Tax reform package offers chance for change

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Tax reform package offers chance for change

Published Friday, March 23, 2012   |  704 Words  |  

State House leaders have delivered a seven-part tax reform effort that includes eliminating most sales tax exemptions and reducing the overall sales tax rate.

It's a promising start to reform efforts, but we'll have to see how far and how many of the bills get through the legislative session to assess the impact. If only one or two bills make it into law, it could be problematic. Any bills that don't make it through the legislature this session die.

House Speaker Bobby Harrell, in announcing the package of bills, said, "We ... believe that this is the year to pass meaningful tax reform legislation into permanent law."

But saying it doesn't make it so.

The package includes bills that would:

  • Eliminate about two-thirds of the state's 78 sales tax exemptions. Exemptions would remain for gasoline, food, electricity, water and medicine, Harrell notes.
  • Cut income taxes for small business owners from 5 percent to 3 percent.
  • Lower personal income tax rates of 4 percent, 5 percent and 6 percent to 3 percent. House Republicans say 78 percent of South Carolinians who pay income taxes either would pay less or see no change under their plan. Twenty-two percent would pay more.
  • Reduce the manufacturing property tax rate from 10.5 percent to 6 percent.
  • Reduce the commercial and rental property tax rate from 6 percent to 5 percent.
  • Eliminate the 5 percent corporate income tax over four years.
  • Set up a Joint Tax Review Committee to examine the remaining sales tax exemptions every five years.
  • The reductions in manufacturing and commercial and rental property tax rates, which were advanced this week by a House Ways and Means subcommittee, have raised concerns about the impact on
    local governments. It would reduce their revenue by an estimated $1 billion a year. That money would have to be made up through higher taxes on other types of property -- such as vehicles and owner-occupied homes -- or local officials would have to cut spending for services.

    It's no skin off the collective noses of state lawmakers; the state doesn't collect property taxes.

    House Minority Leader Harry Ott summed it up well: "It's pretty easy for us to sit up here and say we want to reduce taxes when we don't have any skin in the game, wouldn't you say? ... We tell people we want to cut, cut, cut, then we want to tell guys representing local governments, you do all the cutting."

    It certainly was the case with Act 388, the property tax law changes passed in 2006. That has been a lesson in unintended consequences. It cut taxes for owner-occupied homes by removing school operating taxes and replaced those taxes with an additional 1 percent sales tax. The law also capped increases in property values in a reassessment until the property was sold and limited local governments' ability to raise property tax rates.

    Changes to the law last year sought to address concerns about the "point-of-sale" provision's impact on real estate sales and the limits on local government's taxing authority.

    The revisions cut 25 percent of the new market value for commercial and rental properties and second homes when a property is sold. The discounted value can't fall below the existing taxable value. The changes also allow local governments to go back three years to tap property tax rate increases they passed up.

    Act 388's history makes us particularly leery of piecemeal tax reform. The strongest aspect of the reform package in the House is eliminating many of the state's sales tax exemptions.

    The state Supreme Court has taken up the issue with a lawsuit filed last year and a decision is expected soon. Columbia attorney Matthew Bodman's lawsuit contends the sales tax exemptions violate the state constitution's equal protection clause and are "the result of patching and filling by the General Assembly" with no rational basis. He also claims they amount to unconstitutional special legislation.

    If the Supreme Court agrees with Bodman, lawmakers would have to undo decades of special treatment under the sales tax law, a very good place to start tax reform.