Much Ado About Nothing: SC Sales Tax “Reform”

After much publicity about eliminating two-thirds of sales tax exemptions, the SC House Ways & Means Committee concluded on Wednesday that the state’s sales tax system wasn’t so broke after all. After reviewing the $2.8 billion in sales tax exemptions, the committee concluded that only $15 million—half a percent should go. After adjusting the current tax rate for repealed exemptions proposed by Ways & Means, the statewide sales tax rate would drop from 6.0 cents to about 5.97 cents.

Left standing were the sales tax caps on cars, yachts and airplanes, the August sales tax holiday that cuts taxes on wedding dresses and law firm office supplies as well as back-to-school clothes and supplies and the court-invalidated Thanksgiving weekend sales tax holiday for guns.

Despite all the kerfuffle around sales tax exemptions, the reality is that the vast majority of these exemptions make 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 $1.9 billion of the $2.8 billion that is “sitting out there” in sales tax exemptions.

If you look at a number of the exemptions initially targeted for repeal, several would have taxed business inputs. The general rules economists apply is that you don’t tax inputs if you are going to tax outputs because it produces pyramiding taxes on taxes. Thus the $25 million exemption for wrapping paper, wrapping twine, paper bags and containers that grabbed significant business attention makes sense, since the outputs will generally be taxed. The exemption on newsprint makes sense, although failing to tax the newspaper does not.

Some of the changes from the already limited initial proposal were pure lobbying pressure. The leading example of that was the $74 million for toll charges, telegraph messages, telephone carrier access charges and ATM transaction that the subcommittee removed from the repeal list. Those should be taxed.

Did the House GOP Caucus Committee that produced the initial proposal believe for a minute that eliminating the $22 million in fees paid to merchants for timely filing sales tax returns would—or should—survive?

The real problem with the bill as reported to the House Floor for debate this coming week is what it fails to do, not what it does. It leaves the $300 cap on cars, yachts and airplanes that everyone but car dealers agree should be lifted. And it fails to address the fundamental structural problem of our sales tax system. We principally tax goods rather than services even though every year we spend a larger portion of our income on services rather than goods. In its report, the Taxation Realignment Commission (TRAC) proposed taxing a number of additional services and intangible goods, like digital goods, software and data processing.

The “comprehensive tax reform” promised by the House GOP Caucus appears to have been more about election filing dates than about real reform.  The repeal of the corporate income tax has not even been heard in subcommittee.  The changes to property tax assessment ratios which promised to shift a billion dollars in property tax liability onto home and car owners or force major cuts in local services is stalled in Ways & Means.

As it rushes to the May 1 crossover deadline to get House bills to the Senate, the House will only consider an up-to-$84-dollar-a-year income tax cut to the upper half of South Carolina incomes, a 2 % cut in the income tax rate for largely small business pass-through entities and this whopping $15 million in sales tax exemption repeals.  With the Senate and its Finance Committee about to engage the Budget for most of May, chances of these bills getting much traction there are fairly slim.

 

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