes) a mix of both depending upon the individual’s circumstances.
Still, the average figure is instructive to gauge our tax burden versus other states.
Just as interesting is the range of tax burdens from state to state. The highest is Maine, at 13%, and the lowest is Alaska at 6.4%.
Alaska is something of a special case because payments from levies on oil production make a significant contribution to the state’s revenues. But for the great majority of states (38), the tax burden ranges from 9% to 11%. For our hypothetical taxpayer earning $30,000, that’s a difference of $600 from highest to lowest.
Conclusion? There is a mathematical norm around which tax burdens tend to cluster, and we’re in the middle of the herd compared to other states.
Based on that standard, there’s no overall crisis in terms of excessive taxation.
More importantly, the national norm of just over 10% of per capita income represents the combined wisdom of voters and legislators in the 50 states—in a broad sense it represents the will of the people and expresses their view of the optimum balance between spending needs and tax rates for the combined state and local tax burden.
What are the implications for tax policy in South Carolina?
First, there’s no need for the proposed Taxpayer Empowerment Amendment that would limit future state spending growth to an amount based on a formula combining population growth and inflation. The collection of revenues at the state level is easy to control by setting tax rates, such as those on income and sales. The TEA would impose a limit on top of a limit, constraining spending growth in good times and potentially causing a plunge in funding for vital services when the economy slows.
A far better approach would be to require that the state’s fiscal reserves for bad times be increased significantly when the economy is booming and enacting provisions that would prevent the Legislature from spending every dime when times are good.
House Speaker Bobby Harrell has made the point in the past that the state needs a coherent budget process that prevents legislators from treating revenue surpluses as a pot of gold to be used for one-time expenditures that sometimes morph into unfunded multi-year programs.
Legislative or constitutional changes to address these issues would make more sense than a rigid year-to-year limit on growth in state spending.
The issue of local property taxes has been aired many times but never in a comprehensive way that looks at all possible approaches to the concerns of property owners. It makes sense to find ways to limit rapid and dramatic property tax increases that affect individual homeowners because they live in an area with rapidly rising home values. It also makes sense to find ways to help people stay in their homes when they’re on a fixed income but faced with escalating property taxes.
But these issues are complex, and the consequences of quick and dirty solutions can be serious.
That’s why the state needs a permanent independent study commission to address both fiscal (spending) policy and tax policy. The commission could be charged with addressing both the state’s spending needs and tax policy and tax burdens.
Reports and recommendations from the commission could be used as guidance by the governor, legislators and voters.
The alternative is what we have now: A “ready, fire, aim” approach to tax and spending issues that is likely to result in bad policies and unanticipated impacts on the state’s future economic growth and the health, education and welfare of its citizens.
Politically, it may seem expedient to start a stampede in favor of one “tax reform” measure or another, but in the end, such moves can backfire. An article in the March 27, 2005, edition of The Washington Post noted that several Republican governors who had been staunch advocates of strict constitutional limits on state spending reversed direction when they realized that those limits were jeopardizing the future of their states.
“Some people say that makes me a bad Republican,” said Nevada Gov. Kenny Guinn. “Well, I would be a worse Republican, and a worse grandfather, and a worse citizen, if I didn’t find enough money to educate our children and fund our Medicaid program and provide decent prenatal care.”
Idaho Gov. Dirk Kempthorne expressed similar thoughts: “I have done something that’s absolutely not part of my fiber, but I’m not going to dismantle this state, and I’m not going to jeopardize our bond rating, and I’m not going to reduce my emphasis on education.”
Here in South Carolina, let’s be smart and learn from the experience of other states.
Let’s acknowledge that we need to optimize our taxing and spending policies, but let’s also recognize that we can only achieve this goal if we look at the whole picture and develop policies that accommodate the many competing needs that tug and pull at these issues.
The sooner we set up an independent commission to make recommendations on overall tax and fiscal policy, the sooner we’ll be moving down the right path for South Carolina.
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