State Exempts More in Sales Tax Than It Collects

September 14, 2016

Inside Insight

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By DUNCAN TAYLOR

pennies

Welcome to the world of South Carolina state government . . .

In the most recent year for which data is available, a review by The Nerve has found, South Carolina state government collected $2.4 billion in sales tax revenue – but exempted a full $3 billion.

That’s the opposite of what one would expect to find. In most forms of taxes, only a few items are exempt, and in a typical year a typical state would take in far more than it would exempt. It’s a simple matter of government needing revenue: Lawmakers are reluctant to dole out too many exemptions since that means less revenue.

But this is South Carolina. At the General Assembly in Columbia, the exemptions are at least as important as revenue because exemptions indicate relationships – relationships between lawmakers, on the one hand, and lobbyists, friends, consultants, allies, and family members, on the other.

That’s at least the common way of explaining why the tax code is riddled with exemptions, and it makes sense. The state exempts – to take just a few examples from the list – textbooks, newprint paper, Bibles, insecticides, telegraph messages, coal, farm machinery, motor fuel, “livestock used primarily as beasts of burden,” and sweet grass baskets made by South Carolina artists.

This abbreviated list suggests just how entrenched the State House’s culture of favoritism has become over the decades. It also explains why, as a practical political matter, lawmakers are extremely unlikely lower the state’s fairly high sales tax (some states have a lower income tax and, unlike South Carolina, have no income tax). Since fewer consumers and companies actually pay the tax, the rate has to stay high in order to take in what comparatively little revenue it generates.

A House ad hoc committee is currently reviewing the state tax code with a view to making it “fairer” and “flatter.” Like every other committee and commission and task force that’s tried to strike exemptions and lower rates before, this one will come up against the same obstacle: a lobby full of people who think their exemptions are too important to cut.

Duncan Taylor is a policy analyst at the South Carolina Policy Council

  • Erin Lester

    Just to confirm–a telegraph message…is that the same as Western Union?

    • scflyboy

      Western Union used to send telegrams, along with several other companies. They stopped telegram service at the end of January, 2006.

  • danielgallagher

    Why is anyone surprised this is the crooked state I have evr lived in, and I moved her fro NJ. The people here get excactly what they deserve. They continue to reelect the same crooks and expect change. Until there is a complete change in Columbia it will always be this way. Thank you for the great job of reporting the constant abuse of power and lack of any common sense. This state has so much potential, but with schools that suck , road that suck and the high rate of disregard for the law it will never reach that potential. Thanks again for your efforts to inform people of their government at work.

  • Elmer

    Don’t overlook one of the most egregious sales tax “exemptions” of all — the $300 limit on the sales tax for motor vehicles. For example, the buyer of a $6000 fliver pays a 5% tax, and the buyer of a $60,000 luxomobile pays a 0.5% tax. Why not lower the percentage for everyone and apply it to the total sales price, achieving a revenue-neutral result? This is nuts, but when I talk with our “representatives” about it I get the shrug of the shoulders. Of course, they are commonly in the pockets of the auto dealers who like to sell the luxomobiles. I think the same concept applies to boats and airplanes. I could confirm that but my stomach can’t take much more study of the results of the criminal activity in Columbia.

    • Steve Haynie

      The South Carolina Automobile Dealers Association buys the Legislature through its SCADA Dealer PAC.

      • Elmer

        Thanks, Steve. It truly is a criminal conspiracy. It would seem integrity is a quality that is in critically short supply in Columbia. Of course that pretty much characterizes governments throughout SC. I appreciate the work that the SCPC does, but there is so much skullduggery and so few who care or are willing to take action.

    • Lyn Wilson

      That’s not as egregious as it sounds, and a little math shows why once you figure in property tax. The $300 sales tax, plus the property tax paid yearly, will equate to over 11% of the vehicle purchase price in about 8 years. It’s just a deferment, with the money going into different buckets. I would actually prefer to pay the sales tax up front on property, and then enjoy the rights of ownership without being taxed for owning property in perpetuity.

      • Elmer

        Thanks, Lyn, for the comments. Here are my thoughts on them:

        1. I maintain that the sales tax cap is still highly regressive, in spite of your argument to the contrary. The buyer of the Luxomobile pays a 0.5% tax up front and 11% (taking your figure) over the next 8 years. The buyer of the Fliver pays a 5% tax up front, and the same 11% over the next 8 years.

        2. RE: “…being taxed for owning property in perpetuity.” After 10 years or so, a motor vehicle has little or no value. Also, after 15 years (at least in Aiken Count) the valuation of motor vehicles ceases and a standard nominal amount is applied from then into the future. In our case it’s about $35 per year. $35, 15 years from now has very little value. (See Point #3 below.)

        3. Often overlooked is the “time value of money.” I would always prefer to defer taxes into the future, since a dollar 8 years from now will have considerably less purchasing power than a dollar today. This makes your citing of the 8 year taxing period an even more dramatic example of regressive taxation. That is, the 5% payment up front plus 11% over 8 years is a whole lot more burdensome than the 0.5% payment up front and 11% payment over 8 years. So, the Luxomobile buyer’s advantage is two fold.

        • Paul

          It is worse than you think. If you own a classic car that is over 15 years old you pay the nominal property tax rate regardless of value. So someone who owns a classic Ferrari that might be valued in excess of $500,000 pays the $35 a year.

          The sad part is the fix is simple…just apply the nominal rate to anything that has a value of 5K or less after 15 years and tax everything else at the real value.

          • Elmer

            Thanks, Paul, for this information. I don’t usually defend any aspect of SC’s screwed-up tax code, but here’s a thought about your observation. Perhaps it is reasonable to view a highly valued “classic car” as a piece of art or museum exhibit, rather than a transportation vehicle that plies the roadways regularly. The typical classic car is used infrequently and over short distances and, therefore, makes little use of the roads and bridges. Insofar as I know, SC doesn’t tax other sorts of high-value possessions (art, antiques, guns, musical instruments, etc. ) that people own.

  • Nancy Yates

    I favor Comprehensive Tax Reform: 1) Eliminate some of these sale tax exemptions and deductions 2) Broaden tax revenues with consumption based taxes 3) Balance budgets instead of borrowing, and apply revenues generated to pay debt (i.e. pension funds, while phasing them out) 4) Decrease personal Income taxes

  • Elmer

    Consumption (read “sales) taxes to replace income taxes? Very regressive.

    • Lyn Wilson

      South Carolina = regressive

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