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.