RIP for Cigarette Tax Hike in 2008

It's hard to know how to feel about this one. The South Carolina legislature has failed to override Governor Sanford's veto of a cigarette tax increase.

We've said before that cigarette taxes aren't a smart way of funding things, and the Governor is parroting this line precisely:

In vetoing the cigarette tax hike, Sanford said he was concerned about funding health-care programs with a revenue source that would decline in future years as fewer people smoke.

He's right. However.
If anyone should be hiking their cig tax, it's South Carolina, which now still has the nation's lowest tax at 7 cents per pack.
In addition, the sad truth is that in South Carolina's political climate, there's no willingness to talk about raising a more sustainable tax (like, say, the income tax or the sales tax). So for right now, it's either the cigarette tax or nothing. This makes the legislature's failure less obviously good, since the designated funding source for the vetoed hike was health care.

In another reminder of political realities, however, the speaker of the House asserted that their failure to overcome the vetoed tax hike is probably a good thing because too much of that government health care would be a bad thing:

House Speaker Bobby Harrell, in arguing in favor of sustaining Sanford's veto,
expressed concerns about expanding Medicaid and promoting an "entitlement
society" that teaches children that "it is the government's job to care for them."

Gosh. Sure wouldn't want government to do that.

There are no good outcomes from a debate of this kind. The Palmetto State is pretty far from having the sort of open tax policy debate it needs. So, the glass-half-full way of looking at it is that maybe this failure will prompt state lawmakers to take a fresh look, in 2009, at options for true reform.
One can hope.

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.