The Haley Budget Translated: Blame It on Obamacare

To listen to Governor Nikki Haley, a core budgetary problem facing our state is Obamacare. “Every dollar that Washington forces us to spend on a still-inefficient Medicaid program is a dollar we can’t put into our schools, into our roads and infrastructure,” her Executive Budget transmittal letter tells us.

Even if we let the Feds run our Health Benefits Exchange and even if we refuse to expand Medicaid, the Affordable Care Act will still cost South Carolina $67.4 million next year because “of the people that the Feds are driving into the system for Medicaid” she told the Thursday presser.

Who are these folks that the Feds will “drive” into Medicaid? SCDHHS estimates that “162,000 people currently eligible, but unenrolled will enroll in Medicaid even without the Medicaid expansion.” So, this $67.4 million is not for some new group of people that Obamacare just made eligible but mainly very-low-income parents and low-income children that SCDHHS has failed to enroll over the years.

The Governor and SCDHHS assume a welcome mat effect as the federally-run Health Benefits Exchange goes online and currently eligible people finally enroll. The agency projects that 60 % will come because employers drop coverage—a fallacy considering people making so little they qualify for the Low-Income Families program likely don’t have access to employer-provided health benefits.

Those currently eligible will come onto the rolls at current federal match rates, not the 100 % declining to 90 % rates[1] that will apply to newly eligible enrollees under the ACA Medicaid expansion to 133 % of the federal poverty level (FPL).

Haley’s budget increases spending on health care by $173 million according to her slideshow. Of that $79 million is for employee and retiree health benefits and $74 million to SCDHHS for Medicaid. Admirably, $11million additional goes to Mental Health, and $5 million to DDSN. Haley blames most of the DDSN increase on new Medicaid rules.

So, health care is a large part of new funding. But the question we must ask is “Will it really suck up dollars that we would otherwise spend on schools and infrastructure?” Not likely.

Nikki Haley is not going into the history books as The Education Governor.

Last year, with a billion dollars added to state budgets, Haley argued that the Base Student Cost, the core of state funding of local schools, should drop to $1,766, lower than the previous year’s BSC funding of $1,880. The General Assembly fixed it at $2,012, well-below the FY12-13 formula requirement of $2,790 per pupil. Maintaining last year’s BSC is her proposal this year. Twenty percent of new General Fund funding for schools goes to charter schools. The additional $16.3 million for the Education Finance Act noted in her slideshow only covers student population growth. Faced with new dollars last year, the Governor proposed that they go to tax cuts and not education.

“Is health care funding sucking dollars from infrastructure?”

South Carolina has a desperate need to improve our infrastructure. SCDOT recently reported that we need $30 billion in new revenues for road needs over the next 20 years. Add to that ports, water and sewer needs and the investment need nearly triples. We have more than 1,000 bridges in need of repair or replacement. For years, the business community and others looking at infrastructure needs have called for a significant increase in our fourth in the nation lowest gas and diesel taxes. The fact is that business recruitment is much harder when we as a state fail to provide adequate water, sewer and roads.

While declaring “infrastructure means jobs,” the Governor categorically rejects a gas tax increase. The Governor’s budget proposal is to take the new dollars that will appear as the BEA updates its revenue estimates in coming months (“the money tree” to Ms. Haley) and apply those first to a modest tax cut ($26 million) by eliminating the 6 % tax bracket and then to infrastructure. Haley claims that spending General Funds on infrastructure is tax relief because it avoids the badly needed increase to the gas tax and, although she didn’t mention it, borrowing for infrastructure needs.

She expects about $100 million in new dollars by the time Senate Finance and the Conference Committee get hold of the budget.  After giving 74 percent of income tax filers a tax cut of about $2.50 a month, that should leave roughly $74 million for infrastructure … against a need of tens of billions to raise the basic safety standards of our state’s roads and bridges.

Misplaced Blame—Federal Health Improvement Efforts Are Not our State’s Economic Pothole

Rather than simply admitting that improving human capital through public education (other than charter schools) is not her priority and that she is unwilling to do the things that are needed to provide the physical infrastructure which underlies economic development, Governor Haley blames Obamacare for our troubles. This is not the leadership our state needs as we make critical budget choices that will frame our state’s priorities in the coming years. As we face the challenges of attracting businesses and keeping our most talented minds engaged, we must admit that our priorities are reflected in our state’s budgeting, and place South Carolinians’ safety and future before blame-game talking points as the gubernatorial election cycle begins.

[1] The Governor misstates the match rates for a Medicaid expansion which start at 100 % and decline to 90 % in 2020 for the newly eligible. Haley asserted that it will start at 10-1 (9 %) and then decline.

Posted in Economy, Education Funding, Health Care, SC Budget, Taxes | Tagged , , , , , , | 1 Comment

Medicaid Expansion: Costs or Savings for South Carolina?

Will a Medicaid expansion under the Affordable Care Act (ACA) cost South Carolina $1.085 billion or save us somewhere between $59 million and $679 million. Those are two numbers on the table as South Carolina begins a debate on whether to expand its Medicaid program to cover all adults up to 138 %[1] of the Federal Poverty Level (FPL).  And we need to understand what those numbers mean to truly debate the future of healthcare for the least prosperous of our state.

The SC Department of Health & Human Services (SCDHHS) contracted with the actuarial firm, Milliman, to estimate the net cost of expanding Medicaid under the Affordable Care Act. The projected cost to South Carolina was $1.085 billion through State Fiscal Year 2019-2020 (SFY ’20). However, a July 2011 study by researchers at The Urban Institute suggests that South Carolina could save between $59 million and $678 million from 2014 through 2019 because of the same Medicaid expansion. Those are big differences with significant policy implications for the state.[2]

Why so different? Milliman estimates include half of calendar year 2020 when state costs for the expansion population will go up a little. From 2014 through 2016, the federal government will pay 100 % of those costs, declining to 90 % from 2020 on.

Good news is that more people will be covered under the program, and though it will cost more in Medicaid, it will mean savings elsewhere for South Carolina.  Although the Milliman report includes significant state savings from increased drug rebates ($335.5 million), lowered costs for uncompensated hospital care ($217.5 million) and four years of enhanced federal match for the Children’s Health Insurance Program (CHIP) ($130.2 million), it does not look at state savings outside the SCDHHS budget. Those would include significant increases to the number of Department of Mental Health patients made eligible for Medicaid, meaning that the feds would pick up at least 90% of costs now paid by state dollars. Nor does it address eliminating coverages for those currently eligible at above 138 % of FPL. That includes pregnant women who would be eligible for subsidized private insurance through the Health Benefits Exchange, so no longer need Medicaid coverage

Much of the difference in calculation is because we have to estimate how many people will sign up for Medicaid—especially among those currently eligible. Two-thirds of the added costs posited by Milliman are for folks who could walk into SCDHHS tomorrow and sign up regardless of whether South Carolina expands Medicaid. Milliman estimates twice as much cost from currently eligible families ($1.032 billion) as from the newly eligible ($429 million). The federal government will only cover the current match rates for those currently eligible, roughly 70 % for adults and 80 % for children eligible under the Children’s Health Insurance Program (CHIP).

There is a large body of academic research on participation rates, discussed here. The Milliman estimates are, to be generous, at the high end of the evidence on actual participation rates. Milliman asserts: “… the participation rates were reviewed for consistency with participation in the Medicare program which exceeds 95% and the Medicaid / CHIP programs for children which exceeds 85%.” In Medicare a large portion of enrollees are automatically enrolled as seniors eligible based on age, so these take-up rates are largely irrelevant to the more stigmatized Medicaid program. Child take-up rates will exceed those of adults.

Milliman argues (more strongly in public presentations than in their written report) that the personal responsibility requirement, the mandate, will drive eligible persons to sign up. But what is frequently ignored is that the mandate the Supreme Court dubbed a tax will not apply to persons who are not required to file federal income tax returns—which is just about anyone who is a parent with children living at below 50 % of FPL.

Yes, there will be a welcome mat effect which will see many currently eligible parents and children enroll because they are made aware of their eligiblility and enrollment is made easier. The high levels of already-eligible children enrolled when we opened our CHIP program were the result of very intensive outreach efforts. Any welcome mat effect here is likely to be more a product of consumer education efforts through the Health Benefits Exchange than through a Medicaid expansion—a cost of the ACA but not of an expansion. If we eliminate costs for those currently eligible, the multiyear Milliman estimate drops to $53.5 million.

And there will be some “crowd out” as newly eligible persons who currently have private insurance opt for Medicaid coverage. The research literature is pretty clear that there is practically no crowd out below 100 % of FPL. People paying below poverty wages (aside from public employers) don’t provide health coverage and private coverage is completely unaffordable. But Milliman shows large crowd out effects for those currently eligible.

Taking welcome mat and crowd out effects into account and relying on the available empirical research on participation rates, The Urban Institute estimates that Medicaid costs will increase by $570 million from 2014-2019, not the $1.8 billion asserted by Milliman.

South Carolina’s report is one of a series which Milliman issued across the country. Those reports have come under attack for a number of failings, including especially unrealistic participation estimates. See, for example, health policy researcher Leighton Ku’s analysis of the Milliman report on Nebraska. Milliman estimates that 85 % of expansion uninsured parents and 80 % of expansion childless adults will enroll. The Urban Institute coverage model, based on “take-up rates consistent with the empirical literature,” “achieves an average take-up rate of about 73 percent for the uninsured who are newly eligible.” This is higher than a 60 – 70 % “baseline rate due to outreach and enrollment simplification provisions in the ACA.”

A recent study “… suggest[s] that when Medicaid is expanded in 2014, take-up may be less than anticipated because new enrollees will be offered a more restrictive set of benefits—known as ‘benchmark coverage’—compared to those in traditional Medicaid, and the majority of newly eligible adults will be in groups with traditionally low take-up (primarily nondisabled adults).” (Benjamin D. Sommers et al, Reasons For The Wide Variation In Medicaid Participation Rates Among States Hold Lessons For Coverage Expansion In 2014, Health Affairs, 31, no.5 (2012) 909-919.) Although the low take-up rates (just above 50 percent in 2007-2009) for those currently eligible in our state create greater potential budget exposure, those low rates suggest that, without major changes in outreach and enrollment, South Carolina will never reach the very high participation rates assumed by Milliman and costs will be much lower than they suggest.

Two additional points. First, keep in mind these estimates cover several years, not just a single fiscal year. The highest yearly estimate by Milliman shows an additional $278.4 million in state costs on the Medicaid budget from the Affordable Care Act in SFY20. That is not chump change, but it is within the range of annual increases in the last decade for the Medicaid budget. Secondly, if Milliman’s estimates are correct, the return on South Carolina’s investment is $13.3 billion dollars in federal matching funds, or 1229 %, by SFY20. That is not even counting the multiplier effects of injecting an additional two billion federal dollars a year into our state’s economy in SFY20 and every year thereafter. Nor does it include a calculation of the benefit to small employers being better able to afford group health insurance because some employees are eligible for Medicaid.

In sum, the estimates for costs of a Medicaid expansion being advanced by SCDHHS are higher than those supported by empirical data and fail to take into account additional savings to the State, if not to SCDHHS. We have not begun to address the beneficial effects of expanding Medicaid to as many as half a million South Carolinians. As the General Assembly explores a Medicaid expansion, it should do so with realistic numbers based on empirical research and taking into account all costs and savings directly attributable to an expansion and not just SCDHHS costs and savings. To date, SCDHHS has failed to provide estimates of those other savings.

[1] The Affordable Care Act expands Medicaid coverage for all persons up to 133 % of the Federal Poverty Level, but the calculation of that income includes a 5 % disregard making the effective level 138 %. Base eligibility for the Low-Income Families Program (basic Medicaid) in South Carolina is currently 50 % of the Federal Poverty Level but only available to parents with children.

[2] For a discussion of why estimates of costs vary so much, see The Urban Institute’s report for the Kaiser Commission on Medicaid and the Uninsured at

Posted in Economy, Health Care, SC Budget | Tagged , | 4 Comments

Governor Haley’s Vetoes and Budget Policy: what seventy-four vetoes to the General Appropriations bill and seven in the Capital Reserve Fund bill mean for teachers, the arts and our oceans

The General Assembly’s failure is two-fold—they failed to produce a timely budget and,­ combined with gubernatorial vetoes issued late Thursday, have thrown school districts and at least two state agencies into uncertainty. Governor Nikki Haley’s vetoes would eliminate $10 million of the $49 million appropriated to pay for 2% raises for teachers and funding for the Arts Commission and the Sea Grants Consortium.

In the normal course of legislative business, the General Assembly adopts its budget, waits on the Governor’s vetoes and sustains or overrides those vetoes well before July 1 – the beginning of the fiscal year. Not this year when vetoed agencies are out-of-business until the General Assembly returns on July 17 and 18 to take up vetoes.

Annual Arts Tradition

Vetoes of the Arts Commission funding have become a routine of the budget process.  Both Governors Sanford and Haley claim that funding arts organizations is not “a core function” of government. The well-organized arts community rallies and the vetoes are overridden. Having to do that every year risks fatigue and puts arts funding at risk. Since the Governor vetoed both state dollars and authority to spend other funds, the Arts Commission has been told to shut its doors until the General Assembly returns.

We don’t know if the Sea Grants Consortium, which leverages the $428,223 General Fund appropriation into $6 million in total funding and has also been told to shut down, has that kind of support.

Too Bad for Teachers, Says Haley

Haley’s argument against the $10 million in funding for teacher salary increases has merit. The funding is non-recurring dollars. If the General Assembly had rejected Haley’s push for the misguided tax cut for pass-through entities, $20 million would have been available to put this in recurring funds. Still, teachers who have not had raises in several years while also suffering furloughs should get the raises … and the General Assembly will ensure that they do.

In fact, the Governor vetoed only $5.7 million in recurring General Fund appropriations, relative chump change in a $6 billion General Fund budget (or .1%). The majority of the vetoes focused on non-recurring funds. That included vetoes of $10.5 million in the Capital Reserve Fund, a short-term savings account and $20 million in 44 vetoes in Proviso 90.20(B) which allocates the $555 million in funds left-over from FY10-11 and FY11-12.

You can argue for or against many among those vetoes. Some vetoed provisions clearly are pork and some plain attempts to end-run agency priorities.

Sacrificing Health and Safety on the Altar of Political Ideology

Some of the vetoes are particularly troubling for the poorest, most vulnerable and most sickly South Carolinians. For example, five vetoes relate to non-recurring appropriations for the SC AIDS Drug Assistance Program ($200,000), domestic violence and sexual assault centers ($453,680), Kidney Disease Early Evaluation and Risk Assessment Education ($100,000), hemophilia ($100,000) and sickle cell ($100,000). Haley argues that “[e]ach of these lines attempts to serve a portion of our population.” She goes on to assert “these special add-on lines distract from [DHEC’s] broader mission of protecting South Carolina’s public health.” These programs should not be funded from non-recurring funds. They should be part of the core mission of DHEC, even if they serve only “a portion of our population” like those with AIDS and survivors of rape and domestic violence.

Many of the vetoes relate to higher education, some for programs and some for infrastructure.  Haley argues that higher education funding is as good as it should be and growth should be restricted to the annual increase in the inflation index for higher education. We wonder if Boeing, BMW and the high tech businesses she claims to want to recruit share that view. For many businesses, higher education infrastructure is more important than K-12 education to ensure a workforce than can keep their company competitive.

Governor’s Budget Pen: “Blue Line” is potentially devastating amendment to budget process

The most interesting item to come out of Governor Haley’s press conference on the vetoes was not her ad hominem attacks on Senate Finance Chair Hugh Leatherman for “buying votes” on the Department of Administration bill with funding for local projects, but her intent to try to move to “blue-line budgeting.” Apparently she intends a system of amendatory vetoes, allowing the governor to go in and reduce the number on a line or rewrite a proviso, rather than having to accept or reject a line or proviso in its entirety. That will require a Constitutional amendment. In a General Assembly unwilling to enact fairly self-evident legislation giving a governor control over basic administrative functions, this massive expansion of gubernatorial power is not likely to pass. It will, however, give our Governor another example of how “the good ol’ boys” have done her wrong.

Haley: Let’s Repeat Austerity’s Failures or “Tax Cuts or Bust”

Governor Haley continues to focus on tax cuts as the pathway to prosperity, ignoring the clear research that taxes have a very modest impact on economic development, an impact dwarfed by businesses concerns about human capital, infrastructure and quality of life. At this critical stage for our economy, long-term thinking has to be a priority, investment that will lead to growth and cultivating a strong workforce through training and an education system should be an easy political compromise.  Although not attacking the core funding for K-12 education, Medicaid or deferred maintenance in higher education, Haley’s 2012 vetoes undermine our efforts to improve human capital, quality of life and our research infrastructure in the long term.

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Cutting School Taxes to Fix School Funding?

“[A]n investment in public education is essential to the future economic prosperity of our great state” declare the prime sponsors of a proposal for education funding reform. However, in part because they combine this reform with property tax cuts for businesses, Representatives Jenny Horne and Rita Allison and Senator Paul Campbell acknowledge that the proposal cuts $600 million statewide in school property tax funding. This when South Carolina from FY07-08 cut a larger share of per pupil funding, excluding federal aid, for education than any state in the Union according to an October 2011 study by the Center on Budget & Policy Priorities.

Rep. Horne et al. suggest funding that cut by taking “… sales tax revenues that have been diverted to other purposes and return them to their original purpose of funding education.” There is not $600 million sitting in the spare change drawer. Diverting $600 million in sales tax revenues currently spent elsewhere means dismantling more state programs and cutting the bejabbers out of health care … while still leaving the schools significantly underfunded.

Instead of “our decades-old, antiquated education-funding system, which channels money through 74 categories,” they propose assessing 100 mills ($100 per $1,000 of assessed value) based upon statewide property values. Currently, the value of a mill and the number of mills assessed varies school district to school district.

At the same time they would reduce the taxable value of manufacturing property and business personal property. The appraised value of a property is multiplied by an assessment ratio to arrive at the assessed value on which property taxes are levied. The appraised value of manufacturing property and business personal property is currently multiplied by 10.5 %. This proposal effectively drops that multiplier (the assessment ratio) to 6 %. A manufacturer with a property appraised at $100 million would see her assessed value drop from $10.5 million to $6 million. At the same millage, the property would produce only 57 % of the previous tax revenue.

This is a bipartisan proposal even though the lead sponsors are Republicans. Many Democratic legislators look to a state wide millage to address unequal wealth across the state. That impacts the ability of local taxpayers to support education, but also economic development when companies looking to locate in an Allendale know they will pay higher property taxes than in a wealthier county. Districts lacking significant business investments also look to those with those investments and seek to share the tax proceeds statewide. Fairfield and its nuclear plants especially get attention.

The distributional concerns are valid. Our state’s Education Finance Act (EFA), the base of state funding for schools, is intended to have the state cover, on average, 70 % of the cost of a foundation program. The state EFA funding for a particular school district varies by the wealth of the school district, reflected in assessed values and calculated as the Index of Taxpaying Ability (ITA), and by the cost of educating different kinds of students.

An elementary student with no physical, developmental, emotional or learning challenges is given a weight of 1.0. A hearing challenged child is weighted at 2.57. These produce weighted pupil units which, together with the wealth adjustments, drive the amount each district gets. Within the EFA, there is no weighting for poverty despite ample evidence that poor kids cost more to educate. The proponents of this change suggest that the property tax funds would be distributed to districts based upon tweaked weighted pupil units including a poverty measure.

The EFA has problems, relating to the fairness of the ITA measure of local ability to contribute, the adequacy of the weights assigned different kinds of students and how we should calculate the Base Student Cost to reflect changes since 1977. Those problems and fixes for them are described well by the SC League of Women Voters here. Fixing those so that we better reflect the actual costs of educating different kinds of students and that we more accurately assess district ability to fund education post-Act 388’s would address many of the distributional concerns facing poorer and rural school districts.

The core problem with the EFA, however, is that the General Assembly has not been funding it. In FY11-12, the formula would have produced funding of $2,790 as the Base Student Cost (BSC) rather than the $1,880 actually funded. Although the Governor proposed reducing the BSC, the House has improved the base student cost to $2,012 for the coming year … still nearly $450 million short of the formula. The General Assembly should fix the EFA and fund it.

Trying to fund an already under-funded education system and cut taxes at the same times entails a fundamental contradiction. Thinking that we can make up the $600 million by simply redirecting sales tax revenues not currently going to education is magical thinking. The sponsors of this legislation are supporters of public schools and the proposal is still sketchy. However, as currently outlined, this is a very bad prescription for South Carolina’s public schools and for “the future prosperity of our state.”


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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 ( 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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Rewarding Work and Building Wealth: A State Earned Income Tax Credit

Rather than doling out small individual income tax cuts of up to $84 per year to better off taxpayers, the South Carolina General Assembly should instead implement a Ronald Reagan endorsed pro-family, job creation measure which can have real impact—a state Earned Income Tax Credit (EITC). Twenty four states, including North Carolina and Virginia, have state EITCs.

The federal EITC is a refundable tax credit, meaning that, if the amount of the credit is more than you owe in income taxes, you get a refund check. You have to be working in order to get the credit. The credit varies by the number of children and marital status. Working families with children making less than about $36,000 to $49,000 are eligible for the federal credit. The effect of family size and income on credits can be seen at

A family with two children could, in 2012, get a maximum federal credit of $5,236. In 2009, the most recent year for which data is available, the federal EITC brought to South Carolina families $1.165 billion, an average of nearly $2,300 per return for over half a million low-income working families. Those taxpayers are spread across the state. In 2008, no SC House member had fewer than 1,403 taxpayers receiving the federal EITC or bringing less than $2.4 million into the district.

The EITC is generally considered the best anti-poverty measure we have in this country. It’s also good jobs policy. Still, South Carolina Rep. Tommy Stringer of Greenville, Chair of the S.C. House GOP Caucus’s Tax Study Committee, recently dismissed a state EITC: “It is bad tax policy to use the income tax system as a way to extend indirect welfare benefits but call it a ‘tax credit’.” But, it’s no more welfare than the home mortgage deduction or the untargeted business tax cuts proposed by Stringer’s study committee.

Wage and salary growth in the past decade has been especially slow at the bottom. Many low-wage jobs simply don’t pay enough to live on. A state EITC helps low-income families to cope with rising costs when no pay increases are available.  This is a credit that rewards low-wage families for working and has shown to increase job participation.  That jibes with our states newly announced pilot to force SNAP (food stamp) recipients to enter a jobs programs. The state and federal EITC also relieve pressure on low-wage employers, many in small businesses to raise wages.

A tax cut of $84 a year for middle and upper income families will simply disappear without real economic impact. Some will go into savings and some be spent in Vail. Research on federal EITC dollars show that they are either immediately put into the local economy or they are used for asset-building expenditures like education or paying off debt. A $524 refundable credit to a family with two kids could make a real difference.

At a time when the SC House purports to seek tax policies which drive economic development, they should look to a state EITC.  Typically states tie their EITC to the federal EITC because that simplifies administration.  Those costs usually run than 1 % according to a brief by the Center on Budget and Policy Priorities.

An EITC set at 10 % of the federal EITC would provide a credit of up to $524 in 2012 to a family with two children.  The price tag on a refundable EITC in South Carolina, according to an analysis by the Institute on Taxation and Economic Policy in D.C., would cost South Carolina about $118 million. That would be a far better investment than a small tax cut for better-off South Carolinians costing $77 million or a pointless general cut in tax rates for pass-through businesses costing $65 million when phased in.

In 1986, conservative icon Ronald Reagan described the federal Earned Income Tax Credit (EITC) as “… the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” South Carolina legislators who repeatedly declare themselves adherents of the former President should join with Rep. Gilda Cobb-Hunter, who has pushed  state EITC for years, and follow his lead to create a refundable state EITC in South Carolina.

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SC Senate on Verge of Giving State Power to Take Over Medicare

The South Carolina Senate is poised to pass legislation to authorize South Carolina to take over all federal health care programs and repeal all federal health care laws and regulations. That would end Medicare, the health care program for persons over 65 or with disabilities, as we know it. The legislation got Second Reading last week on a 25-13 vote.

This bill signs South Carolina up for the Interstate Healthcare Compact, the brain child of conservative activists opposed to the Affordable Care Act. Congress must give permission for this compact to take effect. So, at this stage, state’s passing legislation to join these compacts is a feel-good exercise in the anti-Affordable Care Act drama.

Under that Compact, South Carolina could “… enact legislation to suspend the operation of all federal laws, rules, regulations, and orders regarding health care that are inconsistent with the laws, rules, regulations, and orders adopted by the member state pursuant to this compact.”

After giving up control of health care, the feds would continue, in compact states, to fund it at the level of health care spending in South Carolina in Federal Fiscal Year 2010. Those numbers are adjusted in the future based on population and an inflation factor. In 2009, Medicare provided $7.2 billion in payments for over three-quarters of a million South Carolinians and the federal contribution to Medicaid spending was $4.0 billion for over 800,000 among us.

As the proponents, the Health Care Compact Alliance, note: “Healthcare policy is about who and what is covered. The Health Care Compact is about who decides.” They are selling a pig in a poke.

However, we have seen in the recent US House Budget, what conservatives are thinking about both Medicaid, the joint federal-state program for lower income Americans, and Medicare, the federal program for seniors. For Medicaid, they would block grant it to the states, much as this compact would. States could then design their own solutions for good or ill. The House would transform Medicare by creating a health insurance exchange where new seniors would purchase private or federal health insurance with vouchers.

As Edwin Park of the Center on Budget and Policy Priorities in Washington, DC, observes of Medicaid block grant proposals: “In particular, [block grants] would shift costs and risks quite significantly to the states, to tens of millions of low-income Medicaid beneficiaries, and to the health care providers that serve those beneficiaries.”

Proponents argue block granting is an opportunity to use “states as laboratories” to develop better ways to address health. Matt Salo, Executive Director of the National Association of Medicaid Directors, is reported describing block grant talk as a “distraction. The real issue, as the president said to [governors at their Washington meeting] is, if there are Medicaid flexibilities we can do, let’s do them.” States routinely seek waivers to Medicaid rules to try what they believe are better ways.

Such experimentation could include turning health care over “to the free market”—totally ignoring the market failures inherent to health care, adverse selection and moral hazard. In South Carolina you add in market-distorting presence of an 800 pound gorilla, Blue Cross. Kenneth Arrow, Nobel Laureate economist, observed in 2005:

The problem then really comes down to the fact that the government is better than the private sector at keeping costs down- for insurance purposes. This isn’t true in any other industry. If, for example, you are trying to produce electronics, you could hardly do worse than have the government run such an industry. But, in an insurance program, it’s a different matter.

With no guarantees that the federal funding formulas will keep up with medical inflation or changing age structures in the population, states like South Carolina are more likely to turn to the time-tested tools for cutting costs. Those are: changing eligibility standards so that fewer people are enrolled; reducing services provided shifting costs onto beneficiaries and cutting payments to providers. Health care gets cheaper on the state’s books, but it doesn’t get better or smarter.

Even if the US Supreme Court were to invalidate the Affordable Care Act, the attacks on Medicaid (including the Children’s Health Insurance Program) and Medicare would continue. Medicaid especially comes with lots of federal strings which offends anti-federal state legislators. The programs represent a large chunk of federal spending—21 % of the 2011 federal budget which conservatives would like to reduce significantly or eliminate.

Although nothing in the Compact compels South Carolina to take over Medicare, nothing would stop it from doing so. The Compact only excludes health care provided by the Department of Defense and United States Department of Veteran Affairs to Native Americans.

The lead sponsor of S. 836 had not understood that this Compact includes Medicare—a highly popular program. In the face of questioning from Sen. Brad Hutto on the point, Sen. Mike Rose said he did not believe it did. Clearly it does. When Hutto attempted to amend the bill on 3rd Reading to exclude Medicare, the Senate stopped him from offering that amendment. Senator Rose, at that point, moved to put off the debate until he had researched the question—a motion which barely passed. The bill will be up next week.

Posted in Economy, Health Care, SC Budget | 5 Comments

SC GOP House Tax Plan Shifts a Billion Dollars onto Owners of Homes and Vehicles

Two of the bills in the SC House GOP Caucus tax package will both transfer significant tax burden onto homeowners and car owners and gut budgets of schools, counties, municipalities and special purpose districts.  The legislation is advertised as reducing assessment ratios on manufacturers and on commercial property.  Both are phased in over four years and eight years, respectively.

The manufacturers’ bill artificially reduces the assessment ratio on manufacturing property and on business personal property (“the furniture, fixtures and equipment that are owned and used to operate a business”) to an effective rate of 6 % from the nominal rate of 10.5 %.  This bill will reduce revenues to local governments by $228 million when fully implemented.

The second measure applies not just to commercial properties, but to rental property and second homes as well.  The assessment ratio is dropped from 6 % to 5 %.  This will reduce revenues to local governments (schools, counties, municipalities and special purpose districts) by $827 million when fully implemented.

If you reduce the assessment ratio of  manufacturers, business personal property, commercial property, rental property and second homes, you drop the total assessed value of a community.  The remaining classes’ share of the total assessed value has increased even though its assessed value has remained the same.

To raise the same amount of funds for the jurisdiction’s budget, the millage—the total assessed value divided by the budget (expressed as $1 per $1,000 assessed value)—will have to go up.  If the millage goes up, but my assessed value stays the same, I pay more in property taxes.  The only way to keep my homeowners property tax and property tax on my automobile or truck the same is to keep the millage the same.  That means that my local government gets less money.

Because Act 388 of 2006 swapped property taxes for school operations for an extra penny in sales tax, the lost assessed value can’t be shifted to homeowners.  But that just puts more pressure on vehicle owners, utilities, agricultural property and transportation to fund schools since the amount paid by manufacturers, business personal property, commercial property, rental property and second homes will have gone down.

You might think you can just move this $1.06 billion dollars around, reducing taxes on three class of property owners while hiking it on others.  However, Act 388 also included a cap on millage increases.  The millage can’t increase each year by more than the increase in the consumer price index plus population growth, with some flexibility built in following years when the cap was not reached.  If the local jurisdiction reaches its cap, it’s only option, other than increasing fees, is to cut services.

In FY09-10, South Carolina schools, counties and municipalities had $13.7 billion in total revenues.  Of that, $4.6 billion came from property taxes.  Thus, nearly one in four property tax dollars has to be either reallocated to other property owners or the public goods those taxes fund—schools, public safety, sanitation and so forth—cut.

It’s easy for the General Assembly.  None of this $1.06 billion will come out of state coffers.  They are spending someone else’s money.  And they have hamstrung the ability of those someone-elses to move those burdens around or to raise funds in other ways.

It’s an ill wind that blows no good and this blows some good. When Act 388 passed, no one took it in the ear more than renters.  They had to pay increased sales taxes but go no relief on their rent like homeowners did on their total housing cost.  This legislation would lower property taxes on landlords.  However, there are no requirements that they pass those savings on.  The economics literature suggests that how landlords and tenants share changes in property taxes is largely a function of how tight the rental market it is.  Over the long run, it may slow increases in rents.

For those of us who own homes or vehicles, we are going to face increases in our millage rates and our taxes to pay for some of this billion dollars that people able to afford second homes, landlords and businesses will save.  What can’t be shifted onto us will be paid for by reducing the public goods that protect our quality of life and our children’s future.  This is very short-sighted public policy.

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SC Small Business Tax Cut Shrinks Government but Doesn’t Help Small Business Development

The SC House GOP proposed tax cut for small businesses will cost South Carolina’s General Fund $60 million per year while generating no economic development benefits.  This bill reduces the tax rate on businesses which are not “C” corporations (“sole proprietorships, partnerships, and ‘S’ corporations, including limited liability companies taxed as sole proprietorships, partnerships, or ‘S’ corporations”) from 5 % to 3 %.

The advocates for this change, our good friends with the SC Small Business Chamber of Commerce, do not argue anything but equity on behalf of this change.  “We want parity with big business,” they argued to the subcommittee, in the face of a proposed elimination of corporate income taxes.

These cuts are significant to the budget, but small to the business owner—only 2 % of profits.  For a business with $100,000 in profits, that would be a $2,000 savings—too little to fund new employees or productivity-improving investments.

According to the federal Small Business Administration:  “Most of South Carolina’s small businesses are very small as 77.8 percent of all businesses did not have employees and most employers have fewer than 20 employees.”  Small businesses are fragile businesses.  In 2009, we had 16,515 business openings in South Carolina—but 17,519 closings, including 389 business bankruptcies according to the SBA.  Those businesses on the verge of bellying up will have no profits.  Cutting taxes on profits won’t help them at all.

Businesses with fewer than 500 employees lost 65,943 net jobs in 2008-2009 in South Carolina, more wiping out the job growth in the previous three years.  Barely affecting this loss was the increase of 2,028 net jobs in businesses with 1 -4 employees.

The economic development narrative so often repeated at the State House that “small businesses drive jobs creation” is exaggerated.  Small businesses create a lot of jobs and, through failures, destroy nearly as many.  As a study by the St. Louis Federal Reserve found:  “…when one accounts for job destruction, small businesses appear to account for a significantly smaller share of net new jobs created in the private sector than many people might believe.” But small and medium-sized businesses are still an important part of net job growth.

There are real things that would actually work to help small businesses and grow our economy if that were your goal.  A cross-national study of small and medium-sized enterprises (SME) concludes:  “There is a general consensus that the competitiveness of an individual SME is strongly related to the “quality” of its owner/manager. “Quality” is, in this context, strongly related to the human capital of the individual, in turn influenced by a combination of formal education, training and experiential learning.”

Economic development authority Timothy J. Bartik of The Upjohn Institute for Employment Research recently observed:  “There is good research evidence for several policies that provide services to increase the productivity of small and medium sized businesses. Two policies with rigorous evidence of cost-effectiveness are customized job training and manufacturing extension programs,” which he elsewhere describes as providing “smaller manufacturers with information to improve their productivity through new technologies and better methods of workplace organization, business planning, and marketing.”

South Carolina politicians routinely utter pious mouthings about their commitment to small businesses.  We have some of the helpful programs, such as Small Business Development Centers, but expanding and adding to them and providing significant resources would be real steps to helping small businesses.

With this $60 million, we could better fund public education, health care and infrastructure—the things that businesses looking to relocate here are looking for.  Or we could redirect these funds to building the human capital in small businesses.  There is little evidence that those pushing the SC House GOP Caucus tax package are interested in doing anything but “to shrink government to the size where we can drown it in a bathtub.” Down that road lies ruin.

Posted in SC Budget | 1 Comment

SC House Republicans Move to Tax Working Poor

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”.

Posted in SC Budget, Taxes | Tagged , , | 1 Comment