The State: Let Locals Exempt Groceries Too

South Carolina's state sales tax doesn't apply to groceries anymore. This is a big deal for low-income consumers, who are hit hardest by the sales tax on groceries in the dwindling number of states that still apply it. But it's also a big deal for state coffers, because groceries are typically between 10 and 20 percent of the state sales tax base in states that tax them.

In other words, exempting groceries is a progressive move-- but only if you can afford it.

In a July 31 editorial, the State's editorial board does a nice job of describing these conflicting objectives. Here it is:

It makes perfectly good sense for the General Assembly to declare that some types of taxes will not be collected in South Carolina, by either state or local government. Grocery taxes should be one of them.
But it’s not just as simple as waving a magic wand, or at least it shouldn’t be. That cap that lawmakers passed last year on how much property taxes can be increased each year means that if counties stopped collecting sales taxes on groceries, many would not be able to make up the loss by raising property taxes. They wouldn’t have anywhere else to turn for the money either, because of the stringent limits the Legislature has previously placed on both the types and the amounts of taxes and fees that local governments can raise as an alternative to property taxes. So eliminating local grocery taxes would mean a sharp drop-off in the amount of money they have to pay for police and fire protection and other local services.

Progressives often forget that there are two sides to this coin. The State deserves kudos for reminding us that even the most progressive tax cut has costs-- and that these costs can be unaffordable.

In states that have both state and local sales taxes, this decision can be just as wrenching for local governments as it is for the state-- and, as the editorial points out, it can be even worse for locals because they have less diverse taxing authority than does the state. But there's an added wrinkle in South Carolina: locals didn't even get to make this decision.

The way state law is written, their only choice is to collect a local sales tax that includes the grocery tax or to not collect a local sales tax at all — an unlikely enough choice even before lawmakers slapped a property tax cap on local governments last year.
The least the Legislature should do is allow counties to exempt groceries from their local option sales tax.

Not to sound like a broken record, but the State is right on again. South Carolina locals should be given the ability to decide whether their sales tax rules stick out like a sore thumb compared to the state. It won't be an easy decision-- but at least it's a call they get to make.

Cigarette Tax Hike Dead For the Year?

South Carolina's regular legislative session ended yesterday with no agreement on how much to increase the state's cigarette tax-- which means there will likely be no hike at all this year. In the end, what killed the proposal was the state's short-term projected budget surplus:

Raising taxes with a surplus "is simply wrong," said Sen. Larry Grooms, R-Berkeley. "When we were told 'we have the votes to go around you,' we dug in."

Of course, legitimate questions can be asked about how long that budget surplus will stick around. And for some folks, the point of a cigarette tax hike isn't to raise revenue anyway.

Our hope for next year: if lawmakers are going to decide more money needs to be allocated to health care, they should come up with a revenue source that will grow a little faster-- as virtually any other tax hike would.

The State Says "Leave the Income Tax Alone"

A sensible editorial in today's State newspaper surveys the carnage of the ongoing legislative debate over how to cut South Carolina taxes, and makes several sensible points. First, the editorial board argues that South Carolina taxes are not obviously all that high:

[N]o one has yet put forward a good argument for reducing taxes overall. South Carolina is not a high-tax state. Depending on how you calculate tax burden, we come out in the middle or toward the bottom nationally. And we continue to underfund essential services...

Second, the board argues that the income tax is the wrong tax to cut:

If they must, they should at least make our overall tax system more balanced instead of less, more fair instead of less, more stable instead of less. All of that points to cutting the most volatile, regressive and overutilized tax we have — the sales tax.

This is an especially important argument in light of the biggest tax event of the past week in South Carolina: the 1 cent increase in the general sales tax rate that took effect on Friday.

Having said that, reality intrudes-- and reality in South Carolina right now appears to be that lawmakers will either cut income taxes for upper-income families or for middle-income families. The State argues that the Senate plan is "far superior" because "all income tax payers would receive the same dollar benefit" under the Senate plan.

This is true-- the Senate's plan (which would reduce the bottom tax rate) is definitely less bad than the House plan (which would reduce the top tax rate). But low-income families who are too poor to owe income taxes will get nothing from the Senate plan-- even though these families are hit hard by sales and property taxes. For example, a single mom with one young child would have to earn over $18,000 to see a dime from the Senate plan-- well above the poverty guideline for this family.

Which is why the editorial board's ultimate recommendation-- that lawmakers should "leave the income tax alone until lawmakers are ready to undertake comprehensive tax reform" is so very sensible. Too bad no one will listen.

A Year Later, Who Wins? Who Loses?

This is the week when the chickens come home to roost. The major cuts in homeowner property taxes enacted by the state legislature last year will, as of June 1, be at least partially paid for, as the state sales tax goes up by 1 cent. The State's John O'Connor gives a retrospective on what people are saying about the impact of last year's "tax swap."

O'Connor finds a lot of opposition to the swap:

• Low-income advocates argue (correctly) that it hurts low-income renters, who pay more sales tax but get no benefit from the homeowner property tax breaks.
• Businesses argue (correctly) that they're being dumped on, since the carry an increased share of the cost of funding public schools through property taxes.
• Local governments argue (correctly) that their options for adequately funding their operations are being hamstrung, because the new law caps the growth of property assessed value and also caps property tax rates.

So does anyone have anything good to say about this plan, one year later?

“It still represents the best that we could get through the Legislature to address a very important, long-standing problem,” said state Sen. Larry Martin, R-Pickens.

And Rep. Don Bowen thinks last year's changes reflect the principle that "the state should protect homeowners who wisely chose their real estate or want to live in their homes long-term."

Martin's praise is about as lukewarm as you can get: anything is better than nothing. And Bowen's argument is, to be polite, just not applicable to the bill as passed. Everyone agrees it's important to find a way to keep long-time homeowners in their homes after they retire. But the question is, why is repealing a property tax for every single homeowner in the state-- and hiking the sales tax to pay for it-- an evenly remotely smart way of achieving this goal?

So the revised question should be whether anyone has anything that is both good and sensible to say about last year's tax reform. Any thoughts?

Senate Committee: Use Cig Tax to Pay for Income Tax Cuts

If you're going to use a flatlining tax to pay for cuts in a growth tax, you might as well go all the way.

That's the message from the South Carolina Senate's Finance Committee, which has approved a bill that would use a 45-cents-per-pack increase in the state's cigarette tax to pay for (among other things) eliminating the bottom tax bracket of the state's income tax.

This approach makes us feel a little silly for browbeating the state House for wanting to use the cig tax to pay for grocery tax reductions. In that case, one regressive, zero-growth tax was being hiked to pay for cuts in a regressive, slightly-faster-growing tax. The Senate Committee has basically decided they want to cut something that grows a bit faster.

We've said ad nauseum that the last thing you should ever use cigarette revenues for is to pay for things. As the folks at the Campaign for Tobacco Free Kids know only too well, what the cigarette tax does best is to make people quit smoking-- which means tax collections go down.

Governor Sanford opposes the plan, because a bit of the cigarette tax money would go not for income tax cuts but to create a new health care savings account:

"This is not a revenue neutral plan," Sanford spokesman Joel Sawyer said.

Funny thing is, he's right-- but not in the way he imagines. Whatever this plan raises in the short run, it'll raise a little bit less the next year, a little bit less the year after that. And eventually, it will lose money outright. There's no such thing as a "revenue neutral" cigarette tax swap. But what that means is that the long-run choice made by South Carolina lawmakers this month may end up being unfunded sales tax cuts versus unfunded income tax cuts. And neither is a sustainable option.

Cigarette Tax Hike Heads to House Floor

The tax writing committee in the South Carolina House of Representatives has approved a 30-cents-per-pack cigarette tax hike. The bill now heads to the floor of the House.

Advocates of the cigarette tax hike have made a splash this week about the bill's impact, but have focused almost entirely on its impact as a deterrent for smokers. Less emphasized, but equally consequential, is the impact of this proposal on tax fairness: a cigarette tax is one of the most regressive taxing options available to state governments. It would be hard to design a tax that hit the poorest families harder-- and let the wealthiest off easier.

This doesn't mean that the folks at the Campaign for Tobacco Free Kids are wrong when they espouse a cigarette tax hike. It just means they've got their eye on a different set of policy goals: reducing smoking among South Carolinians and cutting health care costs associated with smoking.

There are two problems here. One is that the scale of the cigarette tax hike under discussion here-- from a tiny 7 cents per pack to a slightly-less-tiny-37 cents per pack-- isn't gonna deter many South Carolinians from smoking. It would likely take a much higher tax rate to achieve that. With the national-average state cigarette tax rate hovering around $1.00 per pack, the Palmetto State has a long way to go before its cig tax even begins to compare to what other states do.

The second problem, with all due respect for the South Carolina lawmakers sponsoring this package, is that lawmakers are very likely not thinking about this tax hike the same way the Tobacco-Free Kids folks are. Lawmakers see dollar signs. They want to make their proposed cuts in income and food taxes seem more affordable, so they're looking under the cushions for any extra pennies they can find.

If the current trajectory of the legislative session continues, and South Carolina swaps a higher cig tax for a lower income tax, the result won't be a healthier South Carolina: instead, the state will have a tax system that is sharply more unfair.

"Cockamamie Reasoning" on Cigarette Tax

The Greenville News' Paul Hyde wants to see a cigarette tax hike in South Carolina-- and wants to see it fail:

Some opponents of a cigarette tax — here in South Carolina, for instance — have argued, lamely, that the cigarette tax shouldn’t be increased because the state would come to rely on a tax revenue source that’s bound to decline...The obvious response to that argument is: So what if the tax declines? It’s undoubtedly a good thing that fewer people would be smoking.
States also may see a decline in some health-care costs related to smoking. So the decline in cigarette tax revenues would not matter that much. Based on the experience of other states, South Carolina could expect cigarette tax revenues to decline. State leaders could plan accordingly.The decline in revenues would be slow and cigarette taxes represent only a small portion of the state budget.

Hyde is right about one thing: forward-thinking lawmakers ought to be able to see the long-term decline of cig tax revenues coming. Lawmakers who've got their eye on the long-term sustainability of South Carolina's fiscal structure should recognize that the cig tax is a quick fix that will need to be supplemented in the long run-- useful to help achieve the dual purpose of discouraging teen smoking and bringing in a few bucks in the short run, but not a long-term solution.

This is all true-- and if state lawmakers are really thinking in terms of a two-part strategy (cig tax now, structural tax reform later on), then it's not the worst idea ever. But how many lawmakers in South Carolina (or in any other state) are that forward-thinking? Most observers of state tax politics would probably agree that state lawmakers aren't thinking ten years down the road-- they're thinking about how they can get through the current fiscal year while ruffling the fewest feathers. They'll absolutely take the cigarette tax revenues if they can get them now, but won't use this short-term fix as a springboard for longer-term reform.

If Hyde overestimates the willingness of lawmakers to think long term, he completely ignores the question of popular support for tax hikes. Even in the best of times, there is a limited appetite for tax hikes-- lawmakers only get so many chances to reform the system, and if elected officials use their political capital to push through a cigarette tax hike this year, it will be that much harder for them to enact needed structural tax hikes next year or the year after. In year 2 or year 3 after a cig tax hike, lawmakers will have to explain to voters that the first tax hike they enacted wasn't enough, and that they have to do another one.

This is the sort of thing that breeds anti-tax sentiment, and it's the main reason why lawmakers should think long-term, not short-term, when dealing with tax increases. They may only get one bite at the apple.

It's nice to see that Hyde is confident in the political will and long-term vision of South Carolina lawmakers and voters. Here's hoping he's right on both counts.

"Funny Money" in State Budget Proposal

"Put your money where your mouth is." As a guide to everyday life, this hoary old phrase means simply that if you believe in something, you should be willing to act on that belief. In politics, the implication is that if you think a state spending program is worth funding, you should figure out a way to pay for it. The editorial board at the State newspaper calls South Carolina lawmakers to task for not following this adage in their proposed budget:

Ask most House members about the budget they’ll debate this month, and chances are good they’ll rattle off a list of popular new programs the bill includes...What representatives probably won’t tell you is that they’re only committed to funding those programs and positions for one year.

Oh, they’ll probably pay for them next year too — if our economy keeps growing at a steady clip. But if things slow down, those programs and all the people who will have
been hired to carry them out — and many more — are toast. That’s because the Ways and Means Committee’s budget pays for them with nonrecurring, or one-time, funding. Unlike recurring money, which is what economists expect our current taxes to generate next year, this is money that has already been collected, but not spent; in other words, it’s money no one can realistically expect to be available in future years — money that should be used to buy school buses or pave roads or take care of other one-time purchases.

Using nonrecurring money to pay for recurring programs is one of the most irresponsible things our lawmakers do. And they do it year after year. That’s the main reason we had to lay off government workers and slash our Highway Patrol and our prison staffs and industrial recruitment efforts to the bone at the turn of the century: The economy tanked, and the irresponsible budgeting caught up with us.

The House's "funny money" approach is mirrored, of course, in Governor Mark Sanford's proposal to fund income tax cuts (which will cost more and more each year) with a cigarette tax hike (which will bring in less and less each year). So House budget writers are, at least, in good company. But South Carolinians should recognize that for all the good and productive areas of public investment the House budget has identified, it's all smoke and mirrors until the legislature--and the governor-- puts their money where their mouth is.

Cig Tax Politics: "Stench of Hypocrisy"

The editorial board at the Myrtle Beach Sun-News is sick of the politics surrounding a proposal to hike South Carolina's cigarette tax:

The stench of hypocrisy emanates from the S.C. House leadership's rationale for refusing to raise our state's lowest-in-the-nation cigarette tax. Thanks to unspent money from the fiscal 2007 budget and a projected surplus for 2008, they say, the state enjoys an excess of $1.35 billion and doesn't really need new tax revenue.
As well, they say, more than a third of House members have pledged never to raise taxes of any kind. So there's no point in pressuring them to raise the cost of smoking.
Both excuses for standing pat at 7 cents per pack are bogus. The point of raising the cigarette tax would not be to pad this surplus (though it would be good public policy to spend more on meeting children's health needs and on helping South Carolinians who need them to buy AIDS and HIV drugs). The point of a cigarette tax bump would be to curtail smoking.

As for members' pledges never to raise taxes, this objection is laughable. Just last year, many of the legislators who made these promises, including most of the Horry County legislative delegation, voted for a 1-cent sales-tax increase for public-school operating expenses.

Their political cover for supporting this state tax increase, which takes effect July 1, is that it was coupled with the repeal of the education operating-expense property tax for homeowners. Therefore, they say, they didn't really vote for a tax increase.
Oh? Tell that to the non-homeowners, especially middle- and lower-income residents who rent, who will pay higher taxes overall once the state's extra penny kicks in this summer. The legislators who supported the education sales tax raised taxes on them to give an undeserved tax break to middle-class homeowners who didn't like it that rising market prices had driven up their property taxes. In this case, their pledges proved meaningless.

This is a remarkably clear-eyed view of last year's "tax swap." The swap will make South Carolina taxes more regressive than they already are, and will result in a net tax hike on many of the low-income families hit hardest by the current system. And the Sun-News' statement on what we should expect to get out of a cig tax hike is dead-on, too: "The point of a cigarette tax bump would be to curtail smoking."

And yet. Every time cig tax advocates remind us that they want to curb smoking, not raise revenue, they end up telling us what they really want to do with the money they're hoping not to see. And here's what the Sun-News wants to do with it: lawmakers "should devote all or part of the revenue from the higher cigarette tax to reducing some other tax."

This would be a contradictory and absurd goal in any context. But following on the heels of Governor Mark Sanford's call for an income tax cut to be funded with a cigarette tax hike--which would pay for a growing cost with a shrinking revenue source--this is simply an irresponsible thing to wish for.

What Budget "Surplus?"

Pity the poor newspaper writer who has to explain state budgeting. Every term is loaded: some authors happily reprint extravagant claims of "budget surpluses" that really aren't. Without an accounting degree, it's hard to know how to evaluate lawmakers' claims that there's extra money floating around-- or that there isn't. In the State newspaper, the always-excellent Cindi Ross Scoppe explains the often-tricky math behind Governor Sanford's surplus politics. If you want to understand whether Governor Sanford's budget proposal is fiscally sound, this is a great place to start. Read it here.

Why a No-Tax Pledge is a Silly Idea

From the Editorial Board at the Charleston Post and Courier (January 15 edition; sorry, no link available), here's a terrific statement on why no-tax pledges are an irresponsible and bad idea: especially useful sections are bolded.

No-tax hike pledges make good political copy for legislative candidates, but bad public policy. Legislators shouldn't take a pass on their budget responsibilities, which can require raising revenue as well as spending it.
The problem with the no-tax pledge has been underscored most recently in relation to gas and cigarette taxes...The gas tax is a user fee that simply isn't sufficient to pay for what it is primarily supposed to sustain: good roads. Among the road users who aren't paying their share are the millions of tourists who vacation along the coast. The state has been penny-wise and pound foolish in failing to increase the gas tax.Only the Legislature can increase the gas tax, and the no-tax pledge makes a politically difficult situation nearly impossible.
The same is true with the cigarette tax, which at seven cents a pack is 28 cents lower than in North Carolina and 30 cents lower than in Georgia. It has been argued that a cigarettetax hike could help pay for an increase in Medicaid eligibility for the working poor, and gain millions in additional federal funds in support of that goal.Linking increased health care with higher cigarette taxes makes sense in view of the indisputable connection between cigarette smoking and ill health.
Raising the price of cigarettes also could discourage their purchase, thereby limiting their ill effects.But the governor's budget plan would link an increased cigarette tax to a reduction in income taxes, in an attempt to make the hike "revenue neutral." Clearly that strategy is designed to make it possible for those legislators who have taken the pledge to indirectly support the cigarette tax increase.But many doubtless would support that increase on its merits had it not been for the no-tax pledge."I don't sign those pledges," Senate President Pro Tem Glenn McConnell said during a pre-session briefing to journalists. "To sign that pledge is to turn your vote over to another person." House Speaker Bobby Harrell agreed, saying he warns new legislators: "You've got your word and your vote. Don't give away either one."Once the no-tax pledge is taken, it's difficult to justify a reversal, he said. "It's wrong to expect members to ignore their pledges."Taxpayers should be able to expect legislators to be careful stewards of public dollars, but a sweeping no-tax pledge has less to do with being responsible than with being elected.
The state shouldn't let roadways and bridges deteriorate because it is politically expedient to deny the DOT the ability to raise money from its primary revenue source. Nor is it responsible to ignore the rising health care needs of a comparatively poor state when a reasonable increase in cigarette taxes could provide care for thousands more.Legislators should resist the urge to take the no-tax hike pledge, recognizing it as a simplistic solution that locks them into a single position that isn't always prudent or responsible.

A recurring theme here (and, in my view, a correct one) is that taking a no-tax pledge amounts to favoring politics over policy; doing what will get you elected rather than what's the right thing. Kudos in particular to leaders in the Senate and House for expressing their (justified) scorn for no-tax pledges.

What's on Tap for the 2006 Legislative Session?

The State's John O'Connor puts on his forecasting hat:

Debate should be short and sweet on most tax hikes this year; lawmakers said raising taxes with a $1.1 billion budget surplus would be nearly impossible. There likely will be extended debate on raising the state's cigarette tax. At 7 cents a pack, it's the lowest in the nation. The question is whether a cigarette tax increase would pay for health-care costs or whether it would be tied to a $205 million income tax cut as proposed by Gov. Mark Sanford.
Senate President Pro Tem Glenn McConnell, R-Charleston, and Majority Leader Harvey Peeler, R-Cherokee, said raising cigarette taxes has a chance only if connected to income tax cuts.
After the approval of $600 million in property tax relief and reduction of grocery sales taxes last year, less time will be spent on tax cuts this year. Harrell said the House will discuss further cutting the sales tax on groceries.
Proposals to raise South Carolina's relatively low taxes on gasoline or alcoholic beverages also could be introduced.

Leaving aside, for the moment, troubling questions of tax fairness, arguments could be made for increasing all three of the "sin taxes" discussed here. South Carolina is one of the few states that can plausibly claim some serious revenue raising potential from the cigarette tax. Their lowest-in the-nation tax rate could be jacked up substantially without further depressing cigarette consumption too much. And gasoline taxes need to be hiked every now and then to ensure an adequate supply of road funding.

But the real non-starter here is the idea of using cigarette taxes to fund an income tax cut. The income tax is a fair and sustainable revenue source. The cigarette tax is neither-- which means that even if lawmakers can put together a revenue-neutral tax swap in the short run, the long-term impact will likely be a growing budget hole.

The State Gets It Right

Months after a contentious 2006 legislative session resulted in a "tax swap" that cut South Carolina homeowner property taxes and hiked the state sales tax rate, the editorial board at the State newspaper rings in the new year by looking back on what lawmakers have wrought.

And their assessment is (as usual) dead on. They've got one good thing to say about the tax swap: it moved South Carolina away from local tax sources and toward state sources.

By increasing the portion of school funding paid for by the state, [the tax swap] begins to move us toward providing the same quality of education to every child, rather than chaining a child's opportunity to how wealthy his or her neighbors are. It also re-balanced a system that was beginning to rely too heavily on property taxes.

But that's about where the compliments end. Here's the lowdown on what went wrong with the 2006 tax swap:

[I]t also barred local communities from determining the level of services their cities and counties will provide, imposed a new regime in which some homeowners pay taxes on the full value of their homes while others pay on an ever-dwindling fraction, shifted as much as $250 million in taxes to businesses, increased the federal tax burden on many homeowners and might have shifted the pendulum too far, setting up sales taxes in some areas that will send shoppers out of state. Worst of all, it made only that tiny move toward solving the biggest problem with our tax system — its inability to provide equitable school funding.

There's a lot to unpack here. But suffice it to say that the State's diagnosis is right on the money. In their haste to enact a very visible, easily understandable property tax cut, lawmakers brought some unforeseen consequences upon themselves that could hamstring future efforts to enact true reforms. Kudos to the State for remaining sober-minded about both the virtues and the defects of the 2006 tax swap.

2006 Tax Swap Draws Ire of Business Groups

Last summer, plenty of sensible people correctly criticized the South Carolina legislature for enacting an unnecessarily expensive, poorly targeted "tax swap" that cut homeowner property taxes and hiked the sales tax. The property tax cuts were "poorly targeted" in two important ways. They were too generous in that they were given to even the wealthiest homeowners, and too stingy in that they offered nothing-- zero, zilch, bupkus-- to businesses. When the revenue loss was made up by a tax that hits businesses too, you can understand why they'd be mad.

Well, the Chamber of Commerce is mad. But they say that Governor Sanford's new plan to cut income taxes by over $200 million could help make it all better.

The lesson? Big tax cuts that exclude an entire category of taxpayers, such as the homeowner property tax cuts of 2006, leave the other shoe hanging, and that shoe has to fall. The already-enacted 2006 tax cuts were bad enough from the perspective of tax fairness. But the worst legacy, by far, of the 06 cuts would be the passage of high-end income or business tax cuts in 2007 as "payback" for businesses left out of the 2006 bonanza. So we may not know for some time just how unfair the 2006 tax swap will have made the South Carolina tax system.