The Brack Report

By Andy Brack

As constant as the rising sun, people complain about taxes. It is easy to do, but without taxes, we would not be able to live in a civilized society. As much as people hate taxes, they love to civilize America.

By paying taxes, we provide funds for government to provide needed services, such as military protection, garbage pickup, road construction, schools and more. By having taxes fund services, we share the burden to get a better quality of life.

Imagine, for example, if you had to pay a toll for every road that was built. It would be much more costly than the few cents extra you pay at the pump currently for roads.

Beyond the constant political rhetoric about taxes, it is time for the state to take a long look at modernizing our tax system. During the summer, lawmakers are planning big meetings on the property tax. But instead of a small fix here or a minor tweak there, lawmakers need to look at equity and fairness to make sure the whole structure is as balanced as possible.

As Columbia economist Harry Miley relates, if you try to tweak one tax, it likely will have unforeseen consequences on the other taxes. It is like poking a finger in a balloon, he says. The more you poke it, the more it will expand in another direction. If you poke it too much, it will burst.

“There’s no tax that’s perfect,” Miley says. “The only reason we have taxes is we have no other way to provide the public services we all demand. That’s why most economists say, if you start tinkering with one tax, you’ve got to look at all of them.”

Currently, our tax structure is antiquated. It is built on three major foundations; taxes on the sale of goods, taxes on income and taxes on property. A growing fourth foundation is the use of fees for services provided.

Taxing property has been the most enduring way for government to generate revenues. As states provided more services, they looked to broaden taxation. Income tax did not really get started in earnest across the country until after 1913 when a national income tax was approved with the 16th Amendment. Across the South, sales taxes did not become a big deal until the 1950s when they were passed mostly to improve education.

In other words, we are operating in the 21st century with a system of taxation that stretches back for generations. The last big update was almost 50 years ago.

As they tinker with property taxes, lawmakers should recall:

Sales tax. During the past 50 years, the country has changed from an economy based on sales of goods into a computer-driven economy that has an increasing mix of services. According to a 1997 report, South Carolina taxes 32 of 164 services. And since the 1970s, the sales tax rate has increased 49% across the nation, but the sales tax base has increased only 20%, indicating a shrinking base.

Meanwhile, the state has more than 60 sales tax exemptions that cause it to lose $1 billion in revenue. It is also losing up to $395 million a year in sales taxes on Internet and catalog sales.

Income tax. The state offers six income brackets for income tax. The top bracket is $12,000, which means that almost everyone pays income taxes at the top bracket. The brackets have not been altered in years. If lawmakers stretched brackets some, income tax would become more progressive (to balance the regressive nature of sales taxes). Additionally, by adding a new top bracket with a slightly higher rate, they could generate some new revenue and broaden the state tax base—or give credits to low-income earners to make the system fairer.

Other taxes. To generate more revenue, or to decrease reliance on income and sales taxes, lawmakers could also consider updating the cigarette tax to the national average, which would bring in more than $150 million a year to fund things like school improvements and health care increases. They could consider hiking the gas tax, which could pay for much-needed maintenance on state highways. They also could consider means-testing some tax breaks for seniors to level the taxpayer-playing field.

Bottom line: There are options to make the system fairer and more balanced. As lawmakers talk about property taxes this summer, they should also consider limiting sales tax exemptions, dealing with lost taxes from online and catalog sales, and broadening the sales tax base to include more services. They also should consider revising income tax brackets to make them less flat and more connected to reality.

Andy Brack is the 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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