Policy Council Testifies on Sales Tax
By Dr. Jameson Taylor
TRAC Testimony: November 12, 2009
Lower the Rate and Eliminate Sales Tax Exemptions
Reforming the tax code should begin with lowering the sales tax rate for everyone. This will not only increase private investment, it will end the sales tax incentives game that rewards inside players and penalizes everyone else. By lowering sales taxes for one industry, sales tax exemptions shift costs to other taxpayers, often those who are not “politically connected.” Such exemptions also distort the free market. Most important, they provide only short-term, often political, benefits at the expense of long-term economic costs. In this way, they violate a basic principle of economics, but also of free democracy, which should be dedicated to safeguarding the good for all. As the famed economist Henry Hazlitt reminds us:
- South Carolina is one of the poorest states in the country, ranking 45th overall in per capita personal income. This is up only 3 spots since 1929, when the state ranked last in the nation.
- Average income in South Carolina is $31,884 – 80 percent of the U.S. average. At the current growth rate, it will take South Carolinians another 20 years to reach the 2008 U.S average of $39,751.
- Economic growth has stagnated since the 1980s, averaging less than 1 percent a year in the 2000s. During the same period, the level of economic freedom in S.C. has fallen from 9th in 1989 to 25th in 2008. By contrast, Georgia and North Carolina are both tied for 3rd in the nation.
South Carolina’s combined state and local sales tax rate is 7.04 percent – 16th highest in the country (see attached map). The statewide sales tax of 6 percent is also far higher than that of neighboring states Georgia (4 percent) and North Carolina (4.25 percent).
- Eliminating the sales tax altogether and replacing the tax with a flat-rate income tax.
- Eliminating the income tax altogether and replacing it with a broad-based sales tax.
Finally, there is the FAIR Tax option the Commission will be studying in the near future. We are not claiming to have all the answers, but want to help sustain an ongoing dialogue toward reforming the tax code and ending the generational cycle of poverty in South Carolina.
Finally, the state needs to simplify the tax code. Again, the best means of doing so is to lower the rate for everyone and eliminate sales tax exemptions for everyone. As it is, even folks who qualify for certain exemptions may not even know it. Take this sample passage taken from the FAQ section that accompanies the sales tax code:
Are sales of farm machinery to a farmer subject to the sales and use tax? Sales of farm machinery meeting the requirements of the exemption in the sales and use tax law for farm machinery are exempt from the sales and use tax. If the sale of farm machinery does not meet the requirements of the exemption, the sale is taxable.
- Sweet grass baskets made by local artists from locally grown sweet grass.
- Electricity used by cotton gins, manufacturers, miners, or quarries to manufacture, mine, or quarry tangible personal property for sales.
- Proceeds from the rental or lease of portable toilets; vacation time-sharing plans; and gold, silver or platinum bullion.
But why are sweet grass and portable toilets more important to the state’s economic well-being than numerous other items and activities that are not exempt from the state sales tax? The government shouldn’t have to decide which of these items and activities are essential to the economy. Rather, the state should let investors and consumers decide for themselves by lowering the sales tax rate for everyone and lifting all exemptions.