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State must work toward solid budgeting practices
The Brack Report
By Andy Brack
A friend observed this week that he buys shirts online because it is easy and he can avoid the mall.
He, like millions of others, has shifted in the way he buys things to make life easier and take advantage of innovation.
But most states, including South Carolina, continue to use archaic tax systems that do not respond to changes in the way people behave, live and do business. And that is why, unless something is done, South Carolina faces a looming budget crisis in coming years.
A new report says South Carolina is among 11 states in the nation that face the highest risk of not having enough money down the road to pay for its current level of programs and services. Because of the way the state’s tax system is set up, its shrinking tax bases will grow at a smaller rate than the costs to maintain government programs at current levels.
So while South Carolina has a balanced budget and the first surplus in years, it has a long-term structural deficit and scores poorly on each of 10 risk factors identified by the Center on Budget and Policy Priorities (www.cbpp.org).
“We’re not trying to tell any state that they should have higher taxes,” says CBPP Deputy Director Iris Lav. “But do you have a tax structure that keeps up with the level of services you choose?”
In South Carolina, the answer is a solid no. Take a look at just a few of the risks, as identified by the center:
Shrinking tax bases. The state’s sales tax base has shrunk 13.4% since 1990, much higher than other states, and
covers less household services than other states.
It does not help that South Carolina has more than 60 sales tax exemptions that could generate $1 billion a year in tax
revenue if they were off the books. Also, the state’s corporate tax base has shrunk 6.6% so that corporations are paying less of their share of government.
“There’s definitely a shifting of the tax burden that’s been going on for the last 10 years,” says State Revenue Department Director Burnie Maybank.
Internet/catalog sales. The state is missing up to $395 million in sales tax revenues because people have shifted to buying things through the Internet and catalogs.
Maybank says the number is much lower, about $80 million, but agrees the tax structure is set up to make it tough to collect taxes from these sources.
Seniors. According to the study, seniors in South Carolina get tax breaks that exceed the average. Meanwhile as a group, the growing elderly population will cost the state more to provide services in future years.
The continued costly growth of Medicaid poses the biggest threat to the budget because it squeezes money from other programs, Maybank says.
Brackets. The state’s top tax bracket is $12,300, which means most people’s incomes are taxed at the same levels. Because brackets do not reflect a real cross-section of incomes, lower income people end up paying more than their fair share.
What is happening in South Carolina, much like at the federal level, is that people want government to perform, but they want to pay less.
“They haven’t modernized the tax structures, but people expect schools to have computers, and they expect hospitals to have MRIs, so the costs of services that states are providing are going up,” says report co-author Liz McNichol.
Options to reduce the risks from a structural deficit in the future include:
• Remove sales tax exemptions, which will grow the sales tax base.
• Close corporate tax loopholes
• Stop giving income tax cuts, especially to the rich.
• Eliminate tax breaks based on age, but consider them based on income.
• Simplify the sales tax structure to make it easier to collect sales taxes on Internet and catalog sales.
• Conduct long term projections on spending and revenues, including growth in cost of services.
Lawmakers need to wake up to budget realities and resist the urge to try to give people something for nothing.
Andy Brack is editor and publisher of S.C. Statehouse Report (www.statehousereport.com), a business forecast of developments in the South Carolina Legislature and state government. E-mail him at brack@statehousereport.com.
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