The debate over South Carolina sales tax exemptions and caps is heating up. Some clarity is needed.

In Sunday’s The State, SC Senate President Pro Tempore Glenn McConnell and House Speaker Bobby Harrell (http://www.thestate.com/2011/11/06/2034930/harrell-mcconnell-beware-democrats.html) attack the litigation filed by Democratic Party Chair Dick Harpootlian questioning the constitutionality of the hodge-podge of exemptions (and caps) to our state’s income tax. McConnell and Harrell claim: “A $3 billion tax increase could be forced on all South Carolinians if a lawsuit before the state Supreme Court succeeds.” Of course, were the Supreme Court to find all of those exemptions and caps unconstitutional, the General Assembly could quickly reset the sales tax rate to nullify part or all of the revenue-adding effects of that decision.

Meanwhile, Dr. Mike Fanning runs around the state on behalf of ROAR (http://www.roarsc.com/) , with his humorous attack on the silliest of the exemptions and caps, “…dedicated to the single issue of reducing our tax rates through honest tax reform that’s dedicated to putting an end to special interest exemptions.” Fanning, and others note, that “… by allowing 80+ sales tax exemptions, we exempt more ($2.7 billion) annually than actually collected ($2.5 billion).”

Except for car dealers, we know of no thoughtful person who finds virtue in the fact that a purchaser of a $6,000 used car pays the same sales tax as the purchaser of a $2.4 million Buggati Vayron … $300. Nor do the multiple loopholes in our August back-to-school sales tax holiday which allow for the tax-free purchase of wedding gowns and lawyers’ office supplies make much sense.

What you quickly discover as you look closely at the exemptions (http://www.bcb.sc.gov/BCB/bea/exemptions.pdf) is that the real money is not in “special interest exemptions” or poorly drafted sales tax holidays. Instead, the big dollar sales tax exemptions are those which hit most heavily on everyday consumers and especially low-income consumers.

Long before we get to the truly obnoxious cap on sales taxes on cars, planes and boats and the multitude of other chump-change exemptions, the real money is in prescription drugs purchased at pharmacies ($585 million), groceries ($354 million) and electricity or other fuel used for home heating ($188 million). That is not to mention the $253 million from sales to the Federal government that is not taxable under the US Constitution or the $500 million in highway fuel which is simply taxed another way. Altogether, that’s $1.88 billion of the $2.7 billion that is “sitting out there” in sales tax exemptions.

Everyone understands that sales taxes are our most regressive tax … they land much more substantially on the poor than the wealthy. The Institute on Taxation and Economic Policy’s examination of tax burdens in South Carolina (http://www.itepnet.org/wp2009/sc_whopays_factsheet.pdf) found that in 2007 those with the lowest 20 % of incomes paid 5.1 % of their income in sales taxes while the wealthiest 1 % paid .8 %. Adding sales taxes on prescription drugs, groceries and home heating fuels and electricity together represents $1.127 billion of the new taxes that will have an especially hard impact on low-income consumers. The elimination of the sales tax on groceries was an explicit attempt by the Republican-controlled General Assembly to reduce some of the regressive impact of the property tax for sales tax swap embodied in Act 388 of 2006. That law raised sales taxes on low income renters while giving them not a penny of property tax relief.

There are ways to reduce the regressive effects of charging sales taxes on additional items and services. Those include a State EITC which provides a refundable, tax credit to working poor families or a refundable low-income tax credit that is not limited to working people and helps the low-income unemployed, disabled and elderly as well.

No doubt, South Carolina needs to find new revenues and to better balance its tax base. There are many ways to do that which are substantially less regressive than eliminating sales tax exemptions on necessities like prescription drugs, groceries and home heating fuels. We will be talking about some of those in coming posts. Meanwhile we continue to wonder why Democrats appear so focused on the most regressive approach to new revenues … eliminating sales tax exemptions.