Bill Calls for Lowering State Sales Tax, Axing Exemptions

June 7, 2011

Investigative Reports

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The NerveThe state sales tax would be lowered by more than a third in exchange for doing away with dozens of sales tax exemptions, under a House bill quietly introduced at the end of the legislative session.

The bill (H. 4271), filed May 25 by Rep. Shannon Erickson, R-Beaufort, and co-sponsored by six other Republican representatives, would reduce the sales tax to 3.85 percent from 6 percent.

The bill would do away with a myriad of sales tax exemptions, though it would leave intact existing breaks on groceries, prescription medicine, durable medical equipment and utility bills, Erickson said Monday.

“I believe we would see businesses coming to South Carolina with the idea that everyone is on the same playing field,” Erickson told The Nerve when asked about the effect of her bill should it become law. “Our goal here is to focus a discussion on at least one piece of the (tax) code.”

Erickson said she and the bill’s co-sponsors, who she pointed out are all women, collectively decided to keep groceries, medicine and utility bills exempt from sales taxes because poor residents typically pay a larger percentage of their income on those items.

“We decided to put out a bill to safeguard what South Carolinians spend most of their budget on,” she said.

Meanwhile,  Rep. Phyllis Henderson, R-Greenville and a co-sponsor of Erickson’s bill, told The Nervelast week that Gov. Nikki Haley recently informed the GOP House Caucus that she is “working on a piece of major tax-reform legislation that she wants to bring to us next year.”

Henderson and Erickson, who noted she also attended the caucus meeting, said Haley did not get into specifics. Haley spokesman Rob Godfrey did not respond to written and phone messages from The Nerveseeking details of the governor’s plans.

“Quite frankly, we’ve been waiting all year long, and that’s why I decided to drop my bill,” Erickson said, adding that she wasn’t being critical only of the governor.

If passed by the General Assembly and upheld by the governor, the bill would take effect July 1, 2012. It cannot be considered until January as the Legislature adjourned its regular business on Thursday, and under a concurrent resolution, cannot take up any new bills when it reconvenes next week to consider certain specific matters.

Erickson’s bill comes on the heels of a recent decision by the S.C. Supreme Court to consider a lawsuit contending that the state’s sales exemptions as a group are unconstitutional.  A hearing on that case (Matthew Bodman v. state of South Carolina and the S.C. Department of Revenue) has not been scheduled.

In a formal response filed Monday to the lawsuit, the S.C. Attorney General’s Office, which is representing the state, denied most of the claims in the suit, noting, among other things, that the case presents “political questions that are for the General Assembly to determine and are not for judicial review.”

Erickson’s bill would do away with 72 of 78 categories of exemptions under one law on items including farm machinery fuels, supplies sold to motion picture companies, computer equipment for certain large manufacturers, locally made sweetgrass baskets and lottery tickets.

Sales tax exemptions collectively cost the state $2.7 billion annually, according to a December 2010 report by the legislatively created S.C. Taxation Realignment Commission (TRAC). The group recommended repealing or amending more than 60 of the exemption categories, estimating it would increase tax revenues by more than $600 million annually, in exchange for lowering the state sales tax rate to 5 percent.

TRAC’s recommendations, however, didn’t result in a flood of bills this year. Sen. Mike Rose, R-Dorchester, in March introduced four bills (S. 708, 709, 715, 716) that would set up procedures to gradually eliminate sales tax exemptions and provide for refundable individual income tax credits to offset the increased sales tax revenue, but none of the bills made it out of the Senate Finance Committee.

How much tax revenue the state would gain or lose under Erickson’s bill is unknown; a required fiscal impact statement from the Office of State Budget has not been completed.

Erickson said she worked with the state Board of Economic Advisors, a division of the S.C. Budget and Control Board, to determine how much the state sales tax would have to be lowered to offset the repeal of the sales tax exemptions under her bill.

For some perspective, the House and Senate versions of next fiscal year’s state budget project about $2.25 billion in retail sales tax revenue. At 6 percent, South Carolina’s rate is tied for the 13th highest in the country, according to the TRAC report.

Erickson’s bill would require that the state’s Education Improvement Act Fund and Homestead Exemption Fund, which are financed with a portion of the state sales tax be initially maintained at next fiscal year’s levels. The same would be true for a separate state general fund account that reimburses school districts for shortfalls in sales tax collections for property tax relief.

Those amounts would be increased annually by the percentage increase in the amount of tax revenues generated in the previous year.

Any tax revenue generated above the base allocations would be “credited to state public school building fund,” which provides fixed amounts to local school districts for capital improvement projects, under Erickson’s bill. Any remaining balance of additional revenues “must be placed to the credit of the general fund of the state and must be used for school purposes only.”

“That’s where it goes mostly now,” Erickson said. “The essence of this bill is where we collect the sales tax, not where it has to be remitted.”

Both the House and Senate versions of next fiscal year’s state budget project Education Improvement Act revenues of more than $563 million, and tax relief trust fund revenues of about $545.7 million.

Erickson said her bill also would reduce certain types of accommodation and local sales taxes that are tied to the state sales tax.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.