This pot is not something you might normally think about, but it has significance. It’s the income tax deduction for interest on home mortgages.

Right now when people do their taxes, homeowners are able to deduct their mortgage interest payments from their overall income, which results in an adjusted gross income.

Federal income taxes are based on that adjusted income. And because states like South Carolina tie their tax system to the adjusted federal income, homeowners don’t pay state income taxes on income used to pay mortgage interest either.

But what if they did? How much untaxed mortgage interest is out there if the state decided to decouple the mortgage interest deduction from the federal return?

A lot. According to the IRS, the state isn’t taxing mortgage interest deductions worth just under $4.6 billion. (See: http://www.irs.gov/uac/SOI-Tax-Stats---Historic-Table-2)

The disparity has left some wondering whether it’s fair for homeowners to get this hidden state tax break, compared to renters who don’t get any tax break for where they live. As one critic contends, doesn’t this mortgage break just mean that every homeowner in South Carolina with a mortgage really is living in “subsidized housing?”

Odious but necessary

One bill that got a lot attention this past legislative session, though not enough votes to pass, was the Angel Investment Act, which provided a substantial, if not complete, personal income tax credit for South Carolinians investing in state companies.

The criticism, and what may have ultimately doomed the bill for this year, was that only the very wealthy were allowed to invest and receive the income tax credits and further backing from state government.

What about the middle class family which had saved dimes, cut coupons, and amassed some money and entrepreneurial spirit, demanded the critics? Why can’t they take part? For them, it was a matter of fairness.

So, how is it fair for homeowners to receive the largest tax deduction in the state, whilst the Average Joe frying fish at the local Captain D’s pays rent with no tax benefit?

It’s not, according to Sue Berkowitz, an attorney and director for the S.C. Appleseed Legal Justice Center, which advocates on the behalf of the working classes.

“We all live in subsidized housing,” said Berkowitz, who said that many homeowners factor the tax savings into their home purchases to make it more affordable than just renting.

Berkowitz, who admitted to also taking a mortgage interest deduction herself, said that the current situation is an unfair as someone paying the same amount of sales tax on a $5,000 car in South Carolina as someone purchasing an $80,000 car, because auto sales taxes are capped in this state.

The response

State Sen. Thomas Alexander (R-Walhalla), a member of his chamber’s Finance Committee, said the mortgage interest deduction was put in place by the federal government to encourage homeownership and help those trying to attain “that piece of the American dream.”

Homeownership has long been touted as a means to a more stable society, and has been largely accepted as a boon, according to Alexander.

Alexander said that government, whether on the state or federal levels, shouldn’t benefit on interest payments made on homes.

House Rep. Brian White (R-Anderson), the chair of the Ways and Means Committee, said that Berkowitz missed the point about sales tax on cars, in that the property taxes leveled annually on that $80,000 vehicle goes to support local interests.

An answer

State Sen. Larry Grooms (R-Bonneau), a gubernatorial candidate two years ago, said that he’s got the answer: do away with state income tax altogether.

Grooms, sponsor of the S.C. Fair Tax bill, said that by doing away with income taxes and shifting to “consumption” taxes, like sales and excise taxes, it does away with the fairness issue completely, when it comes to discussing the benefit some taxpayers receive from deducting mortgage interest.

“The solution is to increase wealth, not tax the elements that create wealth,” said Grooms, who added he would refile the bill before January.

Grooms agreed with Alexander that any attempt to do away with the mortgage interest deduction has a better chance if it’s tackled first on the federal level.

Crystal ball: According to Burnie Maybank, the state’s former head of the Department of Revenue and primary author of the Taxation Realignment Commission (TRAC) report, home ownership deductions are -- and will probably remain -- “sacred.” If he’s right, and he usually is, then South Carolina still has more than a good day’s work coming up with a tax code with a widened base and lower rates that is fair for all paying in, as well as fair for those receiving services and the benefits of government. Still, the first item on legislators’ agendas, especially during an election year, is to just talk about the problem. And tax reform has to come to mean more in this state than tax cuts.

Bill Davis is editor of Statehouse Report.  He can be reached at:  bill@statehousereport.com.

• Unemployment. A Senate LCI subcommittee will meet Tuesday at 10 a.m. in 308 Gressette to discuss a state law that bars those fired for cause from receiving state unemployment benefits. Agenda.
  
  
• Environment. A task force comprised of senators and representatives and other officials will convene Wednesday in 105 Gressette at 1:30 p.m. to begin implementation of a new state law that removes private citizens’ the right to sue over environmental spills and accidents. Agenda.

When Gov. Nikki Haley returns from a trade mission to Japan, she  has the opportunity to remake state utility Santee Cooper. A series of investigative stories by The Post and Courier has uncovered what may be major problems at the state utility. According to sources quoted in the series, Santee Cooper may have been providing cheaper power to one of its major industrial customers at a cheaper rate that what has been offered to other customers.

Around Columbia, some are saying Haley will have the opportunity to shake things up considering there are more than a handful of board member positions unfilled, and members who have stayed on past their original appointment. The utility is also facing allegations of nepotism, racism and ongoing coal pollution.

Of the approximately 66,000 miles of public highways in South Carolina, almost two thirds -- some 41,429 miles of roads -- are owned and maintained by the state, according to the state Department of Transportation (SCDOT). By comparison, the national average for state road maintenance is 19 percent, versus 63 percent in S.C.    

South Carolina has “the fourth largest state-maintained system in the nation,” said the SCDOT’s Michael Covington. “This takes a load off of local government, but it places a heavy responsibility on state government.”

Bridges along these highways are in a mess too. The state road system has 8,383 bridges of which 1,675 are substandard because of structural or design problems, Covington said. Some 424 bridges had load restrictions, meaning that heavy vehicles can’t use them, and seven bridges are flat-out closed.

Why is all of this happening? Because South Carolina’s network of roads is too big for the money it has to maintain them. And they appear to be getting increasingly worse. A new study says South Carolina’s highways are the most dangerous in the nation, based on an amalgamation of several safety reports that ranked states on drivers who don’t wear seatbelts, traffic deaths and federal funding. 

While the study by CarInsuranceComparison.com might have some flaws in how it gives equal weights to six different rankings done by others, it is indicative of our road problems. The study noted South Carolina was “the only state in our top ten to rank in the bottom half of every single category. It wasn’t even close! South Carolina finished a full 37 points ahead of second-place Florida in total score.”

If we accept our roads have problems, which we can feel when driving, then it’s common sense to turn to thoughts about funding. The root of the problem is the amount South Carolinians pay in gas taxes -- 16.75 cents per gallon, 16 cents of which goes to the DOT for roads. Our neighbors pay a lot more. Georgians pay about 28.6 cents in state gas taxes per gallon; in North Carolina, the rate is 37.8 cents per gallon.

“The average state depends on fuel tax revenues for only 35 percent of state-source highway funding,” Covington said, adding that South Carolina’s highway fund depends 92 percent on funding from the state. 

Many states -- not South Carolina -- index their gas tax to inflation. If South Carolina had done this in 1987 when GOP Gov. Carroll Campbell signed the last tax increase into law, the state would be collecting a little more than 32 cents per gallon today, based on average inflation of 2.9 percent. In terms of real dollars, that means the SCDOT this year would have had about $540 million to spend on maintaining and building roads. That amount of money would resurface an extra 2,200 miles of existing roads!

It’s time for South Carolina legislators to modernize and update the amount of money we’re paying for roads. That’s why the S.C. Chamber of Commerce lists road infrastructure improvements as one of the six main planks of its 2012 Competitiveness Agenda. The Chamber is backing an effort to “support an infrastructure plan that allocates General Fund revenues and surpluses to be dedicated to the Highway Fund, and examine other revenue sources for maintaining existing infrastructure.”

In other words, good roads are integral for a state that wants to remain competitive economically. Without world-class infrastructure, competitiveness will go down. And that means jobs.

Rick Todd, head of the S.C. Trucking Association, said raising the gas tax by 10 cents per gallon would help the state’s road network tremendously with about $350 million more per year for maintenance.

“We don’t need to take a look at it,” he said. We just need to flat out do it. 

“When you look at our sister states, which are at the pump about twice what our rate is on the fuel tax, it really doesn’t make sense. Our fuel tax is ridiculously low.”

So, legislators: The ball is in your court. Pick it up and bounce it around. Don’t keep ignoring it.

Andy Brack is publisher of Statehouse Report.  You can reach Brack at: brack@statehousereport.com.

• 8/31:  Don't buy anti-South book
  
• 8/24:  Political infighting will look silly in future
  
• 8/17: Brain dead yet from political negativity?
  
• MORE BRACK:  See our archives

By former U.S. Sen. Fritz Hollings
Special to Statehouse Report

After World War II, the South was broke with no industry. We Southern governors learned quickly that government was responsible for creating jobs. We didn’t cut taxes or get federal aid for policemen, firemen and teachers to create jobs. We increased taxes, got a AAA credit rating, beefed up education and skills, and industry came running. Today, we have the skills to make Boeing’s Dreamliner and “the ultimate driving machine” for BMW. But the government in Washington has been giving away our textile industry to spread democracy and South Carolina has 9.6 percent unemployment. 

We have heard all the Washington lectures on innovation, skills, productivity, education, etc. In the 1970s and ‘80s, the textile industry was investing $2 billion a year to increase productivity. But the most productive textile industry in the world was offshored to the least productive for foreign policy. I started the Advanced Technology Program in 1989 to develop the innovation backed up in the Bureau of Standards in the Department of Commerce. It worked so well that I got the Competitiveness of the Year Award from industry. But the ATP has been abolished. It’s the President and Congress that are not doing their job.

The business leadership would have us believe that globalization is a new phenomenon. The United States was born in globalization or a trade war – the Boston Tea Party. In the early days, we produced agriculture cheaper than any other country. But the founding fathers rejected David Ricardo’s free trade Doctrine of Comparative Advantage and enacted the Tariff Act of 1787 – two years before the Constitution. This industrial policy of protectionism worked so well that Edmund Morris writes in Theodore Rex that within a hundred years, the Colony “was $25 billion richer” than the Mother Country. As Corporate America builds the economy of China and depletes the economy of the United States, we forget our history.

[On your column about the anti-South book]: Gets old don't it?!  Andy, I have breakfast with some retired folks from up North once a week. Talk about attitude. And some of them think we are not aware of their bigoted and snide comments.

-- Steve Johnson, Arnoldsville, Ga.

Story on media coverage was on target

To Statehouse Report:

Your article about the change in news media coverage was right on. But the bigger issue is the slant that the reporters of today put on the news. There is no longer any “NON-BIASED” reporters. An opinion is one thing, but, slanting the news to your brand of politics is just wrong.

-- Kathy Luttrell, Cowpens, S.C.

Never heard anyone who wants to move to Oregon

To Statehouse Report:

I have written you [columnist Andy Brack] several times "griping" about some of your comments.

Well when you write something that I agree with I feel I should write and let you know. It is your defense of the South against a book and an author. We have a "seniors golf group" and at least 50 percent do not speak Southern. We play three days a week and have a great time. The only time “Yankee” or “rebel” is mentioned is in the club house in a joking manner.

I am not sure but I have never heard anyone say, "I think I'll move to Oregon." Ain't gonna say that about the South.

-- Jerry Smith, Florence, S.C.

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Transparency. The S.C. Press Association is asking public officials to sign a “transparency pledge” to ensure ready access to documents and … stuff. More.