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The continuing bonus that is hurting the state
By Andy Brack
SC Statehouse Report

FEB. 16, 2003 - - There's an easy way to solve the big budget crisis the state's having: repeal multi-million dollar property tax and other relief measures approved when times were flush.

Nice idea. But it will never happen. Why? Restoring a tax giveaway to seniors, homeowners, businesses and manufacturers would be considered a tax hike - - even though the very same taxes were generally acceptable a few years back.

In the mid 1990s, the state collected about $5 billion in total revenue a year. Lots of programs got funding and the politically popular idea of refunding property tax money rolled like a locomotive through the Statehouse.

In part because the state had more tax revenues than it knew what to do with, legislators decided to establish a trust fund for tax relief. It required them to make annual refunds for homestead exemptions, residential property taxes, manufacturers' depreciations and taxes on merchants' inventories. All totaled, the state committed in 1996 to refund $305.4 million to taxpayers.

But it wasn't a one-year commitment. It was a continuing commitment - - an annual spending refund that rose in price ever year. In the proposed budget, for example, the state projects it will spend $490.8 million on tax rebates passed in the mid-1990s.

Essentially what happened, therefore, was the state created a giant new commitment when times were good that had to be paid every year.

What lawmakers basically didn't take into account was that the refund would have to also be paid in bad times - - and that it would be hard politically to cut. And that meant if there had to be any cuts, they would have to come from places they could cut - - government programs, employees and services.

The mistake state lawmakers made, economists say, is they annualized the refunds.

Think about it in terms of the Christmas bonus. It is not guaranteed every year. In a down year, you may not get a bonus - - even though you hope to. In an up year, you expect you'll get one.

What state lawmakers did was give the Christmas bonus to taxpayers every year, regardless of how the state's revenues were doing. That commitment has left the state, in part, in the hole it's in.

Analysts say lawmakers should have treated the surpluses from the roaring 1990s as one-time extras. Instead of hog-tying future spending with mandated relief, they should have given an annual bonus - - a one-time expenditure - - every year there was a little extra.

Here's how a pair of Clemson economists summarized the situation in August 2001:

"The fact that most tax relief given by the State of South Carolina has not been contingent upon availability of surplus revenue has indeed contributed to the current budget situation."

A cynic might say tax refunds started in the mid-1990s were part of a two-prong strategy to reduce the size of government dramatically to accomplish political goals:

  • Part One: Give tax breaks when times are flush.

  • Part Two: When times aren't as good, make government smaller by cutting programs, services and people because the budget has to be balanced - - and there's no way anybody is going to settle for a tax hike.

In general, this strategy is transforming government from a subsidized method of delivering programs and services into a system that will require individuals to fund services at the delivery level when they interact with them

So when you're looking at your local tax bill this year and see a refund for property taxes for schools that you paid a few years ago, you're generally looking at the amount it would cost to pay your share of keeping state government the same size.

You might want to keep that refund in mind in the near future when you try to get a state government service and find your cost has increased.


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