Road Funding Bill – Most Confusing Tax Hike Ever?

 

WEIRD PROCEDURAL MOVES, CONVOLUTED SHUFFLING OF TAXES AND FEES … WELCOME TO THE 2016 ROADS DEBATE

The Senate Finance Committee is currently debating legislation that would raise taxes and fees, reduce other taxes and fees, and somehow send additional money to the Department of Transportation for road maintenance and repair.

Here’s what you need to know:

The whole procedure is murky, convoluted

Tuesday’s Finance meeting comes at the end of a series of secret – and thus almost certainly illegal – meetings between committee members. State law mandates that meetings of public officials in which public business is conducted must be open to the public. These meetings were deliberately closed to the public.

It’s unclear, furthermore, exactly how the Finance Committee had authority to discuss the bill, let alone amend it, since H.3579 remains on special order on the Senate calendar. No senator has made a motion this session to recommit the bill to the Finance Committee.

And the bill itself is a hodgepodge that’s likely to incorporate another bill in a different committee. The consensus on Finance is that any road-funding legislation passed by the committee should contain three things: (1) tax reduction of some kind, (2) new money for the Department of Transportation (DOT), and (3) something resembling reform of the DOT. The tax and revenue components are dealt with in an amendment crafted by Sens. Joel Lourie (D-Richland) and Ray Cleary (R-Georgetown), while the DOT reform component – according to Finance chairman Hugh Leatherman (R-Florence) – will be dealt with by the Senate Transportation Committee.

The average citizen trying to follow all this could be forgiven for wondering what on earth is going on.

The tax hikes are numerous and large

The new amendment retained all the tax and fee hikes in the current version of H.3579.

An increase in the gas tax by 12 cents a gallon, phased in over three years.

  • After this initial 12 cents a gallon increase, the bill would increase the gas tax based on CPI average inflation over the last ten years. The inflation increase would be limited to a maximum of two cents a gallon per year.
  • An increase in driver’s license issuance fees from $12.50 to $25 for a five-year license, and from $25 to $50 for a ten-year license.
  • A $16 increase in all biennial vehicle registration fees.
  • A new $60 biennial road use fee on hybrid vehicles, and a new $120 biennial road use fee on electric vehicles. So: those who conscientiously try to purchase energy-saving cars will now be punished for it.
  • An increase of the cap on motor vehicle sales tax from $300 to $600.

Tuesday’s meeting added one new tax/fee :

  • A road use fee on commercial motor vehicles (CMVs, e. trucks) over 26,000 pounds in lieu of property taxes. The fee would be assessed by the DMV in conjunction with the registration process. Unlike the current property tax on CMVs, which only applies to in-state vehicles, the new fee would be imposed on all trucks that use South Carolina roadways. The fee would also be an increase in the amount currently paid in property tax for in-state trucks. (The first $22 million in revenue from this fee would be dedicated to counties to be used without restriction. The remainder of the revenue would be sent to County Transportation Committees.)

The takeaway? Just about everyone’s going to be hit with a significant tax increase.

The tax cuts are small and narrowly targeted

The “tax reform” component of H.3579 offers, meanwhile, offers a bevy of tax reduction measures. But the reductions are relatively miniscule and targeted to certain favored groups.

  • Widens existing state income tax brackets by 30 percent.
  • Reduces the top marginal state income tax rate by 0.2 percent – from 7 to 6.8 percent.
  • Fully adjusts income tax brackets for inflation each year (under current state law brackets are only adjusted for half the rate of inflation).
  • Adjusts the wage ceiling for the two wage earner tax credit from $30,000 to $45,000.
  • Increases the college tuition refundable income tax credit from $850 for a four-year school and $350 for a technical college to $1,500 for either.
  • Increases the police, firefighter, and EMS subsistence allowance from $8 to $9 a day.
  • Reduces the businesses personal property tax ratio from 10.5 to 9.5 percent.
  • Reducing the manufacturer’s property tax assessment ratio from 10.5 to 8.5 percent.
  • Codifies the existing tax credits for donations to scholarship organizations for exceptional needs students, capped at $12 million annually.
  • Creating a refundable state-earned income tax credit worth 3.5 percent of the federal earned income tax credit.

All of the tax relief provisions in the amendment would be phased in over a period of four years. As in previous meetings on this and similar road-related bills, staff presented various numbers on the value of various tax increases and cuts. But even Finance Committee members have expressed the need for further verification. In any case, an analysis of the numbers presented at the Finance Committee meeting indicates that the revenue raised from the tax and fee increases would outweigh the savings from the collected tax reforms.

Why the shell game for a “revenue neutral” bill?

Even if the tax hikes and tax reductions proposed by the amendment turn out to be roughly equal, some citizens are guaranteed to be hit hard by tax and fee hikes. Remember, what’s “revenue neutral” for government is not cost neutral for taxpayers.

Tax swaps inevitably produce winners and losers. The previous tax swap suggested by Gov. Haley and Senate Republicans – an income tax cut for a gas tax decrease – would have been a net loss for the over 1 million state tax filers who pay no income tax.

The new amendment attempts to skirt this problem by the creation of a refundable earned income tax credit. But a refundable earned income tax credit is usually a wealth transfer program, not tax relief. Since the credit is only available to low income individuals (often those who owe no income tax), and since it is refundable, it usually results in government cutting a check to an individual who has no income tax liability. Whatever else can be said about earned income tax credits, it’s still true that some taxpayers will see a net increase in taxes if this amendment and bill were to pass.

New plan depends on sketchy numbers

The amendment’s supporters are downplaying the tax increases by citing an almost certainly bogus factoid: the claim that one third of state gas tax revenues come from out of state drivers. First, this fact should make zero difference to the average South Carolinian who will pay more in gas tax under this legislation regardless of whether out-of-state residents pay more. Second, this statistic has been often repeated but never supported by any evidence. During Tuesday’s meeting Sen. Tom Davis (R-Beaufort) asked for the evidence behind this claim. The answer from Finance chairman Hugh Leatherman (R-Florence) was that the Revenue and Fiscal Affairs Office should supply the supporting evidence.

Why the shell game?

The legislation’s supporters are claiming it will be “revenue neutral” or nearly so – i.e. that it won’t take any additional money out of the economy. If that’s true, why all this convoluted fuss about raising and lowering taxes and fees? Why increase some taxes and fees and decrease others? Why not simply transfer the money from the General Fund to the Department of Transportation?

The sheer complicatedness of this legislation is enough to make anyone suspect that it’s a massive overall tax increase. And what’s undeniably true is that it will be a massive tax increase for some South Carolinians.

The truth is this. We simply cannot know the true amount of resources needed for our roads until the state’s existing transportation authorities are fully reformed. This means abolishing the wasteful debt leveraging Infrastructure Bank, and making the DOT fully accountable to the Governor via a Secretary who sets DOT policy.

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