Why Lawmakers Won’t Clean Up the Code

July 7, 2016

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Confusion

Our tax code is one great confusing jumble. There’s a reason for that.

South Carolina’s tax code, as you’ll know if you’ve ever tried to read a portion of it, is a colossal mess. Rather than imposing an across-the-board tax in any one area, whether high or low, the state code typically imposes the tax and lists a thousand exemptions and exceptions and credits.

Take the sales tax, for instance. The statewide sales tax is 6 percent, with counties reserving the authority to raise that rate by 1 percent if they pass a referendum and use the revenue for certain capital improvement purposes. That’s a fairly high rate compared to other states, particularly in light of the fact that South Carolina also imposes an income tax, but it’s simple enough. Six or seven percent – fine.

But it’s not simple at all, thanks to innumerable exemptions. There are exemptions on livestock, durable medical equipment, railcars, motor fuel, solid waste disposal bags, hearing aids, amusement park rides, prosthetic devices, hydrogen-powered vehicles, newspapers, sweetgrass baskets, insecticides, and more.

Which is great for tax attorneys. If your business sells or purchases an array of products and equipment, chances are some of it’s exempt from sales tax, and you’re well advised to hire a tax attorney to help you figure it all out. It’s great for government, too – someone’s got to make the determination of whether such-and-such qualifies as a railcar or a solid waste disposal bag. And it’s great for state lawmakers: If you want to an exemption from the sales tax, you hire a lobbyist to genuflect before key members of the appropriations committees and ask for a merciful dispensation.

It’s not good for many business, though. They’ve got to spend resources, not on making a better product or providing a better service, but on figuring out which things are exempt from the sales tax and which aren’t. And it’s bad for consumers. The large number of exemptions means the sales tax doesn’t bring in much revenue, and policymakers are consequently inclined to keep the rate high and enjoy the perquisites and power associated with doling out exemptions to special interests. That’s why for years South Carolina has exempted more in sales tax than it collects.

And that’s just the sales tax. Virtually every other tax is just as confusing.

All this occurred to us when, perusing various bills passed by the legislature this year, we came across S.1233. It’s an amendment to section 4-10-470 of the law code. That section has to do with the Education Capital Improvements Sales and Use Tax, the one referenced above; counties may raise the tax by an additional 1 percent if citizens approve the increase in a referendum.

Counties cannot simply hold a referendum and raise the tax, however. They must have raised at least $7 million in state accommodations taxes during the previous fiscal year.

But many counties don’t raise anywhere near $7 million in accommodations taxes in a year. What about them? The logical response would be to lower that threshold or to delete the provision altogether. Why on earth are State House politicians micromanaging county tax policies, anyway?

And here we come to the point. South Carolina state lawmakers must like holding power over local governments. They must enjoy holding the authority to dispense favors and exemptions. We say this because what follows that $7 million accommodations tax requirement is a dizzying array of additional requirements and exceptions that can only be understood by someone who specializes in interpreting the tortured intricacies of tax law. There seems to be a special exception for every county that doesn’t meet the original stipulation, and on top of the exceptions there are a host of special directives on what counties must do with the money they collect. We defy any ordinary person who isn’t a tax attorney to read the section and understand even a fifth of it.

One thing any seasoned observer of State House debates will tell you is this: Lawmakers often don’t understand the bills they pass. Is there any reason to suppose that anyone outside a tiny number of specialists understands this section?

Here’s our guess: Many counties are imposing the tax that don’t meet the law’s criteria, and many have been told they can’t impose the tax when in fact they do meet the criteria. All this because members of the South Carolina General Assembly would rather be begged for favors than bother with clarifying and simplifying the law.

In any case, H.1233 – another exemption pertaining, we assume, to Kershaw County, since Sen. Vincent Sheheen is the sponsor – passed Senate and House unanimously and was signed by the governor on May 25.