Legislature Returns Budget Surplus to Taxpayers

September 4, 2013

Inside Insight

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Legislature Returns Budget Surplus to TaxpayersThat headline, if true, would mean taxpayers would be taking back the $68 million in surplus tax dollars left over after fully funding this year’s budget, including the $160 million “wish list” full of pork and pet-projects in Part 1B of the budget. The headline isn’t true – not in South Carolina anyway – and it’s not likely to be true at any time in the near future.

Why? The best predictor of future behavior is past behavior – and as our state budget has continuously grown over the past several years (by 56 percent over the past ten years, and by 15 percent over the past five years) taxpayers have yet to see a dime returned to them. Instead, lawmakers have squandered the extra influx of tax dollars (much of it from the federal government and from fines and fee revenue), on pork projects, corporate welfare hand-outs, state agencies already flush with surplus reserves,  and other superfluous programs that fall wholly outside the realm of core government functions. And even though we have a “Tax Relief Reserve Fund” proviso thrown into the budget again, lawmakers have not committed any agency surplus funds to it.

Asking lawmakers to return surplus tax dollars back to taxpayers after an already mammoth budget has been fully funded doesn’t sound like a radical idea. For a state as “red” as South Carolina, the idea of returning unused revenue to its original owner would seem to be the obvious thing to do.

One state already does it – and it’s about as “blue” as a state can get: Oregon.

Oregon’s “Surplus Kicker” policy gives taxpayers an income tax refund if actual revenues are more than 2 percent higher than was forecast at the time the budget was adopted. Taxpayers receive a refund check in the mail, which is calculated as the same portion of each taxpayer’s personal income tax for the prior year, by December 1st following the end of the biennium. Although the corporate tax refund now goes back to the General Fund, the personal income tax refund policy is still intact and has been triggered in several budget bienniums.

In “red” South Carolina, by contrast, the belief seems to be that the state’s elected officials will know how to spend excess revenue with far greater wisdom and foresight than taxpayers.

There is, of course, an argument to be made that excess revenue should go toward paying off state bonds, towards one of our state’s “rainy day funds,” or towards funding the state’s pension plan. Maybe. But if lawmakers were serious about funding any of those things, they should have done it in the actual budget in the first place. Moreover, regarding our “rainy day funds”: two of them (Capital Reserve and Contingency Reserve Funds) are raided every year by lawmakers to fund pet projects, evacuating the word “reserve” of any real meaning, and the General Reserve Fund currently has $281.6 million in the bank.

The principle of returning excess funds holds true in other areas of life. If a father gives his son $500 to buy a lawnmower and the lawnmower only costs $350, the son should not keep the extra $150 unless explicitly given that permission. Similarly, if a worker doesn’t max out his expense account, he generally doesn’t get to keep the remainder. The difference between South Carolina taxpayers and the father or employer in these analogies is just this: that the state’s taxpayers aren’t demanding their money back.

In any case, it turns out the headline is true after all. Just not of South Carolina.

Dillon Jones is a policy analyst with the South Carolina Policy Council