Will the Legislature Raise Your Taxes in 2010?

Despite a lot of talk about budget cuts, the 2009 General Assembly ended up passing a budget even larger than that from FY08-2009 – $20.7 billion compared to $19.97 billion. Subsequent declines in revenue projections have forced state leaders to cut the budget since that time, with the most recent round of cuts coming in at 1 percent ($238 million) for December 2009. But that’s just the beginning of the budget pain. Consider what legislators will be facing once they convene in 2011 to pass the FY11-2012 budget:

 

·      A $752 million budget hole, owing to the disappearance of federal stimulus dollars;

·      A $1 billion-plus tab to pay off loans to the federal government used to keep the state’s unemployment insurance fund afloat; and

·      A $1.341 billion deficit, if revenue remains flat and spending continues to increase.

 

And this is not even accounting for rising Medicaid costs, a multibillion-dollar retirement system shortfall and declining revenue owing to job losses caused by destructive federal policies like cap-and-trade.

 

In short, the stage has been set for a massive tax increase in the near future.

 

More than anything, the problems facing South Carolina have been caused by high spending. When times are good, legislators expand and create unnecessary programs and waste money on pork projects and economic boondoggles. When times are bad, they threaten to furlough teachers and release inmates so as to avoid making targeted cuts. What the politicians neglect to mention is that they could save a lot more money by streamlining government, privatizing certain services and eliminating wrongheaded economic development initiatives. And, even when they do promise to enact such reforms, the lack of an effective constitutional spending cap makes it easy to forget these promises once revenue picks up again.

 

If not for it being an election year, South Carolinians would likely see a “general” tax increase of some kind in 2010. Still, even in an election year, state leaders are already mulling over the following politically “popular,” or, at least, politically “safer,” targeted tax increases.

 

Fine and fee increases: VERY LIKELY

The best way to hide a tax increase is to change the name. In 2009, the General Assembly proposed 108 fine and fee increases – quietly passing 23 of these either as standalone bills or temporary provisos. For example, a $250 fee was added for the registration of captive insurance companies. A $250 fee was also added to expunge criminal records. One fee increase that didn’t pass in 2009 would have imposed an additional $5 fine on all traffic tickets.

 

New for 2010 is a proposed fee increase for golf cart owners. Another bill would impose a $10 per lot annual fee on homeowners’ associations – and thus homeowners. As standalone bills, such fee increases would still be possible even if the General Assembly passes a proposed six-month moratorium on fine and fee increases introduced either as budget provisos or administrative agency regulations.

 

Payroll tax increases: VERY LIKELY

South Carolina’s trust fund for paying out unemployment benefits is broke and running on loans from the federal government. State economists predict bailing out the fund could cost more than $2 billion.

 

This money, so argues state Board of Economic Advisors Chairman John Rainey, has to come from increasing payroll taxes. Rainey’s plan calls for doubling the taxable wage base from $7,000 to $14,000 and raising payroll taxes by anywhere from $249 to $567 annually per worker. If the state fails to pay back the loans by 2011, employers will see an automatic tax increase of 0.3 percent, and rising, until the loans are paid off. According to the Employment Security Commission, this tax increase will apply, effective April 15, 2011, for taxes owed for 2010.

 

Needless to say, economists agree that increasing labor costs, via payroll taxes, increases unemployment. A better strategy for addressing the shortfall is to reduce unemployment by lowering taxes. Proportionately increasing payroll taxes on employers that take more from the unemployment fund while lowering taxes for companies that use the system less also makes sense.

 

Local tax increases: LIKELY

As they did during the 2009 session, legislators may want to continue to claim to be fiscal conservatives while shifting blame to local officials for raising taxes. In 2009, the General Assembly passed a euphemistically termed “local option tourism fee,” that is nothing less than a 1 percent sales and use tax increase. The legislation (S 483) gives Myrtle Beach the option of raising local taxes by 1 percent, despite South Carolina already having a sales tax higher than the national median. New for 2010 – a proposed local option tax increase (H 4229) for Hilton Head.

 

Internet sales tax: POSSIBLE

Otherwise known as the “Amazon tax,” the Internet sales tax is likely unconstitutional, in spite of a recent ruling by a New York trial court. (New York, North Carolina and Rhode Island are the only states to pass the tax.) Nevertheless, the tax increase is a favorite of the Taxation Realignment Commission. As TRAC Commissioner Kenneth Cosgrove put it, the Internet is the “first place we need to look ‘for collecting additional revenue.’ I don’t think it would hurt. I think the state could use any revenues.” But rather than passing an unconstitutional tax, why not lower state sales taxes so as to make brick-and-mortar purchases more competitive? If the tax passes, Amazon, as it has in other states, will likely shut down its state-based affiliates … so much for homegrown entrepreneurship.

 

Cigarette tax increase: POSSIBLE

The House has already passed a 50-cent per pack increase on cigarettes, and the Senate Finance Committee gave such legislation a favorable report. While the future of this proposal is uncertain, one thing is sure: increasing even a politically popular tax is going to cost jobs – not just for cigarette manufacturers, but for small retailers and other sectors. Analysis by the Policy Council found that increasing the cigarette tax to 57 cents per pack will cost South Carolina approximately 4,100 jobs.

 

Gas tax increase: NOT YET

There always seems to be some murmuring about raising the gas tax, which may have been quieted recently by the influx of federal stimulus money for highways. That being said, Department of Transportation Secretary Buck Limehouse told TRAC in October 2009 that the state should increase the current 16 percent gas tax by 6 cents. You can bet that when the federal largess dries up, legislators will look to increasing the gas tax. You can also bet that they will try to pass off the plan as a gas “user fee” rather than a gas “tax.”

 

Grocery tax increase: ARE YOU KIDDING?

South Carolina does not currently tax purchases of unprepared food – i.e., groceries. But that might change if some state leaders have their way. Of the 45 states that impose a sales tax, only 14 actually tax food for home consumption. In fact, South Carolina just eliminated its tax on food in 2007. Yet, along with raising the payroll tax, Board of Economic Advisers Chairman John Rainey is calling for a reinstitution of the food tax, claiming that the tax “is costing this state $374 million in revenues.” Clearly, he thinks it’s his money – and not yours.

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation. Copyright 2010. South Carolina Policy Council Education Foundation, 1323 Pendleton Street, Columbia, South Carolina 29201.

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