South Carolina politicos sometimes claim that ours is a “low tax state” and that it has the “lowest taxes in that nation.” The claim is false. It confuses tax collections with tax rates – that is, total amounts sent to Columbia versus the proportion of South Carolinians’ income paid in taxes.
The truth is that South Carolina is a low income state but a high tax state. Consider:
► At 7.22 percent combined state and local sales tax, South Carolina has the 18th highest sales tax rate in the nation. That’s higher than the rates of neighboring North Carolina (6.9 percent, 24th in the nation) and Georgia (7 percent, 23rd in the nation).
► Five states in the U.S. don’t collect sales taxes at all. And all five of those states’ individual income tax rates is lower than South Carolina’s.
► The state allows localities to levy an additional 1 percent tax (the so-called Local Option Sales Tax) in addition to the state’s cut. The additional tax has to be approved by voters. In addition to this local sales tax, some localities also levy a hospitality tax. In some localities in South Carolina citizens pay as much as 10 percent in sales tax.
► South Carolina exempts more in sales tax than it collects. In 2013, the most recent year for which data is available, South Carolina exempted $3.05 billion in sales tax revenue, and collected only $2.42 billion. That’s a difference of $628.5 million. (The data for subsequent years will be slightly, but only slightly, different.)
► The reason for all those exemptions isn’t hard to find. A culture of cronyism and back-scratching means that lawmakers prefer to keep our sales tax high and divvy out exemptions to favored companies – with the result that average people pay high rates yet the state takes in relatively little in sales tax.
► Accordingly, South Carolina’s tax code is riddled with sales tax exemptions. There are special exemptions on hearing aids, coal, motor fuel, railcars, farm machinery, durable medical equipment, livestock, solid waste disposal bags, amusement park rides, prosthetic devices, hydrogen-powered vehicles, newspapers, insecticides, sweetgrass baskets, anything purchased by a major motion picture company, and many, many other items. These exemptions – carved into the tax code by special interests – ensure that the rate on non-exempted items stays high.
All this means that, political rhetoric to the contrary, South Carolina is anything but a low tax state. What’s important isn’t merely tax rates. The crucial factor is our relatively high rates combined with our low income.
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After months of deliberations and expert testimony, the Joint Committee on Pension Systems Review finalized its recommendations on identical bills filed in both the House (H.3726) and Senate (S.394). These bills change both the funding and the governance structure of the pension system and its administering agencies.
These bills would make several significant changes to the current funding structure of the pension system. Under current law, the employer and employee contributions are linked so that an increase in one mandates an increase in the other. The legislation strikes that provision and increases both the taxpayer, or employer, and employee contributions. The employee contributions would be capped at 9 percent for the South Carolina Retirement System (SCRS) and 9.75 percent for the Police Officers Retirement System (PORS).
The employer contributions, however, would increase incrementally until being capped in fiscal year 2026-2027 at 18.56 percent (SCRS) and 21.24 percent (PORS). The General Assembly could replace part of the taxpayer increase with a line-item budget appropriation, and in fact some lawmakers have insisted this is a necessary “safety net” for situations in which an employer (a state agency or municipality) was unable to fund the required employer contribution increase.
It is important to remember that whenever the employer contribution is increased, either state or local taxpayer money is committed to the pension system. There are only two ways to increase employer contribution: either cut government services and programs and use the consequent revenue, or raise taxes. And politicians rarely cut programs and services.
According to one presentation given to the Joint Committee, the 30-year amortization period is one of the key contributing factors to the pension deficit. Currently the pension runs on an open 30-year amortization schedule, meaning that only interest payments are made – and even then not all of the interest is being paid off. If a household ran on a similar schedule, every year the 30-year mortgage would reset to a new 30-year mortgage while the interest-only payments wouldn’t be fully paid. It would be an ill-advised way to run a household, yet South Carolina’s massive pension system has been run in essentially the same way for years. We’re now dealing with the consequences.
What should be done? The amortization period should be shortened to a 15-year amortization period, yet these bills fall short and instead shift to a 20-year amortization period by fiscal year 2027-2028. If by June of 2027 the pension system is 85 percent funded (as opposed to 90 percent under current law) the employer and employee contribution rates could be lowered by the Public Employee Benefit Authority (PEBA).
Most notably, the bill lowers the assumed rate of return for pension fund investments to 7.25 percent. Under current law, the assumed rate is 7.5 percent. Starting in 2021, PEBA would suggest a new assumed rate of return to the General Assembly every four years. This suggested rate would automatically become law if the General Assembly took no action. Lowering the assumed rate of return is a good move, but the bill does not go far enough. In 2016 South Carolina saw returns of 0.0 percent. While the returns are expected to rise, 7.25 percent is still unrealistically high. Because the assumed rate is set so high, the unfunded liabilities are artificially low. One group calculated a more realistic rate of return and the unfunded liabilities were over $70 billion as opposed to the now $20 billion. Until the assumed rate is reasonable the pension debt will be underreported and we will be facing the same problems in a few years.
The bill would also eliminate the State Fiscal Accountability Authority (SFAA – formerly known as the Budget and Control Board) as a co-trustee of the pension system assets. The state treasurer would no longer have custodianship of the assets; this role would fall to the PEBA board, although the RSIC would select the custodial bank.
The bill adds one member to the Retirement System Investment Commission, increasing the number from six to seven voting members. The addition would be an active member of the pension system and would be appointed by the speaker of the House. Current law requires one of the commissioners to be a retired member of the system, but this bill would give the appointment of that member to the Senate president pro tempore (instead of being unanimously elected by the other commissioners). Finally, the treasurer would no longer be an ex officio member of the commission; he would instead appoint a commissioner. The new commission structure would be as follows:
Worth noting is that this gives Senator Hugh Leatherman two appointments since he’s both Senate Finance chairman and Senate president pro tem, whereas under current law he has only one. The bill also adds additional qualifications for commissioners and limits them to two consecutive terms.
Equally troubling is the move towards a more opaque and less accountable board. The legislature oversaw and even contributed to the failure of the pension system and now wants more control and less accountability. The legislation would create the position of RSIC chief executive officer, who would oversee the chief investment officer rather than having the latter position answer directly to the commission. The commission could delegate authority to the CIO to invest up to 2 percent of the total value of the portfolio’s assets for each investment, under the oversight of the CEO.
Under this bill, lobbyists would be prohibited from contacting anyone with the RSIC to solicit the investment of funds with any entity, and the commission would be prohibited from investing in any asset or entity in which a commissioner has any interest. The commission would also be prohibited from investing in a fund if a placement agent would receive a commission from the investment. The statutorily required audits would be conducted every four years instead of annually, and would be under the office of the state auditor instead of the inspector general.
Finally, under the bill the commission’s annual report must include extensive details about manager fees and expenses, which would also be posted conspicuously on the RSIC website.
The changes to the PEBA structure are less extensive but otherwise similar. Board member terms would be lengthened from two years to five years, and members would be limited to two consecutive terms. Board members could only be removed for cause (instead of at will, as current law provides) and would be personally liable for losses occurred by breaches of duty.
The audit schedule for PEBA would be moved to a four-year schedule instead of being conducted annually and would be conducted under the oversight of the state auditor’s office.
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S.370 would amend the state constitution by having the governor appoint Supreme Court justices, Court of Appeals, and Circuit Court judges rather than having them elected by the legislature. It would also prohibit former legislators from applying for judicial office unless they have been out of office for at least two years, rather than allowing the required elapsed time to be set by the General Assembly (under current law it is one year). Finally, the bill would place the makeup of the Judicial Merit Selection Commission (JMSC) in the constitution rather than merely state law, and would add five members:
Allowing the governor to appoint justices is a key element of the needed reforms in South Carolina. However, this bill preserves the legislative domination over the judicial selection process through the makeup and function of the JMSC. While this bill adds members from the other branches of government and even the bar association, the legislature retains control of two/thirds of the commission. This is a far cry from the independent judicial selection committee recommended by the American Bar Association. Further, this bill would do nothing to change the current system in which the JMSC nominates up to three candidates for each office to the electing authority, making the gubernatorial appointments a mere formality. If this bill passed, South Carolina’s judicial branch would still not be independent of the other branches of government.]]>
H. 3650 attempts to streamline and simplify business licensing in the state. It would create a uniform business license tax, that would expire on the 30th of April of each year. This proposed licensing tax would be based upon the adjusted gross income of a given business. A clearly defined and easily understood licensing fee would be a tremendous step for making South Carolina an easier environment in which to do business, but this bill adopts a “one step forward, two steps back” approach.
The calculation and payment of a business license based on adjusted gross income should be a simple matter. A business owner would simply calculate their adjusted gross income (AGI), and multiply it by the assessment factor. An assessment factor of 2.5 percent of AGI and an AGI of 100,000 dollars would mean a license fee of 2,500 dollars. Unfortunately, a simple and easily understood system is beyond this bill.
H. 3650 would create within the office of the Secretary of State the Business License Class Schedule Board. This board would be composed of 9 members, 6 of which would be legislators or their designees. 2 of the other positions would be filled by representatives of the South Carolina Association of Counties and the Municipal Association of South Carolina, two special interest groups. The board would be tasked with determining the License Class Schedule, or assessment ratio using data from the IRS and the classification codes from the North American Industry Classification System in odd years. There would be classifications, or assessment ratios, ranked from lowest to highest. Unfortunately, this is where H. 3650 gets even more complicated.
H. 3650 would allow for counties and municipalities to approve additional classifications or assessment ratios based on “particularized considerations as needed for economic stimulus” after a vote of the county or municipal council, and would allow them to review these revised considerations in executive session, away from the public. These sessions would be exempt from Freedom of Information Act requests, though any new classifications would have to be approved in public. Essentially, counties and cities would be able to consider different tax ratios for certain favored industries within their borders, away from public view and exempt from FOIA.
Little imagination is needed to see how this system could very easily be abused.
For South Carolina to be a beacon for business, simplicity is needed, not more planning boards, or more ways to reward favored and politically favored businesses.
Far from being a simplification of the state’s business licensing regime, H. 3650 further muddies the waters while masquerading as a clarification.]]>
House leaders filed H.3516, a bill allegedly designed to repair South Carolina’s deteriorating road system. Not surprisingly, the bill treats the entire issue as a revenue problem – it’s premised on the assumption that taxpayers simply haven’t sent enough money to Columbia. Accordingly, it ignores the actual problem: accountability.
Currently, the bill would raise the gas tax by ten cents (for a total gas tax of 26 cents) in two-cent increments over the next five years. Vehicle registration fees would be almost doubled (from $24 to $40 for most vehicles), and a new “infrastructure maintenance fee” would be imposed for initial vehicle registrations in South Carolina, capped at $500.Any vehicle that was not first purchased and registered in South Carolina would be subject to a new $250 fee.
The bill would also impose a new biennial “road use fee” for hybrid and electric vehicles ($60-$120, depending on the vehicle type). And the vehicle sales tax cap would be raised from $300 to $500. The bill would direct these monies to infrastructure, some to the State Highway Fund and some to the notoriously unaccountable State Transportation Infrastructure Bank, or STIB, which would use the funds to finance new debt.
Legislators amended the bill to make it slightly more difficult to stop the governor’s appointments to the DOT board, however this still does not solve or really improve the problem of accountability with infrastructure.
Arguments for the bill, and for many similar bills, always assume that road funding has remained static in South Carolina. But it hasn’t. Transportation revenue has seen a steady increase from $1.54 billion in 2012 to more than $2.2 billion in 2016, without any discernible improvements.
There have been no discernible improvements, of course, because existing money is spent badly. And that’s not about to change. The Department of Transportation “reform” bill passed last year blurred the lines of accountability further, keeping the power firmly in the hands of legislative leaders whom the vast majority of South Carolinians can’t vote for and have never heard of.
The solution to South Carolina’s admittedly dire road problem is simple and straightforward:
As it is, the House leaders’ proposed road fix simply takes more money out of the economy and dumps it into the same unaccountable system that’s failing citizens already.
Update, 02/10/2017: On Thursday, February 9 the House Ways and Means committee unanimously passed the bill onto the full House. Along with adding language to make it slightly more difficult to stop the governors DOT board appointees the House exempted military members from a new fee for vehicles purchased out of state.
Update, 02/07/2017: On Tuesday, February 7, a Ways and Means subcommittee passed an amendment to H.3516 that contained elements of “reform”: it would direct all new revenue created by the bill to an “infrastructure maintenance trust fund.” Trust fund revenue could only fund maintenance, not new construction. The amendment also gave the DOT final say in fund transfers to the STIB (this provision was adopted instead of eliminating the STIB, which had been under consideration). The bill was approved with no opposition and will be considered by the full Ways and Means committee on Thursday, 02/09/2017.
Update, 02/03/2017: On Thursday, February 2, the fiscal impact statement of H.3516, the house gas tax bill, was released. Estimates put the revenue from this bill at over $450 million for the first two years.
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H.3443 would expand Medicaid to cover adults sixty-five years of age and younger who are at or below 138% of the federal poverty level. This expansion is one that legislators have attempted to pass in different forms on numerous occasions.
Government healthcare in general is both bad policy and impractical, but Medicaid expansion is particularly so. The incentive to expand Medicaid is the promised federal funding to cover the initial expansion. However, that funding would phase out in 2022, leaving states to shoulder the newly-increased financial burden themselves. South Carolina is already facing a huge pension deficit and, at least according to lawmakers, the roads and educational systems are underfunded as well. Medicaid expansion would be one more financial drain that South Carolina cannot afford.]]>
H.3473 is a resolution calling for an Article V Convention of States to amend the US Constitution. The resolution attempts to limit potential amendment subjects to a spending cap and fiscal restraints. While no one would argue that the federal government needs additional restraint, the Convention of State approach is misguided and overlooks the fact that the first step to real federal reform would be to turn down the federal dollars (and their subsequent mandates) that currently comprise one-third of our state budget.]]>
H.3468 would allow an individual, partnership, limited liability company, trust, or estate to transfer an unclaimed textile mill site rehabilitation tax credit to another recipient, provided the Department of Revenue approves of the transfer.
South Carolina’s tax code is riddled with tax breaks and credits to select industries and special interests and currently exempts more sales taxes than it collects. These tax favors should be eliminated altogether, not expanded.]]>
H.3352 creates a new judicial branch under the Administrative Law Court that would oversee Freedom of Information Act (FOIA) appeals and challenges and would institute a number of reforms to current FOIA law. This bill seeks to strengthen FOIA by capping both search fees (not to exceed the prorated hourly salary of the lowest-salaried staff member who can fulfill the request) and deposit requirements (limited to 25 percent of the anticipated cost of reproduction of records). The required response time to a FOIA request would also be slightly reduced by the proposed law. Yet another provision would require that public bodies make available online all documents produced by the body over the past six months.
Unlike versions of this bill from previous sessions, H.3352 includes a provision that places any hearings involving dashcam and audio recordings taken by law enforcement under the jurisdiction of the circuit courts. This version also allows citizens to challenge an agency’s determination that requested records are exempt from FOIA. This provision gives citizens another avenue to challenge the impediment of public information.
This legislation specifies that despite an agency’s failure to respond, record exemptions are not waived, whereas before it was unclear. Negative changes also include turning FOIA violations into a civil rather than a criminal offense and allowing public bodies to seek relief from “unduly burdensome, overly broad, vague, repetitive, or otherwise improper requests.” These highly subjective terms would provide ample cover to public bodies seeking to skirt the law and, therefore, violate the entire spirit of the FOIA law.
Finally, the need for a new government office to handle these complaints is debatable, as they are currently handled well by the existing courts. Moreover, search fees and deposits should be eliminated rather than simply capped. It is unclear why a new government office is needed when a citizen can already take a FOIA complaint to a court – as the South Carolina Public Interest Foundation successfully did against Ethics Commission Director Herb Hayden, who denied the existence of a public record to The Nerve.]]>
S.301 would eliminate the Commission of Transportation and transfer the Commission’s authority to the Secretary of Transportation. The Secretary would be a gubernatorial appointment with Senate confirmation. The bill would also abolish the Joint Transportation Review Committee.
This is an excellent reform that would help restore accountability to the DOT. The current system of legislative control leaves citizens unsure of who they should take concerns over DOT decisions to, and incentivizes DOT policies that favor local interests over the interests of the entire state. Establishing a clear line of accountability for the DOT would go a long way towards ensuring that maintenance work receives its proper attention, and that each county receives its appropriate share of DOT resources.
One notable reform that is absent in eliminating the State Transportation Infrastructure Bank (STIB). Since its inception, the STIB has only contributed funding to projects that either create entirely new roads or expand existing ones (by adding miles or widening lanes, etc.). Every dollar that goes to the STIB is a dollar that could have gone to maintenance instead of funding expansions.]]>