Income Mobility in South Carolina
The New York Times recently reported on a new study finding that income mobility in South Carolina is severely limited. Income mobility, as its name implies, refers to an individual’s ability to rise from lower income levels to higher ones (economists typically divide these levels into fifths).
Coincidentally, state government and the state’s news media have been promoting the state’s annual back to school sales tax holiday. While on the surface these issues seem unrelated, taking a close look at them can give us a good idea of why it’s so hard for individuals to improve their economic standing in South Carolina.
The study in question found a number of factors that correlated with intergenerational income mobility. Some of these factors, for instance the absence of two-parent households, are probably more closely related to federal than state policies. Others, like the performance of K-12 education, size of the middle class, and progressivity of the tax code, can be effectively addressed on the state level. One of the reasons municipalities throughout South Carolina fare poorly when it comes to income mobility – South Carolina children from families in the bottom fifth of income earners have only a 4.5 percent chance on average of reaching the top fifth – is because state policies conspire to keep South Carolinians in the lower fifth, in the lower fifth.
Consider the sales tax holiday. The policy supposedly is intended to help the average South Carolinian save money and more easily pay for their children’s school supplies. In reality, the savings from this policy are negligible for the average South Carolina family (using a list of suggested school supplies for sixth graders in 2012, we calculated the average saving per one child’s school supplies to be around $5), and represent only a brief aberration from these same families having to pay the statewide 6 percent sales tax – the sixteenth highest in the nation.
While the weekend sales tax holiday is only one of many sales tax exemptions in South Carolina, it is one of the few allegedly meant to benefit average South Carolinians. In the last fiscal year South Carolina gave out sales tax exemptions worth an estimated $3 billion, the vast majority of which were specifically aimed at lowering costs for large established industries. The sales tax holiday last fiscal year was worth an estimated $2.25 million total – a drop in the exemption bucket.
But sales tax breaks are only one of many methods by which state government favors corporations. Others include corporate tax credits and outright loans to favored companies. So while the political class in Columbia is happy to exempt large well-connected companies from South Carolina’s onerous sales tax on, they are far stingier when it comes to average South Carolinians.
The story is similar with income tax. The level of “progressivity” in South Carolina’s income tax code is extremely low, meaning poor citizens are more often than not paying the same tax rates as the wealthiest individuals. That wouldn’t necessarily be a problem if the tax were low, but it’s not. The top bracket 7 percent is the thirteenth highest state rate in the nation and kicks in at only $14,000. This high tax rate on such low incomes has only been exacerbated over time as the level of income at which the top tax rate is imposed isn’t updated to keep pace with inflation. This means lower incomes are constantly being hit with the top tax rate and people who earn less income are constantly being hit with a higher total state income tax bill.
Even more important than tax policy for income mobility is the education system, and in this area state policy and performance are both damning. Despite poor performance (measured by graduation rates and test scores), legislators have refused to consider any serious education reforms in SC. The one proven method of improving academic results, especially for the least well off students – increased school choice – has never been popular in the General Assembly. It was only in the last legislative session that the first school choice measure passed as part of the budget, and that was an extremely limited tax credit scholarship program for special needs students. While a few legislators had to fight tooth and nail for this scrap of reform, more support was enjoyed by a successful proposal to increase funding for establishment-friendly and consistently ineffective 4K programs. Once again, policies aimed at freeing individuals from a stagnating system are ignored in favor of bolstering the status quo.
To be sure, there are factors that affect intergenerational income mobility that can be far more effectively addressed at the federal or personal levels, but state policy plays an important role in determining income mobility. But until lawmakers lower tax rates across the board and begin developing a more flexible, choice-driven education system, expect to keep seeing South Carolina at the bottom of the income mobility ladder.