The SC House Republicans have moved to amend legislation to increase taxes on working poor South Carolinians.  The bill (H. 4997), part of the House GOP Caucus’s “comprehensive tax reform,” originally provided up to a $168 tax cut to taxpayers with taxable incomes in excess of $5,600 ($25,700 for a  single mother with two kids, no capital gains income and taking the standard deduction).  They accomplished the $163 million cut in General Fund revenues by collapsing the six tax brackets into 3—0 % ($0 to $2,800), 3 % ($2,800 to $14,000) and 7 % (income over $14,000).

In subcommittee, Rep. Garry Smith of Greenville moved an amendment which eliminated to 0 % tax bracket and applied the 3 % tax rate to all taxable income, not just that above 3 %.  That does two things.  It cuts the tax benefit for middle and upper income tax payers in half.  Since that reduces the hit to the General Fund from $163 million to about $77 million if no one paid more.

The other thing it does is increases taxes on all taxpayers making under $11,200 in taxable income.  Although the average increase is relatively small ($11 for those making less than $17,000 and $8 for those making between $17,000 and $27,000), the Fiscal Impact Statement shows $26 million in tax increases on those communities least able to afford such an  increase.   [The analysis of effects was done by the highly respected Washington, DC, based Institute on Taxation and Economic Policy (ITEP).]

The co-sponsor of the amendment to tax working poor South Carolinians claims that it is “flat and fair”.  That is only true if you ignore our regressive sales taxes which hit much more heavily on low-income people.  It’s only true if you ignore the discount South Carolina gives to capital gains income which is unavailable to most low-income South Carolinians.  It’s only true if you ignore the home mortgage deduction available to reduce taxes on those who can afford to buy homes.  We could go on.  In the real world, this proposal is not “flat and fair”.

An $84 tax cut makes no practical difference to middle and upper income South Carolinians.  It’s chump change that would barely buy you lunch at McDonalds once a month as long as you don’t bring a spouse or children. At most, it would represent a tax cut of one tenth of a percent for those in the middle 20 % of incomes.  Even at a net $51 million fiscal impact, that’s a serious hit to state funds with no significant  benefit for any family.

There is an alternative which provides meaningful assistance to working poor families—the Earned Income tax Credit. Described by Ronald Reagan as “The best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” the federal EITC provides a refundable tax credit to low-income working families.  That means that families get a check even if they owe no taxes. The credit has proven effective in moving low-income persons into work and incentivizes them to work additional hours.  The Committee for Economic Development, an organization of 250 corporate executives and university presidents, concluded in 2000 that “The EITC has become a powerful force in dramatically raising the employment of low-income women in recent years.”

Dana Milbank notes in the Washington Post that the latest proposal by Paul Ryan, the Chair of the US House Budget Committee “…slashes the safety net to pay for tax cuts mostly for wealthy Americans.”  Here, we raise taxes on the working poor to help pay for tax cuts for middle and upper income taxpayers while undermining state revenues that support education, health care and social services.  The growing war on the poor is morally deficient and bad public policy.

In 2009, the most recent year for which data is available, the federal EITC brought to South Carolina $1.165 billion, an average of nearly $2,300 per return for over half a million low-income working families.  A state EITC set at 10 % of the federal level would cost $118 million according to ITEP estimates and be simple to administer. It’s a much better alternative than collapsing tax brackets.

The Ways & Means Committee will likely take up this bill at its next meeting, which has not been scheduled.  When Governor Haley proposed a similar collapse of brackets to 0 %, 3.75 % and 7 % in her Executive Budget, she proposed holding harmless those whose taxes would otherwise be increased.  This plan, if it is to move forward, should be further amended to hold harmless those who would have their taxes increased.  Those who have signed “no new tax” pledges would otherwise out themselves as really meaning “no new taxes except on the working poor”.