By Andy Brack

If the plan for South Carolina politicians is to shrink state government by starving it, then it’s working. 

Yes, this year’s budget was larger than ever before—some $7 billion in state tax funds alone.  But the huge influx of $1.4 billion in new revenue isn’t lasting.  Next year, an economic downturn highlighted by higher interest rates and slow housing sales will force the state into a shortfall that could approach $430 million. (Experts say the real shortfall probably will be $250 million off what’s been projected, but that’s still not chicken feed.)

If you step back a little, what becomes clear is that the state is starting to cycle wildly from fiscal surplus to shortfall and then back again. Why? Because politicians are responding to political whims by offering the dessert of tax cuts before partaking of the meal of good budgeting practices.

For all the caterwauling about South Carolinians being taxed too much, the state will take in almost $600 million less in the coming year because of recent tax cuts:

Estate taxes. Because South Carolina tied its estate tax to a federal cut, the state phased out so-called “death taxes” from 2002 to 2004.  In the coming year, it won’t collect $60 million that it would have received without the cut.

Small business income taxes. In 2005, lawmakers passed an income tax cut targeted to small businesses that caused the rate to drop from 7% to 5% over four years. In the coming year, the state won’t collect $54.5 million it otherwise would have received.

Venture capital fund. Because insurance companies now can contribute monies that once were taxes into a special venture capital fund and get a juicy tax break at the same time, the general fund isn’t getting about $50 million in taxes from insurance companies that it once got.

Grocery taxes. Next week, consumers no longer will have to pay the state sales tax on groceries.  The benefit came as the result of two laws—a 2006 measure that cut the rate from 5% to 3% as part of a property tax swap and a 2007 law that eliminated the remaining 3% completely as part of an income tax cut. Combined, the average family of four will save about $225 per year in taxes. The state will lose $235 million in revenue in the coming year.

Personal income taxes. The state in 2007 eliminated the 2.5% personal income tax bracket for all filers—a measure that will keep the state from realizing $86.4 million in the coming year.

If you add all of the tax cuts, the state won’t bring in some $585.9 million in 2008 that it would have if the tax cuts had not occurred. In other words, without the tax cuts, the coming year’s budget likely wouldn’t face a shortfall of up to $430 million. Instead, it would have a surplus of about $150 million.

Now while all of these numbers are interesting, the practice of incessant tax cuts means something really deeper: Instead of having a surplus next year and being able to improve education, health care, prisons, the environment and a host of programs, state leaders are facing another annual funding crisis. 

By cutting in good times, lawmakers create a rhythmic dynamic that they don’t have enough in lean times. In turn, that means they’ll cut more government services. In the end, government becomes smaller by default, not by design.

But some would argue that it’s by design anyway because the long-term purpose of cuts is to serve as tools to starve government—to drown it in a bathtub, as one famous budget-cutting devotee has opined.

In our book, this strategy is wholly disingenuous.  If leaders want to cut government, they should cut programs outright and face the music offered by voters.  They shouldn’t stand by and wait for lean times to cut programs because they don’t have money.

So why do they do it this way?  First, South Carolina politicians just won’t raise taxes when they need money because of the fear of political backlash.  And they’re scared of another kind of backlash if they cut programs directly—that a disaffected constituent might run against them.

Andy Brack, publisher of “S.C. Statehouse Report,” can be reached at  brack@statehousereport.com.

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