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State needs to deal with finances with long-term view
By Andy Brack
SC Statehouse Report



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AUG. 10, 2003 - - From farming to investing, diversification is a big deal.

Farmers grow more than one crop a year on different timetables to limit their risks. If they only grew one crop, the entire year could go up in smoke if there were a natural disaster or drought. Similarly, investors often seek a broad portfolio of stocks and bonds to make their holdings less volatile to the whims of the marketplace.

But states often don't pay attention to the long-term benefits of diversification when considering revenue structures, a Tennessee economist told members of the state's Joint Committee on Taxation last week. In recent years, South Carolina's stream of revenue has been more volatile not only due to tough economic times, but because the structures in place have been modified and weakened.

"You clearly don't want to rely on a single item" to be your tax base, University of Tennessee Prof. Bill Fox said in an interview this week "You want broad tax bases with low tax rates" to diversify the state's tax structure.

Traditionally, South Carolina has been recognized as a state with a good balance of revenues - - about a third from property taxes, a third from sales taxes and a third from income taxes. But in the last few years, some of those taxes - - particularly sales taxes - - have become less stable. Among the reasons why are:

  • People are spending more money on services, such as health care, than they were 20 years ago. Because most services aren't taxable, the state is generating less sales tax revenue per capita than it has over time.

  • Some sales tax sources - - such as cigarettes - - haven't been increased to keep up with inflation. Remember that South Carolina's tax is 7 cents per pack - - a far cry from the 60 cent per pack average across the U.S. As cigarettes in general have become more expensive over time, they're generating less revenue per pack, which means they're not as reliable of a stream of revenue if they can't keep up with growth.

  • Spending habits are changing. People now order much more from online sources and catalogs, which generally allows people to avoid some taxes - - and keep the state from getting revenues.

  • Lawmakers continue to add special exemptions and gimmicks such as sales tax holidays to the sales tax base, which means fewer things are taxed and more revenue is lost to special interests. Currently, South Carolina provides more than 60 sales tax exemptions. If the state collected that revenue rather than give it away, it would have $1 billion more in revenue every year. (Look at it another way - - if lawmakers had the courage to get rid of exemptions, there would be no state budget crisis, layoffs, service cutbacks and more.)

"Your revenues [in South Carolina] are growing just about 80 percent as fast as the economy," Fox said. Additionally, about 60 percent of the state's total tax base is generated through taxing structures, such as sales taxes and corporate income taxes, that are shrinking in relation to the economy.

In other words, the way the current tax structure has been legislated, the state isn't going to be able to generate enough revenue in the long run to keep up with legislated needs. That means a couple of things are likely unless lawmakers revamp the way the state structures taxes: more cuts in services or knee-jerk reactions to increase tax rates, which in today's climate is political suicide.

To combat the erosion of the tax base, Fox says lawmakers might want to consider ways to simplify sales tax codes (which would bring great joy to small businesses), broaden the sales tax to apply to more services, decrease exemptions and refrain from adding more exemptions.

Fox suggests that lawmakers seriously mull tax structure changes to ensure a diverse tax base that will grow at the rate the economy grows. Regardless of the debate over the size of government, that's a better way to decrease volatility and provide more responsible long-term stewardship for taxpayers.

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Thought you might want to see this week's cartoon effort by our Bill McLemore:


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