Tax Favors

 

In a state where politicians love to tout how we have some of the lowest taxes in the nation, there lies a dirty little secret: South Carolina is crony-friendly, not business-friendly. In fact, our current system is set up perfectly for powerful lawmakers and businesses with talented lobbyists. With an unreasonably high state sales tax of 6 percent, a 7 percent personal income tax for those making at least $14,000, and a 5 percent corporate income tax combined with the numerous licenses businesses must obtain, South Carolina politicians see only one option: Give certain businesses and industries favors through taxpayer-funded tax credits and deductions, grants, and sales tax exemptions, while putting the other businesses and industries at a substantial disadvantage.

As we’ve noted before, South Carolina exempts more in sales tax than it collects. Indeed, if these exemptions were eliminated, our personal income tax could be eliminated altogether. Furthermore, lawmakers like to play the role of your “personal investor” by handing out your money – at least half a billion dollars in the case of Boeing – to, as they claim, “lure businesses to the state.”

To be clear, the motive to eliminate these exemptions and tax credits is NOT to increase revenue. To be truly competitive, South Carolina should have the lowest taxes in the nation, across the board. Thus, eliminating these tax favors should be done in tandem with lowering taxes, so that all businesses can be on the same playing field in completion with other businesses both in and out of state.

Below are just some proposed bills from this session relating to tax favors. Keep in mind that while some of these, individually, may look like a good idea – who could blame anyone for wanting to pay lower taxes? – the overall policy of adding an exemption here, a tax credit there, has created a culture of cronyism and high taxes on the majority.

Proposed in 2014 Legislative Session

Subsidizing Coastal Residents (Filed 3/21/2013, Amended 4/9/2014 and 4/15/2014)

S.569 as covered in the 2013 edition of Best and Worst is a bill designed to subsidize part of the property insurance costs of coastal residents. The bill has however, been modified in one meaningful way since the close of the 2013 legislative year. Property insurers whose insurance portfolios is made up of more than 80 percent coastal properties will no longer be eligible to receive a new premium tax credit. Other provisions of the bill remain such as requiring coastal residents to be notified of ways they can legally lower their insurance premiums, and redirecting one additional percent of the insurance premium tax to the hurricane damage mitigation program (a program which provides grants to coastal residents who make certain weather protection upgrades to their homes). The removal of the tax credit is a positive step but this bill still redirects general tax revenue to a program that benefits a favored constituency.

More Ways to Qualify for Job Tax Credits  (Filed 4/10/2014)

H.5105 would allow service-related facilities that have a net increase of at least one thousand new full-time jobs at a single corporate campus, and the jobs have an average cash compensation level of more than one and one-half times the lower of state per capita income or per capital income in the county where the jobs are located to qualify for the job tax credit.

Historic Structure Rehabilitation Tax Credits (Filed 4/03/2014)

S.1200 would provide new larger state tax credits for taxpayers who make qualified rehabilitation expenditures in certified historic structures in South Carolina.

“Economic Development Tax Incentive Evaluation Act” (Filed 3/06/14)

H.4875 would require the Dept. of Revenue to compete a study every 4 years to assess the impact, including both the economic benefits and the financial cost, of economic development tax incentives. Included in the reports would be the baseline assessment of the incentive, statutory goals of the incentive, number of companies it is granted to, a cost-benefit comparison of the revenue foregone and the tax revenue generated by the taxpayer receiving the credit, estimated number of jobs created as a direct result, and more.

This bill seems like a well-intended attempt to critically evaluate the state’s current crony-taxation policies. Unfortunately, the study is done by a state agency, and state agencies have a habit of coming out with “studies” that show particular programs in a positive light. And even when studies do actually show substantial flaws in the status-quo, lawmakers tend to ignore them (see the lack of action after a Dept. of Commerce study showed how uncompetitive and outdated our income tax system is, and after the governor’s ethics study committee found several legitimate changes that need to be made—most of which have been ignored by lawmakers).

While it would be good to know the actual impact of these tax credits, the real changes need to be on the front-end of these incentives. These incentive deals need to be open to the public, since it is the public’s money that’s being used to “incentivize” companies. Even when they are just targeted tax cuts, other companies not getting these cuts are put at a competitive disadvantage, and equality of opportunity is lost.

Tax Credits for Purchasing Hybrid Vehicles

H. 4619 (Filed 2/6/14) would provide an income tax credit beginning in 2015 to anyone that purchases or leases a hybrid electric, battery electric, or alternative fuel motor vehicle in South Carolina. This is another case of legislators attempting to influence how and where citizens spend their money. The bill’s sponsor, Rep. Dwight Loftis, has a history of sponsoring legislation laced with tax breaks for ‘green energy’.

Subsidizing Wind Energy Research (Filed 2/06/14)

S.1011 instructs the South Carolina Public Service Commission to adopt regulations that would, among other things, provide incentives (amount unspecified) and cost recovery for energy suppliers and distributors who invest in offshore wind research and development activities. We have pointed out before that the state already subsidizes non-renewable energy sources such as nuclear energy through advanced cost recovery, and to a lesser degree, subsidizes renewable energy through tax favors and grants to research facilities. Unsurprisingly, neither of these policies has generated very favorable results for taxpayers or South Carolina’s economy. Legislators should be dismantling, not adding, to our flawed system of energy subsidies. It’s past time to let the market demonstrate what energy forms are most profitable to energy and most desired by consumers.

New Tax Credits to Mirror Federal Program (Filed 1/14/14)

S.892, the “South Carolina New Market Jobs Act”, would provide tax credits to qualified “community development” entities that make equity investments in qualified low-income community businesses. Modeled after then federal New Markets Tax Credit program, this bill would mandate the Department of Revenue to certify $250 million in qualified equity investments. Advertised as a “jobs” bill, this is just another example of using legislation to transfer the tax burden from certain industries that the state favors onto other businesses that don’t qualify for state-approved tax breaks. In other words, since the state budget usually grows regardless of the amount of tax revenue is collected, the state will make up for the loss in revenue from these tax credits by either borrowing, keeping the base tax rates for other businesses and individuals high, or even increasing taxes statewide.

Update: In the first week of session, this bill was transferred from the Senate Committee on Banking and Insurance to the Senate Finance Committee. Since major bills tend to eventually go to this powerful committee, this may be a sign that this bill will get some attention this session—or that this bill may be used as a “vehicle” (as we discuss in Capitol Update) to tack on credits, grants, or bonds to specific companies.

S.881 would allow counties to exempt a large portion of property taxes for solar energy electric systems. Read more on “green” government subsidies here. (Pre-Filed 12/17/13

H.4362 would exempt the sale of electricity that is used exclusively to cure agricultural products from sales tax.

S.820 would provide tax credits to individuals who serve as eligible “caregivers”.

S.951 would exempt owners of manufacturing properties from paying a large portion of property tax on those manufacturing properties.

Proposed in 2013 Legislative Session

Expanding Eligibility for Clean Energy Tax Credits (Filed 2/27/2013)

H.3644 lowers by hundreds of millions of dollars the level of investment in clean energy manufacturing needed for companies to qualify for a 10% income tax credit. Another provision in the legislation extends the tax credit to 2020 (the credit is currently set to expire December 31, 2015). This is a massive tax favor to clean energy manufacturers that should be worth millions of dollars.   

In addition to clean energy tax credits, the bill extends a license tax credit for cost incurred acquiring, constructing, or operating a county or municipality-owned multi-use sports and recreational complex, if the county in which the complex is located has collected at least $5 million in state accommodations tax in one fiscal year.

Finally, the bill increases the value of a withholding tax credit from $500 to $1,000 for manufacturing, processing, or technology intensive facilities that negotiate to with a technical college to retrain employees.

The potential combined value of the tax favors in this bill is staggering. Legislation like H.3644 is a large part of the reason why taxes on the majority remain high, while favored interests foot a much smaller bill.

S.262 would give the Department of Commerce power to allocate income tax credits for investments in favored sectors.

H.3357 and S.163 would add more taxpayer funded incentives to film productions taking place in South Carolina.

S.329 would create a tax credit for solar energy units.

S.12 would make companies that hire “assigned employees” from professional employer organizations eligible for the same job development tax credits as employers that hire employees independent of a third party.

S.387 would increase the size of a job retraining tax credit for companies engaged in manufacturing, technology intensive activities, or processing operations.

H.3301 and H.3302 would exempt from sales tax machinery used in renewable energy and electric or hybrid car production.

H.3241 would give tax credits to financial institutions in exchange for loans they make to organizations that work to create or preserve housing for low income South Carolinians.

H.3125 would give grants to microloan delivery organizations that provide loans to companies that have five or fewer employees.

S. 279 would allow modest state income tax deductions for parents of home-schooled and privately schooled students.

S.46 would allow South Carolina business owners who have met the maximum allowable special federal deduction for depreciable businesses property to further deduct the cost of that depreciable property from their South Carolina taxes up to $1 million dollars.

H.3296would provide a tax credit to an employer for hiring someone who has been collecting unemployment benefits for at least four weeks.

H. 3030would give a tax credit worth up to 30% of cost of purchase and installation of a generator for a business/individual who plans on using the generator to distribute gasoline during an electrical outage.

H.3155 would give farmers new tax exemptions for machinery, replacement parts, and attachments used in breeding and raising livestock.

H. 3182 would give businesses a $10,000 tax credit each year for two years for employing formerly incarcerated individuals.

H.3093 would give a person or a business that rehabilitates an abandoned building a tax credit equal to 25% of the cost of the revitalization of the building of up to $400,000 per building.

H.3522 would eliminate roughly twenty lines of exemptions from our state’s sales tax code, while adding two new exemptions.

H.3114 would extend the state sales tax to include unprepared food items, which are currently exempted.

H.3155would give farmers new tax exemptions when purchasing machinery, replacement parts, and attachments used in breeding and raising livestock.

H.3023 would establish the last weekend of May as “Hurricane Preparedness Weekend”. During this weekend, many “hurricane preparedness items” would be exempt from sales tax such as batteries, hand-held radios, portable generators, and cell phone chargers.

S.402 would cause the tax credit which a person who purchases a “clean energy vehicle” gets to expire when the federal tax credit expires.

H. 3505 gives a 25% income tax credit to an angel investor who invests in a business with less then 25 employees; if they invest in a “South Carolina Launch portfolio business” they get a 50% income tax credit.

H. 3605 would make the tax credits which a person or business gets if they renovate or rehabilitate a textile mill transferable between people and businesses.

H.3604 would exempt a business engaged in manufacturing from a license fee on their gross income made through interstate or international commerce.

S.33 concerns state income tax credits for donations of land for conservation purposes, establishing the credit as 25% of the total value of the contribution.

S. 56,with certain restraints, establishes an income tax credit of 15% of the total amount of a premium paid by an individual in a long-term care insurance contract.

H. 3089 would allow a tax credit of up to $3,000 for volunteer state constables.

H.3107 would give an earned income tax credit starting at 10% and would gradually increase it until in 2016 it would be 20%.

H.3110 would deduct benefits received because of duty in the military from income tax; the deduction would start at 25 percent, and eventually in 2015 reach 75 percent.

H.3253 would give up to a $2,000 income tax credit to cover the closing cost of purchasing a piece of property.

H. 3557 expands the “tax credit for port cargo volume increase” to businesses that import and export through South Carolina’s port, provided it “supports a presence in state” (meaning they will build a distribution center in South Carolina within five years).

S.481 would require a Motor Speedway to host at least one NASCAR race a year in order to get the admission license tax exemption, instead of requiring a speedway to have to have at least 60,000 seats.

S.474 would exempt admissions the State Museum collects from the Admissions License Tax.

S.526 would give a digital media company who is producing a “State Certified Production” an income tax credit equal to 25 % of their base investment.

H.3834 would give an income tax credit worth 25% of the cost of purchasing and installation of a solar energy system.

Creating a New “Clean Energy” Council

S 525 would establish the “Clean Energy Industry Manufacturing Market Development Advisory Council” within the Department of Commerce, ostensibly to encourage the development of clean energy technologies and industries in South Carolina. To aid this goal, the bill also includes provisions to enhance the state’s “Clean Energy Tax Incentive Program.” This program gives a 10% income tax credit to businesses in the renewable energy industry that are either relocating to the state or expanding here.

H. 4018 would give a business who hires a formerly incarcerated individual for a year a $5,000 tax credit, which could only be used on each individual once.

H.4033 would exempt half of each soccer admission from the admissions license tax.