A state bill calling for the elimination of South Carolina’s income tax was discussed Wednesday before a House subcommittee – the first time in recent memory that such legislation received a legislative hearing, supporters say.
“The bill you have in front of you is clearly a game changer,” Rep. Bill Taylor, R-Aiken and sponsor of H. 3116, told the Ways and Means Sales and Income Tax Subcommittee.
“Tax what people spend, not what they earn,” he said. “It’s a lot fairer.”
Under Taylor’s bill, dubbed the “South Carolina Fair Tax Act,” the state income tax would be replaced with a 6 percent sales tax on all new goods and services on a retail base of about $110 billion, said John Steinberger of Charleston and head of the S.C. Fair Tax Association, a group that advocates taxation of goods and services, not income. The proposed broad-based sales tax under H. 3116 would, among other things:
- Tax goods and services only once. Sales taxes on used goods and business purchases would be exempted;
- Boost disposable income at least $400 a month for most families, supporters say;
- Provide a monthly rebate payment to legal state residents that would cover sales tax expenses on basic needs, such as food, medicine and utilities. Based on federal poverty data, a family of four would have to spend more than $2,500 a month before paying a net sales tax. For two people in a home, they would spend $1,900 a month before paying a net sales tax; and
- Establish taxpayer-protection provisions, such requiring as a two-thirds vote in both chambers to raise the sales tax rate and a simple majority to reduce it. Taxpayers would have a “presumption of innocence” in audits, with the burden of proof shifting to the S.C. Department of Revenue.
The nonprofit Washington, D.C.-based Tax Foundation told The Nerve by email Wednesday that the following nine states have no income tax:
- New Hampshire;
- South Dakota;
- Washington; and
New Hampshire and Tennessee have no tax on wages and salary but do tax interest and dividend income, according to the Tax Foundation.
Speaking to the House subcommittee Wednesday, Steinberger said according to Karen Walby, a former chief economist for the state of Florida who drafted the “South Carolina Fair Tax Act,” state coffers would continue to collect about $6.3 billion in state revenues a year if Taylor’s bill becomes law. Steinberger said by eliminating most current sales-tax exemptions, the new sales tax would generate enough to cover the cost of the monthly rebate payments on necessities for South Carolinians.
The S.C. Board of Economic Advisors has not yet analyzed the bill, which has 53 co-sponsors, though it was prefiled on Dec. 11. Sen. Larry Grooms, R-Berkeley, introduced a companion bill (S. 185) on Jan. 8, but it has been stuck in the Senate Finance Committee.
Two members of the Ways and Means Sales and Income Tax Subcommittee said Wednesday they support tax reform.
“The (S.C.) Supreme Court all but told us we’re going to have to deal with tax reform this next year, so I appreciate you (Steinberger) bringing this forward,” said Rep. Murrell Smith, R-Sumter .
Smith was referring to a May 8 Supreme Court ruling that rejected a challenge to the state’s 78 current sales tax exemptions. Although the high court said the relatively high number of exemptions was not unconstitutional, the chief justice opened the door for possible future challenges.
“In my opinion, many of these exemptions and caps could not withstand even the minimal level of scrutiny under an equal protection analysis,” Chief Justice Jean Toal wrote, noting the $300 sales-tax cap on auto purchases.
Smith said it speaks volumes that veterans are retiring in Florida or Texas instead of South Carolina because those states don’t have an income tax.
Rep. Gary Simrill, R-York and a subcommittee member, told Steinberger and the 40 to 50 supporters of H. 3116 who attended Wednesday’s hearing that South Carolina needs tax reform, though he offered a warning regarding the process of amending bills in the General Assembly.
“As this bill were to move forward in the State House … I guess by the time it got through I wonder what the fair tax would look like,” Simrill said.
Steinberger said the S.C. Fair Tax group would respond to any changes in the bill.
“South Carolina has a lot of good things going on right now,” Steinberger said, noting the recent decline in the state unemployment rate.
But he also said research indicates 62 percent of the job growth nationwide in the past decade has occurred in states that have no income tax, noting that neighboring North Carolina is among states seeking elimination of its income tax.
Steinberger acknowledged that services, medicine and unprepared meals, which currently are exempt from South Carolina sales tax, would be taxed under the House bill. Overall, though, the elimination of the state income tax would make the Palmetto State more attractive for businesses and people from other states to move, he said, contending that enough revenue would be generated with the sales tax to allow municipalities and school districts to lower property tax rates.
“By broadening the base, we are lowering everyone’s tax burden,” said Johnny Fryar Jr., a Myrtle Beach accountant who spoke in favor of the House bill.
Rep. Rita Allison, R-Spartanburg and the subcommittee chairwoman, said there could be another hearing on H. 3116. But with the 2013 regular legislative session ending in a week, the bill likely won’t be considered again until next year.
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