The Senate voted 35-2 on a resolution to keep government running at current levels should the fiscal year start Sunday without a budget. That scenario seems increasingly likely.
The vote came hours after disgusted House and Senate budget negotiators adjourned, even further apart than they were last week. Some senators worried that the resolution would take the pressure off budget negotiators.
The impasse arises over the amount and method of giving a tax break to small business owners.
The stalemate over the chambers’ $6.7 billion spending plans began over a $45 million tax break difference. That was whittled down to $40 million Friday. Now it’s over $22.5 million.
When the conference committee adjourned late Friday, the House still insisted on giving small business owners a $60 million tax break by immediately reducing their income tax rate from 5 percent to 3 percent. The Senate wanted to phase in the cut over three years.
The breaks would apply to businesses organized as limited liability companies, S corporations and sole proprietorships, which report their business profits as personal income.
House Ways and Means Chairman Brian White offered to split the difference, giving $40 million in relief this coming year while phasing in the rest in 2013-14. Without discussion, Senate Finance Chairman Hugh Leatherman, R-Florence, immediately counteroffered with a deal he says focuses on the truly small businesses – such as radiator repair shops – shifting the debate to who benefits.
Rather than sign a compromise, budget negotiators left saying they were “back at square one.” The committee meets again Tuesday.
Even if budget negotiators reach agreement Tuesday, the fiscal year could start without a budget. Senate rules require that a conference report be public for 24 hours before a vote, though a super majority vote in the Senate could override that. Under state law, the governor has five days to issue vetoes, excluding Sunday.
“That’s a scenario no governor should be presented with,” said her spokesman, Rob Godfrey. “The legislature has had six months to pass a budget – this is not Washington, D.C. It is not acceptable in South Carolina to ignore their responsibilities and not pass a budget.”
Senate Minority Leader John Land, representing Senate Democrats on the committee, said the targeted relief idea stands a better chance of approval in the Senate. The House proposal is skewed to the wealthy, he said.
According to state economic advisors, 44 percent of the flat tax cut under the House’s initial plan would benefit those reporting incomes of $500,000 and above. Under the Senate’s counteroffer, 46 percent of the relief goes toward business owners reporting $250,000 or less.
“We have South Carolinians who are truly struggling. This is the fairest thing we can do,” Leatherman said.
His offer would reduce the rate from 5 percent to 3 percent immediately for business income up to $16,200. Additional profit would be paid on a 4 percent tax rate. That saves roughly 58,000 small businesses in South Carolina a combined $37.5 million, according to documentation handed out at the meeting.
The House’s leading Democrat, Minority Leader Harry Ott, offered a possible compromise. He suggested the GOP majorities accept the Senate’s proposal as a first of a two-year phase-in, giving the additional $22.5 million in relief in 2013-14. But Leatherman didn’t want to commit to giving the additional relief later to the upper brackets.
“I’m certainly not opposed to targeting tax relief to smaller businesses …” said Ott, D-St. Matthews, a farmer. “But let’s not hold up the state of South Carolina from doing all the positive things we finally have an opportunity to do because y’all can’t decide how to spend that last $20 million.”
Rep. Murrell Smith, R-Sumter, accused Leatherman of sounding like a Washington Democrat. Republicans shouldn’t begrudge hard-working business owners for making a good living, he said.
“We’re going to have a campaign based on that in November, coming from the current president, and that’s the argument I hear today, and it’s disheartening,” Smith said.
Leatherman responded that the class arguments in Washington are over tax increases.