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Governor, House Part Ways on Tax Reform

A potential overhaul of the state tax code this year has fallen into a parting of ways between Gov. Nikki Haley and the S.C. House, with Palmetto State taxpayers stuck in the middle as the potential losers.

For her part, Haley has proposed a reform plan that arguably equals half a loaf.

The House, meanwhile, has demonstrated its “appetite” for reform by, for example, renewing a $114,000 tax rebate for an annual NASCAR race in Darlington County and reviving a sales tax holiday for guns. (More about that “appetite” later.)

For many years, observers ranging from politicians to policy analysts have decried the state tax code as byzantine and overrun with special-interest favors for a few at the expense of the many.

And for just as many years, the General Assembly has failed to do anything about it.

This trip around the sun might be no different.

In her executive budget for the 2012-13 fiscal year, which starts July 1, Haley proposed a four-prong plan to:

  • Phase out the state’s corporate income tax over four years;
  • Lower the state’s 4, 5 and 6 percent individual income tax rates to 3.75 percent;
  • Amend the S.C. Constitution to allow for property tax rates, particularly on manufacturing assets, to be set by law rather than the constitution as is currently the case; and
  • Require regular reporting on the dollar amounts and beneficiaries of all state tax credits, deductions and exemptions.

Haley estimates that businesses collectively would save $61.6 million in the first year, 2013, of her proposed corporate income tax phase-out.

She projects a $78.2 million total tax cut in the first year of her plan to lower the 4, 5, and 6 percent individual income levies to 3.75 percent.

That’s a combined $139.8 million in tax relief next fiscal year, according to Haley’s plan.

Back in January, though, Haley convened a State House news conference in which she unveiled a different income tax reform proposal. In that plan, Haley called for the 4, 5 and 6 percent rates, as well as the top bracket – 7 percent – to be reduced to 3.5 percent.

In any case, after Haley sent her executive budget to the Legislature, the House Ways and Means Committee, where budget bills begin, did not adopt any of her tax reform ideas in the committee’s proposed spending plan for 2012-13.

The committee sent that budget to the full House last week. After debating it since Monday, the chamber gave the spending plan unanimous final approval this morning. It now goes to the Senate.

Haley Calls House Out

Haley was none too pleased with the House passing on her ideas and, on Monday, held another news conference at the Capitol. “Well, the House doesn’t have a plan, that’s the problem,” she said in answering a question about how her proposal compares to the House’s.

Responding to a question from The Nerve about calling, during her January news conference, for the 7 percent income tax rate to be cut to 3.5 percent, but not doing so in her executive budget, Haley said, “No, it’s always been that we were going to go from six brackets to three.”

She added that she wants to eliminate the 7 percent rate eventually but her plan is based on phases.

“This isn’t about tax reform this year,” Haley said. “This is about saying we’re serious about tax reform for the next four or five years, so that we can get us back to being competitive like other states in the country.”

By some estimates, the income tax reform plan Haley put in writing in her executive budget is substantially less favorable to taxpayers than the one she announced during her January media event.

The Nerve’s parent organization, the South Carolina Policy Council, pointed out that the average South Carolina family falls into the 7 percent bracket – and that rate is among the highest top brackets in the nation.

“In addition to providing only minor tax relief, the governor’s written proposal does nothing to address the inherent injustice in the fact that middle class families are paying a rate of 7 percent,” the Policy Council wrote. “This rate is unfair to middle class families, and it makes our state uncompetitive. Any tax reform that’s serious about restructuring our system must address this high rate.”

In her news conference Monday, Haley went out of her way to link tax reform to job creation.

She said her main concern in crafting her executive budget was the core functions of government and that she proposed more funding for some of them, including law enforcement and education.

“But what we also knew was my No. 1 agenda item is jobs,” Haley said. “You hear me talk about it all the time. It is all about jobs and the economy, and through every company that I try and recruit here, they always come back to the tax structure.”

“My job is to bring jobs to this state,” she added later, “and the only way I can bring jobs to this state is through tax relief.”

But, in lieu of her plan, Haley used her bully pulpit to pressure the House to set aside $140 million for tax relief in 2012-13. “Create a tax relief trust fund,” she said.

That amount would roughly equal the combined business and individual tax savings Haley estimates in the first year of her plan.

Rhetoric vs. Reality

Although the House has not adopted any of Haley’s proposed tax changes, on the same day she conducted her second news conference – Monday – the chamber’s majority Republican Caucus filed a seven-bill tax reform package.

Among other things, the bills would cut the manufacturing property tax rate from 10.5 percent to 6 percent; eliminate the corporate income tax; lower the 4, 5 and 6 percent individual income tax rates to 3 percent; and abolish two-thirds of the state’s 75-odd categories of sales tax exemptions.

While comprehensive in the whole, the odds that any of the bills will pass this year are way long. The legislative session ends in early June, and any proposals that do not clear the General Assembly before then die.

Haley emphasized that point in her media event this week.

Indeed, while the House Republican Caucus is acting on tax reform late in the game, the chamber’s budget committee renewed the $114,000 tax break for a yearly NASCAR race at Darlington Raceway, and revived a sales tax holiday for guns, early in the session.

For this fiscal year the Legislature discontinued the latter, dubbed the “Second Amendment Weekend,” after allowing it for at least the previous two years.

But, defeating a motion by Rep. Gilda Cobb-Hunter, D-Orangeburg, to nix it again next year, the House this week approved bringing back that special-interest tax favor along with renewing the NASCAR tax rebate in 2012-13.

All the while, in the backdrop of the tax reform debate a lawsuit challenging the constitutionality of the state’s sales tax exemptions is pending in the S.C. Supreme Court.

In that case, House Speaker Bobby Harrell, R-Charleston, and Ways and Means Chairman Brian White, R-Anderson, join their Senate counterparts in asserting that the Legislature has “the appetite to take up the complicated issue of tax reform and to perform it in a timely and responsible manner.”

Be that as it may, in the world of rhetoric vs. reality, so far that appetite is serving up the same old meal to South Carolina taxpayers – just warmed over a bit.

Reach Ward at (803) 254-4411 or eric@thenerve.org.

Budget Economic Development General Assembly Incentives Legislation Taxes

House Speaker Bobby Harrell Rep. Gilda Cobb-Hunter Gov. Nikki Haley Rep. Brian White South Carolina Policy Council