Spreading the burden

Thursday’s editorial:

The suggestions recently released by the state’s Tax Realignment Commission are not yet set in stone, but they do reflect one undeniable truth: There is no painless way to approach next year’s state budget.

Good-government advocates have eagerly awaited the ideas that this nonpartisan study group (though legislators have not been so enthusiastic, intentionally delaying the group’s schedule so it would come after the end of the current election-year legislative session). The state’s sales tax code is riddled with exemptions - a favorite example is that we tax wrapping twine, but not a spool of string - and optimism was high that eliminating some of these odd handouts could improve the state’s fiscal health.

The commission’s first report did not offer nearly such a quick fix. After examining approximately 100 different tax exemptions, caps, holidays and other exclusions, the commission returned a recommendation that the state eliminate $690 million worth of those loopholes, but use that money to lower the state sales tax from 6 to 5 percent.

The problem is, $450 million of those loopholes aren’t special-interest handouts at all - they’re bare necessities. The state currently exempts groceries, prescription drugs, electricity and water from sales taxes, and the TRAC would institute a 2.5-percent sales tax on each, half of the regular sales tax, the lower rate perhaps a nod to the hardship taxing those items will cause for the poor.

How much of a hardship would that be? The U.S. Bureau of Labor and Statistics suggests that the average household in the South making $59,000 spends about $3,500 on groceries each year, about $2,500 on power and water bills and $500 on prescriptions. A 2.5-percent sales tax on those purchases would cost that household an additional $162 each year.

Would the corresponding reduction offset those costs? Among the largest non-essential spending categories, the average household spends $3,000 on prepared food and drink, about $2,000 on entertainment items, about $2,200 on household furnishings and supplies, and about $1,800 on clothing. That $9,000 in spending would be taxed at 1 percent less for a savings of about $90.

Each actual family’s circumstances will differ, of course, but it appears the shift results in a greater net increase for households that spend most of their income on necessities.

What’s worse, this tax increase on necessities does not dramatically improve the state’s fiscal health. Next year, lawmakers are projecting a $4 billion general-fund budget that includes a nearly $1 billion shortfall, making even the deep cuts in services this state has suffered over the last few years seem only the beginning. By lowering the overall tax rate to keep total sales-tax revenue flowing to the state about even, the reforms presented so far do nothing to bridge that gap.

Finally, the politics surrounding the package only make less likely to be effective. Over the past week, Reps. George Hearn and Nelson Hardwick have each raised the widely-noted concern in separate conversations with The Sun News editorial board that lawmakers will not be taking an up-or-down vote on the package. Once it is released, they fear, lawmakers will be beset by special-interests seeking to preserve their exemptions.

The state’s tax code must made fairer, and next year’s budget crisis will be so severe that South Carolinians at all income levels will feel it. At this point, it is difficult to imagine a path forward for this set of TRAC recommendations to solve either problem. The commission will meet once more in September to give the plan final approval before sending it to lawmakers, and thereafter will study other portions of the state tax code (such as services and the gas tax), so perhaps some hope for a good solution still remains.

Good-government advocates have eagerly awaited the ideas that this nonpartisan study group (though legislators have not been so enthusiastic, intentionally delaying the group’s schedule so it would come after the end of the current election-year legislative session). The state’s sales tax code is riddled with exemptions - a favorite example is that we tax wrapping twine, but not a spool of string - and optimism was high that eliminating some of these odd handouts could improve the state’s fiscal health.

The commission’s first report did not offer nearly such a quick fix. After examining approximately 100 different tax exemptions, caps, holidays and other exclusions, the commission returned a recommendation that the state eliminate $690 million worth of those loopholes, but use that money to lower the state sales tax from 6 to 5 percent.

The problem is, $450 million of those loopholes aren’t special-interest handouts at all - they’re bare necessities. The state currently exempts groceries, prescription drugs, electricity and water from sales taxes, and the TRAC would institute a 2.5-percent sales tax on each, half of the regular sales tax, the lower rate perhaps a nod to the hardship taxing those items will cause for the poor.

How much of a hardship would that be? The U.S. Bureau of Labor and Statistics suggests that the average household in the South making $59,000 spends about $3,500 on groceries each year, about $2,500 on power and water bills and $500 on prescriptions. A 2.5-percent sales tax on those purchases would cost that household an additional $162 each year.

Would the corresponding reduction offset those costs? Among the largest non-essential spending categories, the average household spends $3,000 on prepared food and drink, about $2,000 on entertainment items, about $2,200 on household furnishings and supplies, and about $1,800 on clothing. That $9,000 in spending would be taxed at 1 percent less for a savings of about $90.

Each actual family’s circumstances will differ, of course, but it appears the shift results in a greater net increase for households that spend most of their income on necessities.

What’s worse, this tax increase on necessities does not dramatically improve the state’s fiscal health. Next year, lawmakers are projecting a $4 billion general-fund budget that includes a nearly $1 billion shortfall, making even the deep cuts in services this state has suffered over the last few years seem only the beginning. By lowering the overall tax rate to keep total sales-tax revenue flowing to the state about even, the reforms presented so far do nothing to bridge that gap.

Finally, the politics surrounding the package only make less likely to be effective. Over the past week, Reps. George Hearn and Nelson Hardwick have each raised the widely-noted concern in separate conversations with The Sun News editorial board that lawmakers will not be taking an up-or-down vote on the package. Once it is released, they fear, lawmakers will be beset by special-interests seeking to preserve their exemptions.

The state’s tax code must made fairer, and next year’s budget crisis will be so severe that South Carolinians at all income levels will feel it. At this point, it is difficult to imagine a path forward for this set of TRAC recommendations to solve either problem. The commission will meet once more in September to give the plan final approval before sending it to lawmakers, and thereafter will study other portions of the state tax code (such as services and the gas tax), so perhaps some hope for a good solution still remains.