Pulling Back the Curtain on the Governor’s Tax Plan

January 28, 2015

Investigative Reports

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Wizard of OzIf Gov. Nikki Haley’s proposal to cut the state’s income tax rate by 2 percentage points over 10 years becomes law, the average tax bill in South Carolina would drop by just $100 for the entire period.

The gradual reduction of 7 percent to 5 percent wouldn’t directly affect the projected average 1 million yearly tax filers owing no state income taxes – representing nearly 46 percent of the estimated total average number of annual filers for the 10-year period.

But filers owing no income taxes wouldn’t be exempt from Haley’s proposed 10-cent, or nearly 60 percent, hike in the state gasoline tax over the next three years.

You likely won’t hear Haley talking about her tax plan in those terms, even though the figures cited above are listed in documents she used as the basis for her proposal announced last Wednesday in her annual state-of-the-state address.

The S.C. Revenue and Fiscal Affairs (RFA) Office on Friday provided The Nerve with 11 pages of charts showing projected revenues over the next 10 years from the proposed gas-tax hike, as well as estimates on the total number of income tax filers by income ranges, projected average annual taxable income and tax liability, and the estimated annual loss of total income-tax revenue with the requested rate cuts.

The totals in those charts were cited in a shorter background paper provided by the Governor’s Office to the media before Haley’s speech last Wednesday.

In her address, Haley said she would back increasing the state’s gasoline tax – currently 16.75 cents per gallon and the nation’s third-lowest rate – only if the Legislature also would agree to her income tax cut and restructuring the state Department of Transportation.

“If we do all these things, we will have better roads and a stronger economic engine for our people. That’s a win-win,” she said, describing her gas-income tax plan as “one of the largest tax cuts in South Carolina history.”

The background paper provided by her office notes that the plan will “invest $3.5 billion in our roads over 10 years while dedicating almost $5.6 billion in tax relief back into the pockets of our citizens.”

Conflicting Numbers

But according to the charts provided by the RFA to The Nerve, the projected average tax liability per filer under the plan would drop from $1,483 in 2016 to $1,383 in 2025, a decrease totaling just $100 for the entire 10-year period.

The projected number of filers owing no taxes in 2016 is slightly above 1 million, or nearly 46 percent of the estimated 2.25 million filers for that year. By 2025, the projected number of filers owing no taxes would grow to a little more than 1.1 million compared to the 2.46 million total filers, according to the charts.

The estimated average taxable income would grow to $37,837 from $28,330, an increase of $9,607, or about 34 percent, over the 10-year period, the charts show, though there is no detailed explanation for the growth rate.

As for the proposed collective 10-cent hike in the gasoline tax from 2016 to 2019, the charts presume a current cost of 16 cents per gallon, rather than the actual total per-gallon cost of 16.75 cents, though no reason is listed in the documents for using the lower figure. The 10-cent hike would bring the total state gasoline tax to 26.75 cents.

The cost difference per gallon doesn’t sound like much, but based on the 16.75-cent figure, the state over the next 10 years would collect a total of about $253 million beyond what is listed in the charts with the tax increase, The Nerve’s review found.

Before her speech last Wednesday, Haley, a Republican who began her first term as governor in 2011, had consistently rejected any increase in the gas tax.

“Raising the gas tax – forcing our people and our businesses to pay more for the simple act of getting around – is not an option for me,” she said in her 2014 state-of-the-state address. “I will veto any bill that reaches my desk that raises taxes on gasoline.”

The Nerve this week asked Russell Sobel, a visiting scholar of entrepreneurship at The Citadel’s School of Business, to review the charts provided by the RFA and background paper from Haley’s office.

“They really don’t give too much on their ‘methodology’ or how they came up with the numbers,” Sobel, who also has been a visiting fellow at the South Carolina Policy Council –The Nerve’s parent organization – said in a written response Tuesday.

Sobel said one of his “biggest issues is that they keep our stupid (tax) bracket structure,” noting, “This tax plan assures that we basically end up with a future tax structure where like half the population is in the top bracket.”

“We will have a 5 percent flat tax at the upper end,” he said, adding that if enacted, it could result in South Carolina being “tied for the highest flat tax rate in the nation.”

Contacted Monday by The Nerve, Chad Walldorf, who was appointed by Haley as chairman of the state Board of Economic Advisors (BEA), which is part of the RFA, said he recalled it was “sometime in December” when the governor’s staff first contacted his office about doing calculations for her tax plan.

“They didn’t come to me directly, but I was aware that they were working on it in the office,” he said, adding that “folks from her staff talk to the BEA and Fiscal Affairs staff regularly.”

Walldorf, who served as a deputy chief of staff for then-Gov. Mark Sanford, praised Haley’s tax plan, describing it as a “huge tax decrease.” When running for the governor’s seat in 2002, Sanford, a Republican, proposed a similar plan, Walldorf pointed out, though it didn’t go anywhere after he was elected.

‘Growth Assumption’

Contacted this week by The Nerve, Frank Rainwater, the RFA’s executive director, couldn’t immediately specify when Haley’s office initially contacted his agency to conduct the calculations for her plan, saying in a written response Tuesday, “Again, I need to follow-up and get back to you to be sure as to whether it (was) the summer or early fall.” Haley during her re-election campaign last fall didn’t release any specifics of her plan announced last week, saying then she planned to do so in January.

The Nerve also asked Rainwater for documentation showing how his agency arrived at its numbers contained in the charts released to The Nerve. In his initial written response on Monday, Rainwater said the projections for increased gas-tax revenues “for this year and next are our estimates based on current growth,” while the estimates for the remaining years are based on the “U.S. Energy Information Agency’s (EIA) projection of motor fuel consumption in the US,” which he noted “shows an expected decline in consumption.”

Asked if the EIA made specific projections for South Carolina, Rainwater replied in a follow-up email Tuesday, “Our chart is based on the EIA projections for the South Atlantic Region.”

Haley’s estimate that her plan would bring $3.5 billion in new tax money for S.C. road improvements includes $561.2 million over the 10-year period in vehicle sales taxes, which are capped at $300 per vehicle, according to the background paper provided by her office to the media for her state-of-the-state speech. Rainwater didn’t give specifics when asked by The Nerve about the total number of annual vehicle sales that the total revenue projections were based on, saying, “In short, we estimated a slight increase in revenue between FY 14 and FY 15, held that constant through FY 17, and then estimated a reduction in sales in FY 18 and held that constant.”

Asked why revenue estimates from the gas tax were calculated on a base cost of 16 cents per gallon instead of the actual 16.75 cents, he replied, “The $0.75 cents goes to agencies other than DOT and no change was being made to that portion of the motor fuel user fee.”

As for the income tax estimates, Rainwater said those figures are “based on SC income tax returns for 2013 and increased for future years by the BEA’s long range forecast growth for income tax.” He said the “growth assumption” is based on a 1 percent growth in filers and 3.3 percent income growth, including inflation.

The state’s top economic forecasters, however, haven’t had the best track record in recent years in making predictions.

In a 2010 veto message reported by The Nerve, Sanford blasted then-chief state economist William Gillespie, who headed the BEA staff, contending, “Time after time the current chief economist, Mr. Gillespie, makes incorrect revenue projections – misleading not only the General Assembly but the citizens of South Carolina.”

As an example, Sanford said Gillespie in late 2007 was “shockingly optimistic about our state’s economic future despite national economists’ expectations to the contrary. “

The Great Recession followed, which led to the state Budget and Control Board in 2009 to order $438 million in mid-year budget cuts.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org. Follow him on Twitter @thenerve_rick. Follow The Nerve on Facebook and Twitter @thenervesc.