Friday Follies: The Diaper Tax Credit

A CREDIT FOR ONE COMPANY WOULD HAVE BEEN MORE HONEST

South Carolina has an exemption problem. The number of exemptions to the sales tax enshrined in law is staggering. As a result, the state routinely exempts more money in sales tax than it takes in. This is a direct result of the influence of concerned interest groups lobbying legislators for carve-outs in the tax code. Usually this is something to deplore. Just occasionally, though, there’s humor in it.

H.3841, recently filed to the Ways and Means Committee, is a peculiar piece of legislation. The bill would exempt disposable diapers that are bought by a 501(c)(3) from sales tax. Looking deeper, the bill would only allow this exemption if the 501(c)(3) has as its sole purpose the provision of diapers for low income individuals and families. A cursory Google search shows that there is a single 501(c)(3) in South Carolina that concerns itself with providing diapers to low income families and individuals: The SC Diaper Bank.

In effect, H. 3481 could have been written to say “The SC Diaper Bank will henceforth not have to pay sales tax for any disposable diapers that are purchased for the purpose of giving disposable diapers to low income individuals and families” That would have been a more honest way to write the bill, anyway.

This bill is illustrative of a broader problem in South Carolina. Businesses see the tax code as a way to gain a competitive advantage, and as such funnel money and time into seeking tax handouts instead of improving their own products. And legislators are happy to oblige them in their pursuit of perverse incentives by providing favored businesses with tax breaks and exemptions.

If South Carolina is going to impose a sales tax, perhaps the tax should be levied on all sales, at a low rate, with no exemptions. To do otherwise invites bad behavior on the part of businesses, non-profits, and legislators, and leads to people seeking favors from government rather than focusing on improving their own products or businesses.

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