Biz License Reform Bill Not Much of a Reform

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BUSINESS LICENSE TAXES ARE CONFUSING AND PUNITIVE. A REFORM BILL IN THE LEGISLATURE WOULD DO NOTHING TO CHANGE THAT.

By any reckoning, one of the most widely hated taxes is the business licensing tax – and that’s true in virtually any state or municipality where such a tax is levied. The reason for this dislike is some combination of factors:

(1) Business licensing taxes in effect punish people for productive behavior;

(2) paying them is usually time-consuming and financially costly, thanks to the complexity of the process – certainly that is true in South Carolina; and

(3) business license taxes are often arbitrary and unfair: For instance, one firm will have to pay for several business licenses because it operates in more than one subdivision, whereas a competitor will only have to pay for one.

A bill currently in the legislature seeks to address the second and third of these points. H.3650 – sponsored by Rep. Bill Sandifer, chairman of the House Labor, Commerce, and Industry Committee – purports to streamline and simplify business licensing in South Carolina. The legislation would create a uniform business license tax, which would expire on the 30th of April of each year. This proposed licensing tax would be based on the adjusted gross income of a given business.  By itself, that would create a much fairer environment for South Carolina businesses to compete.

Establishing a simpler and fairer business tax regime shouldn’t be difficult. Lawmakers could base the calculation and payment of business license fees on adjusted gross income. A business owner would simply calculate his or her adjusted gross income (AGI) and multiply it by the assessment factor. An assessment factor of 2.5 percent of AGI and an AGI of $100,000 would mean a license fee of $2,500.

Unfortunately, however, there is nothing simple about H.3650.

H.3650 would create, within the office of the Secretary of State, a Business License Class Schedule Board. This board would be composed of nine members, six of whom would be legislators or their designees. Two of the other positions would be filled by representatives of the South Carolina Association of Counties and the Municipal Association of South Carolina, two special interest groups. The board would be tasked with determining the License Class Schedule, or assessment ratio using data from the IRS and the classification codes from the North American Industry Classification System in odd years. There would be classifications, or assessment ratios, ranked from lowest to highest.

The bill gets even more complicated.

According to an amendment adopted by the Labor, Commerce, and Industry Committee, H.3650 excludes 25 percent of the revenue that a business collects outside of the municipality or county where it maintains its primary license from the Adjusted Gross Income calculations. Already, then, certain kinds of businesses – namely those whose activity is located within one municipality – have an arbitrary advantage over those that aren’t. A plumber, say, who does all of his business in Richland County would be on the hook for a higher AGI than one who’s licensed in another county but who does some business in Richland County. The first plumber would be liable for 100 percent of income in Richland County, while the second one would only be liable for 75 percent of income in Richland County. The provision worsens the bill in two ways: It makes the licensing system pointlessly complex, and it affords an arbitrary advantage to some firms over others.

H.3650 would also allow for counties and municipalities to approve additional classifications or assessment ratios based on “particularized considerations as needed for economic stimulus” after a vote of the county or municipal council, and would allow them to review these revised considerations in executive session – that is, away from the public. These sessions would be exempt from Freedom of Information Act requests, though any new classifications would have to be approved in public. In essence, counties and cities would be able to consider – in secret – different tax ratios and higher taxes.

Little imagination is needed to see how this system could very easily be abused.

If lawmakers want to address the complexity and arbitrariness of the business license tax – numbers (2) and (3) mentioned in the first paragraph – there’s a way to do it, but H.3650 isn’t it. We suggest addressing (1) instead: Taxing people for engaging in productive, wealth-creating behavior is a regressive and counterproductive practice; getting rid of the tax altogether would foster economic growth and solve the problems of complexity and arbitrariness.

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