The South Carolina House Republican Caucus finally introduced its “comprehensive tax reform plan” this week.
The seven planks of the plan include three aimed at encouraging economic development that will do little or nothing to bring new jobs or raise per capita income in our state. One plank phases out the corporate income tax. As we have discussed elsewhere, the export businesses we are trying to recruit don’t pay corporate income taxes in any case because of how we apportion multistate income based on where sales are made rather than where products are made. Eliminating a tax that new businesses won’t pay, or at least won’t pay much of, hardly helps entice new businesses.
Another cuts income taxes on the many small businesses that flow their profits through to the owner’s personal income taxes. These untargeted cuts, aimed at “entrepreneurs” according to the release, will wind up often just padding profits for the many small businesses which are not growing and have no intention of growing or are so up against it that they have no profits yet. The funds could be much better spent training new and existing employees of small businesses and providing support services through Small Business Development Centers.
The third effectively cuts the manufacturers property tax assessment ratio from 10.5 % to 6 %. The reality is that any manufacturing business which is moving into South Carolina, expanding its employment or making significant capital investments can already cut a deal, a fee-in-lieu-of-taxes agreement, with counties that effectively cuts its assessment ratio to 6 % or, for really large investments, 4 %. The 10.5 % ratio is only an economic development burden because it makes us look bad in unsophisticated national rankings that only look at nominal rates and not actual rates.
In reviewing effective tax policies for economic development, Timothy J. Bartik, a leading authority on the matter, notes: “One policy option that is NOT cost effective is an across-the board cut in business taxes.” The House has chosen the ineffective approach to economic development.
The economics research is pretty clear that the beneficial economic development effects of tax policy are fairly small and are quickly eliminated or turned negative if you pay for them by cutting the kinds of government services that businesses think help them in the long term—things like education, health care, infrastructure and quality of life.
As outlined in a Caucus press release Monday, will take no less than $220 million out of recurring General Fund revenues each year going forward despite the fact that the BEA projects revenue growth to slow in future years. We go into the next Fiscal Year $600 million short of meeting our statutory obligations to fund local schools through the Education Finance Act. Even with a strong rebound in revenues for this year, the House Ways & Means Budget funds only $2,012 of the formula requirement of $2,790 in Base Student Costs. This $220 million is most likely to come out of education funding.
We will be analyzing the proposals to eliminate some of the sales tax exemptions and to collapse the bottom four individual income tax brackets into one at 3 %. It’s clear that they have taken all the real-money sales tax exemptions off the table—gasoline, groceries, prescription drugs, home electricity and water. That’s good because these would be very regressive taxes. However, they have not expanded the number of services which are taxed. Reviewing sales tax exemptions every five years is not a terrible idea, but it is unclear that a perpetual tax review will produce any more coherent policy than our episodic tax studies.
The House Caucus press release makes pretty clear that this plan is more about an anti-tax ideology, and filing deadlines, than about sound economic policy. The so-called economic development changes will, given the revenue-negative effects of the changes, end up suppressing economic development in our state.