State Exempts More in Sales Tax Than It Collects

September 14, 2016

Inside Insight

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By DUNCAN TAYLOR

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Welcome to the world of South Carolina state government . . .

In the most recent year for which data is available, a review by The Nerve has found, South Carolina state government collected $2.4 billion in sales tax revenue – but exempted a full $3 billion.

That’s the opposite of what one would expect to find. In most forms of taxes, only a few items are exempt, and in a typical year a typical state would take in far more than it would exempt. It’s a simple matter of government needing revenue: Lawmakers are reluctant to dole out too many exemptions since that means less revenue.

But this is South Carolina. At the General Assembly in Columbia, the exemptions are at least as important as revenue because exemptions indicate relationships – relationships between lawmakers, on the one hand, and lobbyists, friends, consultants, allies, and family members, on the other.

That’s at least the common way of explaining why the tax code is riddled with exemptions, and it makes sense. The state exempts – to take just a few examples from the list – textbooks, newprint paper, Bibles, insecticides, telegraph messages, coal, farm machinery, motor fuel, “livestock used primarily as beasts of burden,” and sweet grass baskets made by South Carolina artists.

This abbreviated list suggests just how entrenched the State House’s culture of favoritism has become over the decades. It also explains why, as a practical political matter, lawmakers are extremely unlikely lower the state’s fairly high sales tax (some states have a lower income tax and, unlike South Carolina, have no income tax). Since fewer consumers and companies actually pay the tax, the rate has to stay high in order to take in what comparatively little revenue it generates.

A House ad hoc committee is currently reviewing the state tax code with a view to making it “fairer” and “flatter.” Like every other committee and commission and task force that’s tried to strike exemptions and lower rates before, this one will come up against the same obstacle: a lobby full of people who think their exemptions are too important to cut.

Duncan Taylor is a policy analyst at the South Carolina Policy Council