S.C. tax reform proposals eliminate most sales tax exemptions

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COLUMBIA, S.C. — House Republicans are introducing a package of bills that would eliminate most sales tax exemptions, streamline individual income taxes, and cut various business taxes in South Carolina.

The GOP caucus is touting the half-dozen or so measures as wholesale tax reform — an idea advocated for years without serious movement.

But legislators may feel compelled to act by what the chairman of the caucus’ 18-member tax study committee called a perfect storm for an overhaul: a lawsuit on sales tax exemptions before the state Supreme Court, recommendations from a yearlong tax study that were largely ignored, and an economic crisis that put a spotlight on the state’s out-of-date, overly complex tax code.

It also helps that it’s an election year, said the panel’s leader, Rep. Tommy Stringer.

“People are tired of inactivity by elected officials,” said the Landrum Republican, who is in his second term.

Republicans don’t want to reveal too many details until the bills are introduced, possibly this week. But Stringer said the plan would:

• Eliminate two-thirds of exemptions on state sales taxes worth several hundred million dollars, while reducing the state sales tax rate by half a percentage point, to 5.5 percent.

• Reduce the property tax rate on manufacturing from 10.5 percent to 6 percent in phases. Those taxes go to local governments.

• Lower taxes on small business owners, who pay profits as personal income taxes.

• Eliminate corporate income taxes over time.

• Streamline personal income taxes by collapsing six tax brackets into three.

• Require sales tax exemptions to be re-evaluated every five years.

A phase-in of the plan is designed to buffer the impact on the state’s and counties’ budgets. The hope is that the business breaks will create jobs that generate other tax revenue, Stringer said.

“We want to makes taxes flatter and fairer, which is better for the economy and individual taxpayers,” said House Speaker Bobby Harrell, R-Charleston.

Other states have tried without success.

Joe Henchman of the Washington-based Tax Foundation said tax reform proposals generally die as special interest groups make their case for why their tax exemption, credit or deduction should remain intact. He pointed to Georgia for the latest example of a tax overhaul plan that went down in flames. Republicans there pulled their bill last May after economists couldn’t substantiate whose taxes would rise and whose would fall.

Then there’s Maryland, where a broad-based plan for sales taxes in 2007 got whittled down to a new tax on computer services, which was later repealed, he said.

“Nobody’s hit on the formula on how to make this work yet,” said Henchman, vice president of state projects for the nonpartisan nonprofit. The last time a state eliminated a major tax was in 1980, he added, when Alaska removed individual income taxes.

South Carolina House Republicans are hoping to improve their chances by breaking up their proposal.

“We’ve tried to do tax reform on a very large-scale basis, and the effort collapses under its own weight because multiple interests ban together to pull the large bill,” Harrell said. “We’re hoping by doing it in a series of small bills, we can avoid that.”

The package is the result of more than a dozen meetings dating back to last summer. The first three were public, as the panel took testimony from economists and accountants. Developing the plan behind closed doors, Stringer said, allowed the chamber’s GOP majority to freely discuss their ideas and opinions.

Democrats are skeptical of a tax plan crafted solely by the GOP. House Minority Leader Harry Ott said he fears the package ultimately would raise sales taxes on working class people while benefiting “those who already have plenty.”

“Anytime you take an exemption away from somebody, you’re raising their taxes,” said Ott, D-St. Matthews. “We’re coming out of a recession and there’s still a long way to go. I’m personally not in favor of raising anybody’s taxes.”

He also said it’s folly to call anything wholesale tax reform if the 2006 law known by its number, Act 388, isn’t on the table. The law cut property taxes on owner-occupied homes, by removing school operating costs from their bills, in exchange for a penny-on-the-dollar increase in the state sales tax, plus a reduction — and later elimination — of sales taxes on groceries. The law also capped how much property values could rise for purposes of reassessment, until the property’s sold, and limited local governments’ ability to raise property taxes.

“Act 388 was supposed to be their save-all. It was going to fix all the ills in our tax code, when in fact all it’s done is create headaches for everybody,” Ott said.

The consequences have drawn complaints from not only school and local government officials, but real estate agents and developers, as well as businesses and owners of second homes and rental property who complain the tax burden shifted to them. And because sales dropped amid the Great Recession, the additional penny has not covered the property tax swap as designed. By law, that difference must come out of the state’s general fund.

Stringer said the law was designed before the fiscal crisis caught lawmakers off-guard — “2008 made a lot of decisions bad,” he said.

The tax package will address some of the problems of that law, Stringer said.

But Harrell made clear repealing the law is not an option. That would raise homeowners’ property taxes, and there’s no support for that among Republicans, he said.

Harrell has vocally opposed the lawsuit before the Supreme Court on sales tax exemptions, saying what should and shouldn’t be taxed is an issue for the Legislature, not the courts. While the caucus’ efforts pre-date the lawsuit filed last year, he said, he agreed it could serve as a catalyst for lawmakers to act.

Those long arguing for tax reform include advocates of schools and the poor who, during rallied amid the recession, pointed to tax exemptions totaling more than $2.7 billion that they argued could be used to fund crucial services.

But most big-ticket items exempt necessities — such as medicine, electricity, water service, food and gas — that many don’t even consider sales tax exemptions, and removing them would hurt the typical taxpayer, Stringer said. So the caucus plan leaves those intact, while removing, for example, the exemption on guns and portable toilets.

As for the much-derided $300 sales tax cap on vehicles, boats and airplanes, Stringer said, the GOP largely adopted the recommendations of the Tax Realignment Commission, which called the cap one of the most regressive parts of the state’s entire tax code. The commission’s recommendations, issued in December 2010, included phasing out the cap, raising it to $600 in 2011, $1,000 in 2012 and $1,200 in 2013 before eliminating it altogether.

The commission’s report was largely shelved before it was ever submitted, as the idea of asking consumers to pay sales taxes again on groceries and start paying taxes on items such prescription drugs and electricity drew a backlash.

But Stringer said the report was useful to his committee.

“There’s nothing new under the sun when it comes to this stuff,” he said. “We don’t claim credit for originality.”


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