Is State Government Shrinking – or Growing?
TAXPAYERS ARE GETTING POORER. GOVERNMENT ISN’T.
Lately a number of commentators have tried to make the case that South Carolina is already a lean model of low taxes and limited government. These commentators don’t actually approve of these ideals – in fact they favor a much more active and expanded role for government than we do – but they think the ideals obtain in South Carolina.
Unfortunately, these claims are dead wrong. And even more unfortunately, they have a certain face-value persuasiveness about them. That persuasiveness derives from two factors:
- Defining the state budget as only the General Fund (i.e., excluding Federal Funds and Other Funds); and
A recent opinion piece in The State is typical of these claims. The author, The State’s very capable opinion page editor Cindi Scoppe, contends that South Carolina over the last decade has decreased its taxes and steadily reduced the size of its government.
She begins with the argument that population increases over the past decade (overall a 15 percent increase) have resulted in increased tax revenue – more taxpayers means more revenue – while taxes paid per person, she says, have actually been decreasing. Scoppe offers this example: Suppose your salary is cut by 10 percent, but your previously unemployed spouse gets a job. In that case, your income rises. That, she argues, is essentially what has happened at the state level: While the state’s population has increased (meaning more jobs and taxpayers), median household income has fallen from $47,929 in 2001 to $44,587 in 2011¹ (when controlling for inflation by expressing the figures in 2011 dollars).* This is a 7 percent drop in real income. Over the same time period the Department of Revenue in its annual reports, when accounting for inflation, reported a total revenue increase of $493,751,558 – that is, an increase of 6 percent.
To further illustrate her point the author states that South Carolina’s per capita tax collections have fallen 18 percent from 2001 to 2011, using a Tax Foundation study as a source. The Tax Foundation data we found claims that South Carolina state tax collections per capita have fallen by 22 percent over that time period. This argument is further followed up by the citing of another Tax Foundation figure that states South Carolina’s combined state and local tax burden per capita is $2,742 – the second lowest in the nation.
So far, fair enough.
But from here, Scoppe makes the leap in logic that since population has increased and tax collections per capita have decreased, taxes must therefore have been cut to a significant degree over the same time period. In fact, however, income and sales tax rates (the largest drivers of General Fund revenues) have increased outright or increased due to inflation over the last decade.
South Carolina’s top income tax rate of 7 percent – incidentally the 13th highest state rate in the nation – took effect at $12,000 of income in 2002 as reported in the DOR annual reports. If this tax bracket was tied to inflation, the 7 percent rate should have taken effect at $15,314 in 2012. Instead it took effect at $14,000. In other words: Since lawmakers failed to adjust the rate to match inflation, taxpayers are subject to the same tax rate at a lower income level, and so their tax liability has increased. This increase in tax liability, remember, is on top of a 7 percent decrease in real income over roughly the same time period. In addition, the state sales tax rate has increased outright from 5 percent in 2002 to 6 percent today – the 16th highest state sales tax in the nation.
So yes: tax collections may have been going down in recent years, but the reason has nothing to do with taxes decreasing. The burden of government hasn’t been lessened for the average South Carolinian. The primary reason for decreased tax collections is that South Carolinian’s are getting poorer.
Nor is it surprising that the tax burden or tax collections expressed in dollar amounts would be low in comparison to other states, since South Carolina has the 5th lowest median household income in the United States.
Scoppe also argues that the size of South Carolina’s government has been shrinking over the last decade. The evidence? She cites the fact (without accounting for inflation) that while population has increased by 15 percent over the last decade, the General Fund has increased only 12 percent. The problem with this analysis is that General Funds make up only roughly a third of the budget, and the real growth in the budget over the last decade has come in the area of Other Funds (collected from fines, fees, and a variety of other sources) and Federal Funds. She admits that Federal and Other Funds have increased significantly over the last decade but then dismisses these funds as “extremely squishy.”
Squishy or not, Federal and Other Funds are relevant, and they are very much a part of the size of state government. In fact when we control for inflation and account for all funds in the budget, total funding has gone up by 19.1 percent from FY 2003 to FY 2013. The budget has grown 4 percent more than the state’s population over the past decade. Translation: The state is indeed spending more per person than it was a decade ago.
On a surface examination, it may appear that South Carolina government is scaling back and taxpayers are better off than they were a decade ago.
The reality is otherwise: South Carolinians have gotten poorer while their government has grown fatter.
¹To give those who say government is shrinking the benefit of the doubt we used the highest available median household income number for 2011 (a 2007-2011 average), other census one year estimates give the 2011 median household income in SC as low as $40,084.
* All inflation calculations were done using the Bureau of Labor and Statistics CPI inflation calculator.