Governor Proposes Most Liberal Budget in SC History

ANOTHER YEAR, ANOTHER RECORD BUDGET

At roughly $25 billion, it can be said that the executive budget for Fiscal Year 2014-15 is the most liberal in state history. While the proposal states the total budget is roughly $23.5 billion, for the second year in a row, the executive budget does not include the roughly $1.5 billion in federal food stamp funds for the Department of Social Services. So when these funds are included, the proposed executive budget is nearly $1 billion larger than last year.

Aside from the growth in tax dollars being used to fund state government, the budget’s “liberalism” can be found in both the governor’s explicit priorities—priorities that she has emphasized in her budget speech and written documents—and her implicit priorities—priorities that can be assumed from where money is placed in the budget. And as we will explain, there are no proposed provisions to give taxpayers any of their money back.

Explicit Priorities

Throw More Money at K-12 Education: The governor’s budget suggests new spending of roughly $160 million with the majority of the new funding being dedicated to school districts that have a large number of students in poverty. Additional funding for districts with a large number of children in poverty is an intuitive solution, but as we have noted, it is not likely to be an effective solution in the long run. The growth of education spending in America over the last fifty years combined with stagnant test scores over that same period demonstrates that increased funding is not an education solution by itself. A true education solution would be promoting the proven reform of school choice, ideally through having public education funds follow the child, or alternatively through extensive tax credit scholarships. The Governor’s budget makes no mention of this proven reform.

Fund Transportation through the “Money Tree”: The governor’s budget proposes spending $1.35 billion on roads over the next ten years in addition to the regular appropriations for the Department of Transportation. The materials presented along with the budget stress that these new funds can be appropriated for transportation needs without having to raise taxes. Instead, the new spending will be financed by dedicating what politicians refer to as the “money tree” to transportation. The money tree is the additional revenues that come in above the Board of Economic Advisors (BEA) November revenue projection for the coming fiscal year and its May revenue projection. According to the governor, the money tree averages to $106.9 million each year, and this money can be leveraged into $737 million each year through pay as you go and bonding.

The problems with the governor’s approach to transportation are threefold.

  1. There is no guarantee that the money tree will fall every year. Some years there may be no additional revenue growth between the BEA estimates, as was the case in the years immediately following the financial crisis.
  2. Bonding out more funds and thereby adding more debt to the public ledger is never a sensible long term solution to funding a recurring expense.
  3. The governor’s plan doesn’t address the real transportation finance issue—the failure to prioritize repair and maintenance over new construction. Until that issue is addressed, transportation financing will continue to be an expensive headache for South Carolina.

Eliminate the 6% Income Tax Bracket: Like last year, the governor’s budget proposes the elimination of the 6% income tax bracket, which would result in a $26.7 million annual “loss” of revenue to state government and an average savings of $29 for three-quarters of South Carolina taxpayers.

With 6 different brackets and a top rate of 7% that kicks in after $14,400 of income, South Carolina’s income tax is one of the highest and outdated in the nation. And as we explain here, even the South Carolina Department of Commerce agrees. As the department’s study states, as of 2010, South Carolina had the “highest marginal tax rate on the lowest level of taxable income in the Southeast (and third in the nation).” In other words, even some of the poorest South Carolinians are being taxed at the highest rate on part of their income.

Real tax relief would mean the elimination of the state income tax (a bill to do so, S. 901, was pre-filed for this year), not the elimination of just one bracket that spans roughly only $3,000 of someone’s income. According to the budget proposal’s own statistics (on the last page), South Carolinians with an annual income of $30,000-$40,000 would have an average tax liability of $2,104 under our current tax code, and $2,075 under the governor’s proposal. Needless to say, that tax liability would go to $0 with no state income tax, and that extra $2,000 would prove valuable to South Carolinians, especially those who are suffering in this stagnant economy.

Implicit Priorities

Putting More People on Medicaid: The budget proposal includes an increase of $407.1 million for the Department of Health and Human Services (DHHS). Although this executive branch agency hasn’t specifically utilized the Medicaid eligibility expansion provided for in the Affordable Care Act, it has made a concerted effort to enroll more South Carolinians through auto-enrollment and presumptive eligibility programs (which we explain in more detail here) into this government-run health insurance program—a program that has not proven to actually improve the physical health of enrollees.

Continue use of Capital Reserve Fund as a “Slush” Fund: There is nothing “Capital” nor “Reserve” about many of the items in the governor’s proposed $117.1 million Capital Reserve Fund. This constitutionally mandated section of the budget is appropriated with 2 percent of the previous year’s general fund revenue, with the purpose of reserving money for long-term, large-scale necessary improvements like roads, bridges, prison refurbishments, government buildings, etc. Unfortunately, the proposed fund, like in years past, includes non-capital projects like the following:

  • K-12 Technology Initiative: $29.2 million
  • Higher Education Infrastructure Bank: $29.2 million
  • Technical Education Infrastructure Bank: $11.7 million
  • State Park Cabin Renovations: $500,000
  • Sesquicentennial State Park—Splash Pad: $500,000
  • Deal Closing Fund: $2.4 million
    • Used to give tax dollars to certain businesses to “lure” them to the state

If the governor believes these items are worthwhile projects for the state, then they should be funded through the General Fund of the budget.

Keep All Spending Power Over Tax Dollars in the Hands of State Government: The fact that nothing in the proposed budget would actually give “excess” revenue back to taxpayers shows that the governor believes every penny used in the budget is necessary and would best be used by state government instead of South Carolina taxpayers. The fact that more revenue is collected through income, sales, and corporate taxes in a year doesn’t mean the state has more needs, and should therefore spend that revenue. And even when money is budgeted in “reserve funds”, this money is still never seen again by the taxpayers who earned it in the first place. In total, this $25 billion budget embodies the belief in government as the key driver of the state economy—as opposed to the belief that government should use only enough money to provide core government functions and let private citizens drive the economy through the free market.

This Budget Will Probably Be Irrelevant Anyway

Assuming that the House Ways and Means and Senate Finance Committee ignore the state law again that requires the committees to hold joint open public hearings on the governor’s budget 5 legislative days after it’s officially proposed, the legislature will ignore the governor’s 576 page budget and write their own. And if history continues to be an indicator, the budget passed by the House and Senate at the end of session will be even more liberal than the governor’s budget, as it will likely include the “money tree” money we referenced earlier.

Until lawmakers actually start following the law, taxpayers will continue to have little to no say in how and how much of their tax dollars are being spent. If these public hearings were held, taxpayers would at the very least be able to publicly hold the governor’s budget accountable for what it really is—continued expansion of government just like the federal government. Instead, these budget decisions are made by a few powerful legislators in the budget committees of each chamber, and accountability is lost. Until the law is followed, South Carolina has no realistic chance at becoming the freest, most prosperous state in the nation.

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