Why Tax Reform Can’t Happen (Yet)
THINK THERE ARE GREAT ARGUMENTS FOR ELIMINATING THE CORPORATE INCOME TAX? SO DOES ALMOST EVERYONE ELSE. AND YET . . .
In a red, “conservative” state like South Carolina, one would assume that our state would be among the leaders in promoting free-market policies on the state government level. But with some of the highest tax rates in the nation and a continuously growing budget, South Carolina has maintained its big-government status quo.
Unfortunately, implementing lower taxes and limited government isn’t as easy as just proposing a bill, mustering up support for the bill, and getting the bill passed and signed into law. Before such a bill could have a chance of passing, eight barriers to free-market reform would have to come down first.
With our ever-growing federal and state governments, we absolutely understand the drive pro-liberty South Carolinians have to go straight to trying to get free-market legislation passed (see for instance Obamacare “nullification”). Much time, money, and effort is spent trying to get these bills passed by the legislature, signed by the governor, and eventually enacted. Yet for all the talk and attention some of these measures receive, they come to nothing.
Consider one issue: Elimination of the corporate income tax.
Thousands of South Carolinians are pushing for it, and for good reason. Eliminating the tax would be a big step towards economic freedom by both keeping nearly $250 million in the private sector (and by extension out of the hands of government officials) and by cutting away at crony-taxation policies in which lawmakers and officials keep most companies taxed at a high rate and then pick and choose which companies get breaks. A zero percent corporate tax rate would give all companies a level playing field to compete (aside from the taxpayer-funded grants lawmakers and officials like to hand out to their friends).
So why would a measure with broad support and logical appeal be so difficult to get through the legislature? There are eight reasons.
Barrier: SC’s Secretive Incentives Process. Each year, lawmakers and bureaucrats hand out millions of dollars’ worth of tax breaks to certain companies, with virtually no details of these deals being made public. Yet whatever can be said against these deals doesn’t mean much to the lobbyists who represent the beneficiary companies, the politicians who get the satisfaction of handing out favors to the companies and who get to take credit for “creating jobs,” and to the army of public-sector employees who play middle-men in making these deals happen. Cutting the corporate tax rate to zero would do immeasurable damage to the whole process.
Reform No. 1: Make All Incentives Public and Hold Recipients Accountable. If all details of these deals were open to the public and if businesses actually had to reach their publicly stated targets per these deals, far fewer of them would occur. Fewer incentive deals would mean less incentive to maintain a high corporate income tax rate, and much less pushback against eliminating the tax altogether.
Barrier: Lawmakers Withholding their Income Sources. In South Carolina, lawmakers don’t have to disclose their sources of private income on their statement of economic interest. The result? No one knows whether they’re profiting from the legislation they sponsor, promote, and vote on. Lawmakers can and do – legally, though not ethically – profit from companies that receive special corporate income tax breaks from the state, and so eliminating that tax is that much more difficult.
Reform No. 2: Mandate Lawmakers Disclose All Income Sources. With income sources made public, it would be much easier to notice when lawmakers introduce or support or vote on legislation that benefits them. It would in turn be that much more difficult for lawmakers to oppose elimination of the tax.
Barrier: Lawmakers Policing their Own Ethics Violations. Members of the General Assembly police their own ethics violations in their respective House and Senate Ethics Committees. Much of the process is kept private, and lawmakers are less likely to be charged by their peers than they would be by an independent agency. If the ethical shenanigans have anything to do with conflicts of interest involving companies or industry groups benefiting from corporate tax breaks, the lawmaker will have little personal motivation to end the tax.
Reform No. 3: Give Ethics Commission Authority Over Ethics Violations. If the public were much likelier to know about ethics violations and their adjudication – and “outsourcing” ethics matters to an independent agency would make it likelier – lawmakers would be less tempted to engage in ethically suspect behavior involving corporate beneficiaries of the tax code. And that, in turn, would remove a strong internal argument for blocking the elimination of the corporate income tax.
Barrier: Lawmakers Exempt from FOIA Requests. South Carolina has one of the weakest Freedom of Information laws in the country, and state lawmakers are exempt from even that. If a lawmaker opposes the elimination of the corporate income tax because corporate donors, for instance, wants him to do so, it’s presently virtually impossible for the public to discover it.
Reform No. 4: Eliminate Lawmakers’ Exemption. An end to the FOIA exemption wouldn’t make lawmakers more likely to vote to eliminate the corporate income tax, but it would make hiding improper reasons for opposing it more difficult.
Barrier: Lawmakers Breaking Budget Process Law. State law requires that the governor, not the legislature, write the first draft of the budget, and that the legislature make revisions to governor’s budget in “joint open hearings” – a requirement that’s routinely ignored. Instead, the budget is cobbled together in committees and subcommittees, making it virtually impossible for citizens to have any input into what our state budget should include. The consequence is that the public remains almost completely in the dark throughout the state budget process, and since legislative budget-writers are extremely unlikely to “give away” the $250 million the state receives from the corporate income tax, what’s required is the one thing South Carolina’s budget process doesn’t have – external prompting from the public.
Reform No. 5: Enforce the State’s Open Budget Law. Enforcing 11-11-90 of the law code would give citizens a chance to understand the state budget as a coherent product before the process begins, and therefore give them a voice in how lawmakers amend it. Open discussion of the topic of eliminating the corporate income tax would at least be a possibility.
Barrier: Lobbyists Having Too Much Time to Push Special Interests. South Carolina has one of the longest legislative sessions in the country, which favors career politicians over citizen-legislators. (After all, only a tiny minority of the state’s citizens can support themselves financially while spending half the year or more in Columbia.) That’s bad news for citizens trying to persuade lawmakers to cut or eliminate the corporate income tax. If they spend a day or a week speaking to lawmakers, lobbyists employed by the benefitting corporations can spend the entire legislative session – a half a year or more.
Reform No. 6: Shorten Legislative Sessions. The longer lawmakers spend in Columbia, the more face-time lobbyists have with them. A sensible reform would be to mandate an end to sessions by the second Friday in April – making each one last roughly 90 calendar days – and cap them at 45 legislative days. Also, sessions should be held every two years, as is done in Texas. That would encourage legislators to prioritize core taxpayer concerns (lowering or eliminating the corporate income tax, for example) over insignificant matters and special-interest concerns.
In short: What’s needed is not more or better arguments for the benefits of cutting taxes. Lawmakers don’t need to be told that the private sector can use $250 million more productively than the public sector. They are likely very aware that eliminating the corporate income tax altogether would boost economic activity across the state. What they need, however, is the removal of several unstated but nonetheless powerful motivations to keep that tax in place.