Tax Reform


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Tax Reform

  1. 1. An analysis<br />In Support of <br />Comprehensive Tax Reform<br />Olde English & Western Piedmont Consortia<br />Is our State Broke?…Or is our System Broken?<br />
  2. 2. Two Things We Hear in South Carolina:<br />“…But the state of South Carolina has no money…”<br />“Our Taxes, Here in South Carolina, Are Just Too High!”<br />True or False?<br />Olde English & Western Piedmont Consortia<br />
  3. 3. With budget cut after budget cut… and the state and country in the midst of a recession, these words are often uttered.<br /> But South Carolina has real needs… and citizens continue to expect basic services such as education, safety, and healthcare.<br />Olde English & Western Piedmont Consortia<br />“But the State of South Carolina Has No Money?”<br />
  4. 4. But the State of S.C. Has No Money?<br />Olde English & Western Piedmont Consortia<br />Since 1953, South Carolina experienced negative revenue growth only 2 times… <br />But we are now entering our third year of negative revenue growth (2009-10)…(revenue down $660 mil)<br />The S.C. Board of Economic Advisors (BEA) has cut revenue estimates 7 times in the last 9 months!<br />Education has suffered 9 rounds of cuts in 18 months ($700+mil)<br />Just this yr, k12 has had its low 2009-10 budget cut $317(1997 level)<br />Just over the last year, the state of South Carolina has lost over $1.3 billion in revenue… leading to multiple budget cuts!<br />
  5. 5. What Has Happened to S.C. Revenue?BEA to the TRAC, Dr. Bill Gillespie, September 30, 2009<br />Olde English & Western Piedmont Consortia<br /><ul><li>Since 2006, S.C. has cut 1/5 of the state budget (19% cut)
  6. 6. S.C. now relies on the Sales (47%) and Personal Income (40%) Taxes for a total of 87% of State Revenue
  7. 7. S.C. Sales Tax Revenue has decreased (even though we’ve increased the tax twice since 1984) due to:
  8. 8. Increased numbers of Sales Tax Exemptions
  9. 9. S.C. economy shifts from products to “services” (few are taxed)
  10. 10. Shift of sales to Internet (little-to-no S.C. taxation)
  11. 11. Personal Income Tax Collections not kept up w/ growth
  12. 12. All Remaining (non-Sales/Personal Income): only 13-15%</li></li></ul><li>SC’s Overall State/Local Tax Burden: <br />37th highest nationally<br />Estimated at 8.8% of income <br />(below the national average of 9.7%)<br />Olde English & Western Piedmont Consortia<br />“Our Taxes here in South Carolina are just too high!”<br />
  13. 13. Are South Carolina Taxes Too High?The Tax Foundation, non-profit 501-c-3 since 1937:<br />Olde English & Western Piedmont Consortia<br />Sales Tax (6%): 25th<br />Cigarette Tax (7cents):50th<br />NC raised 10-cents to 45-cents<br />National Average: $1.34 -pack <br />Gas Tax: 46th (1987 last increase)<br />Car Sales Tax: 40th<br />Income Tax<br />Top Rate: 14th<br />Overall: 35th<br />Indiv. Property Tax: 34th<br /><ul><li>Industrial/Commercial Property Taxes: 7th
  14. 14. Due to Act 388 tax swap
  15. 15. Business Climate Tax: 25th
  16. 16. Compares 5 areas: corporate taxes; sales taxes; unemployment insurance taxes; indiv. income taxes; & taxes on property
  17. 17. Corporate Income Tax: 40th </li></li></ul><li>South Carolina Taxes Versus the Nation<br />Olde English & Western Piedmont Consortia<br />
  18. 18. Permanent Tax Cuts have Eroded state Revenue Stream<br />(size of reduced state revenue since 2006)<br /><ul><li>Property Tax Relief for Homeowners (sales swap): $585 million
  19. 19. Total Elimination of the State’s Grocery Tax: $354 million
  20. 20. Elimination of S.C.’s bottom income tax bracket: $86 million
  21. 21. Reduction of tax on small businesses (7% to 5%): $129 million</li></ul>* Source: State Budget Outlook presentation by SC Sen. Finance (Mike Shealy & Craig Parks)<br />S.C. is Collecting 22% Less ($1.5 billion) in Tax Revenue than in 2006. Why?<br />Olde English & Western Piedmont Consortia<br />
  22. 22. We collect little in the way of “Internet Sales Taxes”<br />Random tax incentives for New (nothing for existing) Businesses<br />We tax fewer “Services” than many states<br />In a deep hole & won’t stop digging! (19 new bills!!)<br />Permanent tax cuts in strong years (no revenue in lean!)<br />Several taxes are some of lowest in the country (i.e. cigarettes, gas, cars)<br />Property Taxes …& Act 388<br />Sales Taxes…& Exemptions<br />The state’s not broke… Our revenue system is!<br />Olde English & Western Piedmont Consortia<br />
  23. 23. The Three Legged Stool<br />South Carolina’s Tax Structure prior to 2007<br />What Do We Tax in South Carolina?<br />In 2007, S.C. passed Act 388 which eliminated owner-occupied property taxes (for schools) in exchange for a 1-cent state sales increase.<br />Prior to this, our state’s tax structure was praised by economists because it was balanced with three major sources of revenue: sales, income and property taxes. This three legged stool had served our state well for decades.<br />Today, S.C. relies mostly on Income & Sales Taxes to Fund most of its state budget… largely a two-legged stool!<br />Olde English & Western Piedmont Consortia<br />
  24. 24. What Did Act 388 do to S.C.’s Tax System?<br />Act 388 shifted the tax burden from stable revenue source (owner-occupied property) to a less reliable & more volatile source (sales). With sales down 8-10% in the current recession, so is state sales tax revenue<br />Since the General Assembly (G.A.) has promised to make up any lost 388 tax swap (sales tax) revenue, the G.A. has been forced to budget $50 million (2008-09); $108 million (‘09-10); & an estimated $120 million (‘10-11) to reimburse school districts.<br />A recent Anderson Independent report found that Act 388 has cost the state $585 million since 2006.<br />Olde English & Western Piedmont Consortia<br />
  25. 25. The Effects of Act 388 on Property TaxesDr. Robert Cline, Ernest & Young, LLP, “Broadening the Tax Base”<br />Act 388 shifted the local burden of funding public schools from homeowners to SC businesses(only 1 left!)<br />SC business now pay 48% of the total S.C. property tax collections (the U.S. average is only 33%)<br />Large Industrial Property: SC is 5th highest (74% above US av.)<br />Large Commercial Prop: SC is 20th highest (9% above US av.)<br />Homeowner Property: SC is 37-39th (34% below the US av.)<br />Property tax share of business taxes in SC is 36% higher than US<br />388 created a tax incentive for people from NC to move to SC, work & pay NC taxes, & bring children to schools<br />Olde English & Western Piedmont Consortia<br />
  26. 26. The Effects of Act 388 on Property TaxesRudolph Bell, Greenville News, December 23, 2009” and Ellen Saltzman, Clemson University’s Strom Thurmond Institute, December 2009<br />The difference in tax bills between owner-occupied homes & 2nd homes or rental homes is much wider in S.C. than in Georgia, N.C., Tennessee, & Virginia<br />Prior to Act 388, the difference was 50%; now it is<br />141% higher in Beaufort County; 138% in Greenville; 133% in Clemson<br />Grvl: For $1 million home, the bill is $7,756 if its classified as a primary residence & $18,486 if classified as 2nd home<br />Grvl: For a $100,000 home, it is $776 vs. $1,849<br />Statewide: the differences can range from 119 – 165%<br />Consequence? Huge increase in % home classified: primary<br />Beaufort: increased from 25% to 40% (just fill out form!) <br />Olde English & Western Piedmont Consortia<br />
  27. 27. What DO We Tax in South Carolina?<br />Olde English & Western Piedmont Consortia<br />South Carolina’s State Sales Tax is 6%. The state raises $2.5 billion annually through this tax.<br />By allowing 80 exemptions to this sales tax, the state exempts more ($2.7 billion) annually than it actually collects ($2.5)<br />S.C. could eliminate 95% of exemptions, cut the sales tax in ½ (6 to 3-cents), and collect the exact same revenue ($2.5 billion)<br />S.C. taxpayers (w/ no deductions) are subsidizing those who enjoy these exemptions!<br />This naturally begs the question: in South Carolina… what do we actually tax? {Cost of exemption to state in parenthesis.}<br />* Source: South Carolina Board of Economic Advisors “Sales & Use Tax Exemptions: Fiscal Year 2008-09” ( Note: The examples below are just some of the 80+ exemptions to the South Carolina state sales tax. See link for more info.<br />
  28. 28. What DO We Tax in South Carolina?<br />Olde English & Western Piedmont Consortia<br />SC has a Vehicle Tax Exemption of a $300 cap on sales tax <br />We collect $300 on the sale of a used 2006 - $5,000 Hyundai. We collect $300 on a $385,000 - 2009 Lamborghini Roadster – $22,800 exemption. {$152 mill}<br /> We collect $300 on a $36,000 BMW. N.C. collects $1,080 & Georgia collects $2,520 on the same vehicle.<br />We collect $300 on the sale of a $5,000 - 15 foot Sylvan Smokercraft Fishing Boat. We collect $300 on a used 1982 – 126 foot $6.5 million Feadship Yacht – a $389,700 exemption. {$5 million}<br />
  29. 29. What DO We Tax in South Carolina?<br />Olde English & Western Piedmont Consortia<br /><ul><li>We collect 90 cents (6%) sales tax on a $15 model airplane, but we cap the tax on a million dollar leer jet at $300 - a $59,700 tax exemption. {$1.2 million}
  30. 30. We collect $300 on the sale of a 1989 - $5,000 Chieftain Winnebago. We collect $300 on a 2007 - $130,000 Coach House Platinum Recreational Vehicle – a $7,500 exemption. {$7.9 million}
  31. 31. We collect $300 on the sale of a 1973 - $5,000 Singlewide (2 BR/1Ba/480 sq ft) Manufactured Home. We collect $300 on a 2001 - $139,500 Doublewide Commander Manufactured Home (4 BR/2Ba/2432 sq ft) which meets certain energy efficiency standards – a $8,070 exemption. {$26.6 million}</li></li></ul><li>What DO We Tax in South Carolina?<br />Olde English & Western Piedmont Consortia<br /><ul><li>We collect taxes on 1/2 of proceeds from the sale of a modular home. We collect no taxes on the other half? {$1.9 million}
  32. 32. We collect $4.14 on the sale of a Panasonic KXTS 2-line corded phone at Wal-Mart. We collect nothing on the sale of “charges for colored telephones and retractable cords” obtained through a telephone company. {total customer exemptions: $22.8 million}
  33. 33. We collect $18 in taxes for the sale of a Classic Lionel Train Set. We collect no taxes on the sale of a $300,000 EMD 1750 HP GP-9 Locomotive. {$352,710}
  34. 34. We collect 18 cents on a $3 spool of string used to fly a kite. We collect nothing on the sale of a spool of twine used to deliver newspapers. {total containers exemption: $600,000}</li></li></ul><li>What DO We Tax in South Carolina?<br />Olde English & Western Piedmont Consortia<br /><ul><li>We collect 6 cents on a $1 pack of college rule paper. We collect nothing on the sale of newsprint paper sold to newspapers. {$5 million}
  35. 35. We collect 42 cents on the sale of $7 College Football Preview Magazines. We collect nothing on the sale of The State newspaper. {$7 million}
  36. 36. We collect taxes on the supplies and equipment bought by coin-operated Laundromats. We collect no taxes on the sales of supplies and equipment bought by laundries and dry-cleaners. {total cleaner exemptions: $3.3 million}
  37. 37. Banks charge customers $2 for use of an automated teller machine – not affiliated with the person’s bank. The state collects nothing for the transaction. {$5 million}</li></li></ul><li>What DO We Tax in South Carolina?<br />Olde English & Western Piedmont Consortia<br /><ul><li>We collect 14 cents tax on the dry cleaning of shirt. We collect nothing on the dry cleaning for ships involved in intercoastal trade. {total vessel bunkering exemptions: $1.5 million}
  38. 38. We collect taxes on gloves used by farmers in cleaning out chicken cage houses. We collect nothing on the sale of automatic clean-out systems for cage houses.
  39. 39. We collect $35 on the sale of a 9-ft G-3 Jon Boat. We collect nothing on the sale of a $15 million – New Hopper 560-ft Barge. {$169,546}
  40. 40. We collect taxes on the broadcasting tower for an FM Radio Station. We collect no taxes on the broadcasting tower for an AM Radio Station.</li></li></ul><li>What DO We Tax in South Carolina?<br />Olde English & Western Piedmont Consortia<br /><ul><li>We collect taxes on a Dinner Cruise in Charleston. We collect no taxes on a vacation time-share near the Battery in downtown Charleston. {$5.3 million}
  41. 41. We collect $60 in taxes on the sale of new asphalt for your driveway. We collect nothing for the sale of asphalt products transported and consumed out of South Carolina. {$614,000}
  42. 42. We collect sales taxes on concession items sold at the State Fair. We collect no taxes on concession sales at the annual Ridgeway Pig on the Ridge Festival. {$475,000}
  43. 43. We collect taxes on the sale of a new chassis for the rebuilding of a C-10 Chevy. We collect no taxes on the chassis sold to international shipping lines. {$550,000}</li></li></ul><li>What DO We Tax in South Carolina?<br />Olde English & Western Piedmont Consortia<br /><ul><li>We collect $12 in taxes on the sale of a carburetor for the engine of a Chevrolet Nova. We collect no taxes on the sale of parts/supplies used in repairing commercial air carriers. {$562,000}
  44. 44. We collect taxes on the sales of Carolina and Clemson football tickets. We collect no taxes on lottery tickets. {$47.6 million}
  45. 45. We collect taxes on 30% of the gross proceeds of the rental of a portable toilet. We collect no taxes on the other 70% of the toilet. {$332,976}
  46. 46. We collect taxes on a family’s outing to Chuck-E-Cheese. We collect no taxes on an amusement park ride (or anything connected building/repairing rides). {$3.9 million}</li></ul>{These are just 25 of the over 80 sales tax exemptions! For examples of all 80 exemptions, go to What Do We Tax in SC? @}<br />
  47. 47. Comparison of Gross vs. Net Sales TaxesMike Shealy & Craig Parks, SC Senate Finance Committee, 1.22.2010 and Department of Revenue’s Annual Report, 2009<br />Sales TaxesFY1999FY2008%Change<br />Gross Sales $94billion $146billion +55%<br />Net Taxable $45billion $59billion +32%<br />Sales Amount<br />% Change of Net 47.9% 40.8%<br />Taxable Sales<br />Olde English & Western Piedmont Consortia<br />
  48. 48. In addition to the above tax exemptions, in 2009 the state of S.C. added a “Tax Free Weekend” for Gun purchases (thanksgiving)<br />Sales Tax Exemption for Guns!<br />Olde English & Western Piedmont Consortia<br />
  49. 49. S.C. Loses Revenue on Internet Sales2010 University of Tennessee Study<br />S.C. lost $94 million last year in uncollected Internet sales taxes. This year, S.C. is expected to lose $110 million<br />From 2007 to 2012, S.C. is projected to lose $569 million!<br />Most S.C. citizens are unaware that they are required to pay sales taxes on all Internet purchases, by either:<br />Pay the sales taxes on line 26 of the S.C. Income Tax Return<br />Bring in receipt to DOR each time you make purchase & pay<br />Other states have adopted procedures to collect Internet tax!<br />NC law increased Internet sales tax collections by $500 mil<br />(w/o internet collections, SC businesses competition disadv.)<br />Olde English & Western Piedmont Consortia<br />
  50. 50. Over the years, SC has offered tax incentive packages on an individual, case-by-case basis… not a part of a comprehensive job-creation, pro-business over-arching state strategy.<br />In the past ten years, the special tax incentives have increased from $32 million to $254 million per year.<br />Once these tax incentives are “in,” they are “in.” Often, there is no “clock” for when all tax incentives expire.<br />How are existing businesses supported? Do they end up paying for these incentives for out-of-state breaks?<br />What does this do to the overall tax burden/revenue?<br />Tax Incentives for New S.C. Businesses<br />Olde English & Western Piedmont Consortia<br />
  51. 51. S.C. taxes only 35 (out of the possible 170) services!<br />This is significantly less than in other states (@ bottom nationally).<br />New “growth” items: not taxed<br />Traditional SC products: taxed, no growth<br />Olde English & Western Piedmont Consortia<br />“Do We Tax “Services” in South Carolina?”<br />
  52. 52. S.C. and the Taxing of ServicesJim Eads, Executive Director, Federation of Tax Administrators, January 6, 2010<br />Since we’ve moved from an Industrial to Service economy, many states have adjusted tax structures accordingly!<br />Nebraska recently found itself in a recession… and has increased from 55 to 74 services taxed (to balance revenue)<br />What are other states doing? (to spread & lower tax burden)<br />Florida: taxes 63 services<br />Tennessee: taxes 67 services<br />West Virginia: taxes 105 services<br />Why? Spread the tax burden on broader base to lower rates<br />If SC taxed all feasibly taxable services, we could raise $955 million in revenue (or decrease all accordingly)<br />Olde English & Western Piedmont Consortia<br />
  53. 53. The state’s not broke… Our revenue system is!<br />Cigarette, Gas, & Car Taxes (ranked between #40-50): <br />$300-800 million per year<br />Property Taxes (& Act 388): <br />$150 million per yr. (*no local)<br />Sales Tax Exemptions<br />$2.7 billion per year<br />Internet Taxes Not Collected:<br />$110 million per year<br />Random Annual Tax Incentives:<br />$32 – 254 million per year<br />“Service” Taxes Not Collected:<br />$955 million per year<br />Bottom Line<br />Uncollected Revenue, current rate<br />Approx. $4-5 billion annually<br />Could SC “plug the hole in the leaky ship” & adequately fund essential services ($1.5 billion)?<br />Could SC drastically lower tax rates for all South Carolinians?<br />Could we do BOTH?<br />Olde English & Western Piedmont Consortia<br />
  54. 54. Our State is not Broken…<br />Our current system of taxation is!<br />Olde English & Western Piedmont Consortia<br />“So… How Did We Get in This Mess?”<br />
  55. 55. Why Do We Need Tax Reform?<br />Olde English & Western Piedmont Consortia<br />Our current system of taxation is a hodgepodge that has evolved from tax cuts and tax shifts over the past 20 years that has left the state with unstable and unreliable revenue sources. <br />We have cut tax sources during the good years leaving us with insufficient resources during the down cycles. <br />We have responded to the pressure of special interest groups (mainly wealthy homeowners) to eliminate tax on property, a very stable source of revenue, and shifted that burden to sales tax, a very unstable source of revenue.<br />
  56. 56. Why Do We Need Tax Reform?<br />Olde English & Western Piedmont Consortia<br />Our system does not support infrastructure development needed for the successful future operation of our state. It only supports the state’s needs during the boom years.<br />We tax some goods & not others without any apparent reason<br />And it doesn’t stop! Our elders taught us that, when you look up & find yourself deep in a hole… the first thing you’ve got to do… is to stop digging! (at least until you analyze how you got there… and what’s the best solution to get out)<br />Just this session, the General Assembly has introduced 19 new bills – giving new tax breaks to everything from animal husbandry to geothermal heat pumps exemptions!<br />
  57. 57. What are the Fundamental Criteria <br />of a <br />Sound Tax Structure?<br />Olde English & Western Piedmont Consortia<br />“So… What Can We Do to Change our System & Get Out of This Mess?”<br />
  58. 58. Fundamental Criteria of Tax StructureSaltzman & Ulbrich, Strom Thurmond Institute <br />Olde English & Western Piedmont Consortia<br />It must be competitive. It cannot be viewed as one that discourages industries and people from coming to our state, living in our state, expanding business in our state, and investing in our state.<br />It must be adequate. It must support improvement of SC’s economic foundations:<br /><ul><li>Educational and workforce quality systems
  59. 59. Infrastructure
  60. 60. Vibrant and growing communities
  61. 61. Overall quality of life</li></ul>It must be equitableboth horizontally and vertically. It must be perceived as fair. No one segment should have advantage at the expense of others. (Palmetto Institute)<br />The best approach is to have a broad tax base with the lowest possible tax rates. This is not the way we are currently headed.<br />
  62. 62. Fiscally Sustainable Revenue System<br />Olde English & Western Piedmont Consortia<br /><ul><li>A fiscally sustainable revenue system is a structure of revenue streams, spending obligations, and reserve funds that allow government to maintain an acceptable level of public services over the long term and through fluctuations in economic activity.
  63. 63. A fiscally sustainable state revenue system will:
  64. 64. Raise adequate revenue to pay desired services
  65. 65. Raise revenue from a mix of sources while keeping tax rates low
  66. 66. Increase revenue at a rate no less than population growth plus inflation
  67. 67. Be prepared for unanticipated spending needs and revenue shortfalls</li></ul>Saltzman & Ulbrich, Strom Thurmond Institute <br />
  68. 68. On June 24, 2009, the leaders of the General Assembly passed S.12 creating the <br />“South Carolina Tax Realignment Commission,” <br />also known as TRAC.<br />Olde English & Western Piedmont Consortia<br />“So… What is Our General Assembly Doing to Fix It?”<br />
  69. 69. What IS this “TRAC” Commission?<br />Olde English & Western Piedmont Consortia<br />TRAC is a temporary & independent commission comprised of non-legislators. It is created to assess the effectiveness of the current tax structure and make recommended changes to the General Assembly by November, 2010 (dissolve Jan. 1, 2011).<br />Members include:<br />Ken Wingate (CPA, JD – Gov. Sanford) * Jack Shuler (Speaker Harrell)<br />Brian Moody (CPA – Gov. Sanford) * Bob Steelman (Chairman Cooper)<br />Don Weaver (Sen. McConnell) * Kenneth Cosgrove (Chair Cooper)<br />Burnet Maybank, (JD - Sen. Leatherman) * Ray N. Stevens (DOR Director)<br />Ben Kochenower (CPA – Sen. Peeler) * (Staff: Craig Parks, Sen. Finance)<br />Charles S. Way, Jr. (Sen. Land) <br />Jimmy Addison (Speaker Harrell) <br />
  70. 70. Support the goal of Tax Reform & the work of TRAC.<br />Call your local Representatives & Senators NOW… thanking them for passing S.12 (TRAC) & encouraging them to vote to support TRAC’s recommendations.<br />Begin sharing (holding meetings and/or sharing at existing meetings)… sharing the need for tax reform in South Carolina & the structure for fundamental change<br />Make your voice heard (letter to editor, call/email, etc)<br />Ask candidates for office how they plan to vote: TRAC<br />Olde English & Western Piedmont Consortia<br />“So… What Should I do about it? How Can I Make A Difference?”<br />
  71. 71. What Questions Should I Be Asking?<br />(Share your belief that Tax Reform should be a top priority)<br />How important is tax reform? Where does it rank on your priorities?<br />The General Assembly (G.A.) should be thanked for creating TRAC Is the G.A. just as committed to passing TRAC recommendations?<br />Some say “this is too big to ever pass.” If so, why appoint a highly qualified commission, have these experts spend 6 months of their time & our tax dollars… & then not pass their recommendations?<br />We realize that November 15th (preliminary TRAC report) is after the state budget development. But isn’t Jan. 1, 2010 (right after big elections) the perfect time for the G.A. to pass something bold?<br />Even if the TRAC report isn’t perfect, can we still support it if it gets us “10-20 yards further down the football field to our goal?”<br />Olde English & Western Piedmont Consortia<br />
  72. 72. Who can I contact for more information?<br />Olde English Consortium<br /> (Click on “Board of Directors” for handouts, revised regularly)<br />803-817-6637 or<br />Western Piedmont Consortium<br /> revised regularly)<br />864-223-9127 or RWILSON@SC-WPEC.ORG<br />Please feel free to contact Dr. Mike Fanning (OEC) and/or Dr. Ray Wilson (WPEC) if you would like further information or if you would like for someone to come and speak re: Tax Reform with a group in your region.<br />Please use this information in any way you see fit. They are yours to copy, adapt, & use on your own. Help us get the word out. We want our communities, legislators, and candidates to hear from as many people as possible about this important issue: Comprehensive Tax Reform.<br />Olde English & Western Piedmont Consortia<br />