The taxing situation

By Dick Hughes  

NOVEMBER 2, 2010 12:00 a.m. (0)

South Carolina’s business community hopes an opening created by a sales and income tax reform study will reopen what it sees as a job-killing shift of the burden of property taxes onto businesses.

When the legislature convenes in January with sentiment growing for overhaul of tax policy, along with required consideration of the study on sales and income taxes, business lobbyists again will push to repeal the law that raised sales taxes to give property tax breaks to homeowners.

Critics argue that 2006 law effectively placed the lion’s share of paying for K-12 education on business and industry, created a shortage in funding for schools, contributed to the state debt and produced a patchwork of sales tax exemptions, the biggest one being the tax on groceries.

“Taking the sales tax off groceries – that was one people were not beating down the doors for – blew a $450-million hole in state government revenue” and left other taxpayers, primarily industry and businesses, to fill the gap, said Lewis Gossett, president of the South Carolina Manufacturers Alliance.

“There’s a very good case to be made, obviously, that the manufacturing community through its property taxes is responsible for is subsidizing these other tax breaks, and that is unsustainable.”

By narrowing the tax base, he said, “fewer and fewer” are responsible for taxes and the “burden becomes too much, and that is on the business community of South Carolina.”

Nowhere are the stakes for preserving and attracting manufacturing jobs greater than in Greenville, Spartanburg and Anderson counties, which lead the state in manufacturing jobs, according to an economic impact study by the Manufacturers Alliance.

Of Greenville’s total employment of 224,240, nearly 13 percent are in manufacturing. In Spartanburg and Anderson the dependency is even greater: 21 percent of Spartanburg’s 111,644 jobs are in manufacturing and in Anderson 20 percent of 55,968.

The alliance’s study estimates that 60 percent of the more than $521 million in property taxes paid by manufacturing in fiscal 2007-08, 60 percent went directly to support K-12 education in local communities.

“One of my members is going to be one of the top two property taxpayers in every county of South Carolina, and usually we make most of the top 10 property taxpayers,” said Gossett, noting that manufacturers make up only 4.5 percent of establishments.

Michael Fanning, the 43-year-old executive director of the Olde English Consortium in Chester, has become the pied piper of tax reform, crisscrossing the state with a power point presentation that asks: Is the state broke, are taxes too high and is the system broken?  Yes to all, says Fanning.

Fanning believes that when the legislature convenes in January it will be dealing with a budget deficit that is $1 billion to $1.5 billion more than the $660 million it had a year earlier.

With that reality, pressure to take up TRAC recommendations and the stated support of both gubernatorial candidates, Republican Nikki Haley and Democrat Vincent Sheheen, the timing is right for the first comprehensive review of tax policy “since we implemented the sales tax in South Carolina 67 years ago.”

Gossett agrees that “structurally the system is broken” but is cautious in anticipating the legislature will have the courage to make the tough decisions.

Fanning, who has made between 100-150 presentations to “Rotaries, chambers, ministerial associations, groups at the YMCA,” said he is not giving up until legislators “start hearing from folks at church, at home owners associations and get the message that our state is broke and our taxes are too high.”

Legislators “are going to hear from us that the No. 1 issue that we are going to ask them to tackle is tax reform,” Fanning said.

“They are going to be hearing from some powerful interests that have some powerful money,” he added. “What we want to do is start having numbers that outweigh that one calling with a $10,000-contribution.”

Because enormous publicity accompanies success stories of using incentives to bring high-profile industries to the state, no one sees the burden of taxation on existing companies that “are not receiving any tax incentives to stay here,” Fanning said.

“They are shutting their doors every day because of the tax burden, especially the business property taxes in South Carolina being the 5th or 7th highest in the nation.”

By increasing sales taxes to reduce homeowner property taxes, they argue, the property tax leg of the three-legged stool of balanced taxation was cut off.

The state now relies on sales and personal income taxes for 87 percent of state revenues. Because of their vulnerability as revenue generators in economic downturns, Fanning said, South Carolina has weathered the recession “in a much more unsafe fashion than other states across America.”

He said state revenue projections have been cut seven times in two years; one quarter of the state budget has been excised since 2006; education has been cut nine times in 18 months and is budgeted at 1994-95 levels; and the state has lost more than $1.3 billion “just this last year.”

Revenue from sales taxes has decreased despite two rate increases since 1984 because exemptions exceed items and services taxed, Fanning said.  If 95 percent of the exemptions were eliminated, he said, the state could cut the rate from 6 to 3 percent and raise the same amount of revenue, $2.5 billion.

Fanning points out that of 2.1 million state income tax filers, 41 percent have zero liability, meaning “the 59 percent left pay more.”  Today, he said, personal income tax revenue is at 2001-02 levels.

“For too long in South Carolina, when we need money we raise a tax; if we have extra money, we cut a tax. We do it all in isolation and sometimes we’ll throw a tax exemption out there and nobody knows anything about it,” Fanning said.