Legislature Intent on Tax Reform? Oh Really?

October 31, 2011

Investigative Reports

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The NerveIf the best indication of how people will behave in the future is how they have acted in the past, a claim South Carolina legislative leaders make in a lawsuit against sales tax exemptions is questionable, at best.

And perhaps laughable, at that.

The assertion, more or less: We’re serious about tax reform. (They put it in writing, too.)

The reality, for supporters of overhauling the state tax code: Don’t hold your breath.

In a high-profile case with huge stakes, Columbia attorney Matthew Bodman charges that a web of state sales tax caps and exemptions violates the S.C. Constitution.

Bodman argues that the sales tax scheme breaches the constitutional requirement of equal protection under the law, because the caps and exemptions benefit some taxpayers at the expense of others while shortchanging services funded by sales tax revenue.

He also alleges that the sales tax breaks run afoul of a constitutional ban against special laws.

Because Bodman’s case centers on constitutional questions, the S.C. Supreme Court decided to take it directly, rather than the case originating in a lower court.

Bodman is asking the Supreme Court to strike down two sections of the S.C. Code of Laws that detail the sales tax caps and exemptions: 12-36-2110 and 12-36-2120, respectively.

The code places caps on more than a half-dozen heavy duty durable goods, notably motor vehicles, and identifies 78 categories of exemptions.

It is an “arbitrary and capricious” tax system, Bodman argues in his lawsuit. “South Carolina now exempts more sales tax (per year) than it collects – $2.7 billion in exemptions versus $2.19 billion in collections,” the suit says.

Bodman filed it in March. A hearing on the case in the state’s highest court is scheduled for Nov. 29.

The lawsuit, which The Nerve first reported on in a May 23 story, names the state and the S.C. Department of Revenue as defendants.

Wading in to support them, the four most powerful members of the Legislature – Republicans all – filed a friend-of-the-court brief in the case in early September:

Senate President Pro Tempore Glenn McConnell and House Speaker Bobby Harrell, both of Charleston County, Senate Finance Chairman Hugh Leatherman of Florence County and House Ways and Means Chairman Brian White of Anderson County.

Two of the most important committees, Senate Finance and House Ways and Means control appropriations and the legislative budget process.

Bodman filed a reply to the brief by McConnell et al earlier this month.

In their filing, the legislative leaders make an assertion that strains credulity when judged against modern history. It is just a footnote, albeit a lengthy one, in the more than 20-page, double-spaced document. But like a credit card disclosure agreement, the fine print contains the catch.

McConnell, Harrell, Leatherman and White argue that rather than a legal remedy, what Bodman really seeks is a political end – a radical change to the state tax code. But a court-imposed order is not the correct way to bring that about, they contend.

Now the claim in question:

“Finally, tax reform is an issue at the forefront of the South Carolina General Assembly,” the footnote says.

It goes on to tell how the Legislature, McConnell, Harrell and Gov. Nikki Haley “have all announced in recent weeks intentions for the legislative and executive branches to undertake tax reform and restructuring … ”

The footnote concludes, “These actions indicate that both the legislative and executive branches have the appetite to take up the complicated issue of tax reform and to perform it in a timely and responsible manner.”

Oh really?

To avoid the difficulty of trying to prove a negative, it’s best to judge this declaration against the legislative track record, rather than trying to divine the sincerity of politicians’ stated intentions.

And from the standpoint of the legislative track record, simply put, it’s a farcical claim.

Year in and year out, legislative leaders talk up tax reform. And with each coming and going of the General Assembly’s lengthy, annual session, nothing happens – other than the code getting larded up with more carve-outs.

Maybe the most striking example of legislative rhetoric versus reality is the S.C. Taxation Realignment Commission.

Known as TRAC, it was a special panel the Legislature created to scrutinize most of the state tax code and recommend ways to reform it. Beginning in the fall of 2009 and continuing throughout much of last year, TRAC held meetings, took testimony and collected volumes of information.

Then, in December 2010, the commission issued its final report. A 240-page tome, the report and TRAC’s working documents are available here on the Legislture’s website.

The commission addressed the sales tax at length. In a nutshell, TRAC called for broadening the base of the levy and lowering its rate:

Eliminate more than 60 of the exemptions and use all of the new revenue, an estimated $614 million per year, to drop the rate from 6 percent – tied for 13th highest in the nation – to 5 percent, which would be among the lowest, the commission suggested.

Rep. Shannon Erickson, R-Beaufort, is sponsoring a bill with similar provisions. (Read more about Erickson’s bill in this Nerve story.)

Leatherman was a key player in the formation of TRAC and its mandate. But after the panel released its report, which was widely praised, guess what happened?

Yeah – nothing.

At the State House, Leatherman and company basically ignored TRAC’s recommendations, never even holding the first official hearing on the report.

Indeed, rather than act on the commission’s findings, this year the Legislature created a giant new special-interest sales tax exemption for just one company, allowing Amazon.com to avoid collecting the levy on South Carolina-based purchases for five years.

In its report, TRAC exhumed ghosts of legislatures past regarding inaction on sales tax changes.

“It should be noted that the General Assembly, at least twice during the past decade, has established its own, either joint and/or ad hoc committees, composed of legislators, to undertake a similar review as the one outlined above,” page 64 of the report says.

“However, in neither case did the work of either committee materialize. Simply put, the legislative committees never adopted or published recommendations regarding which sales and use tax exemptions or limitations should be retained, modified, or repealed.”

As it follows, veteran state government journalist Cindi Ross Scoppe was so incredulous at the claim by the legislative leaders in their court brief that they are intent on tax reform that it inspired her to put fingers to keyboard.

At The State newspaper, Scoppe covered the General Assembly for years and now writes about the Legislature frequently in opinion pieces as an associate editor.

From her Oct. 16 take on “the legislative appetite” for tax reform:

“Of course I’d love nothing more than for that to happen. But really. Who are they fooling? Next thing you know, they’ll be telling us that our check is in the mail. And that they’ll still respect us in the morning.”

But one never knows, right? Maybe, just maybe, 2012 will be the year. Maybe.

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