Some thoughts on comprehensive state tax reform

In the past few months, an 11-member commission, known as the Taxation Realignment Committee, has held public hearings to, according to its legislative charge, "assess the effectiveness, fairness and competitiveness of our current system and to recommend changes to the South Carolina General Assembly."

I am not a member of the TRAC; no legislator is. It is comprised of non-legislative economic experts, captains of industry and the like, in order to bring an outside perspective to this important debate.

That said, I have a keen interest in how our state government taxes and spends, and I have submitted my thoughts on the matter to the TRAC chairman, and I share them briefly here.

To properly assess our state's tax code, two separate questions must be addressed: First, is the current amount of revenue collected by the state government sufficient to the discharge of its core functions, or is it deficient or excessive?

And second, what are the fairest, simplest and most competitive (in terms of fostering economic growth) ways of collecting that revenue?

As to the first question, the evidence shows that our state government currently takes in more than enough revenue to provide the things expected of it (e.g., seeing to public safety and prisons, education, a justice system, roads and bridges, etc.). Consider these two measures:

1. Per capita state government spending in South Carolina is 22 percent higher than Georgia's and 13 percent higher than North Carolina's, and our state government debt per capita is almost three times that of Georgia's.

2. Total government spending in South Carolina amounts to 40.5 percent of the state economy -- the 10th highest percentage in the nation -- while North Carolina's and Georgia's is only 32 percent and 30 percent, respectively.

I believe our state government's excessive spending results from either lawmakers' hubris or anxiety, or perhaps both. It's hubris in that they feel qualified to make investment decisions on behalf of taxpayers (the legislative favors they provide annually to selected businesses have increased from $32 million to $254 million in the past decade) and anxiety in that they desperately want to be seen as "doing something" to create jobs.

Whatever the motive, government officials should avoid what Nobel laureate Freidrich A. Hayek called a "fatal conceit," for even when assisted by "development czars," they are bad predictors of the economic future and should leave that chore to the private sector and the profit-and-loss system.

Some argue that decreasing government spending results in "the rich getting richer and the poor getting poorer." Actually, the opposite is true. The benefits of government spending are more skewed toward the politically powerful more than are the benefits of private economic activity.

Currently, 377 lobbyists represent 534 companies and organizations in South Carolina. Those with lower incomes do not have the political power to compete for the special favors. As a recent study by the nonpartisan Economic Policy Institute proved, the larger the government control of the economy, the more concentrated and uneven the income growth.

All of this, I believe, will lead the TRAC to conclude that no additional revenues need be collected and that serious consideration should be given to reductions. The question of how to collect the revenues is more complex but equally suspect to objective analysis. In my judgment, three key facts about our tax code should guide this debate:

First, discretionary sales tax exemptions -- that is, exemptions in our tax code that the state legislature has the power to repeal -- resulted last year in more than $2.5 billion in special tax breaks.

Second, South Carolina has the highest tax on industrial property in the nation -- 2 1⁄2 times greater than Georgia's and four times greater than North Carolina's. And a law passed in 2006 prohibiting primary residences from being taxed for school operating costs has caused property taxes on commercial properties to skyrocket.

Third, our top marginal state

income tax rate is the highest in the Southeast, and our income tax brackets are not accurately indexed for inflation, and as a consequence, taxpayers are pushed into higher tax brackets much quicker than their incomes warrant (i.e., subject to an "invisible" annual tax increase).

Amazingly, there are 112 distinct sales-tax loopholes in our tax code. There is no rhyme or reason to these tax breaks; they are simply the accumulation of successful lobbying efforts over time -- from portable toilet rentals to time shares to newspapers, from direct-mail postage to amusement park machinery to manufactured housing.

As a general rule, no South Carolinian should get special treatment at the expense of another, and the TRAC should recommend that all sales exemptions expire as of a date certain unless a new law is passed to keep the exemption (perhaps some still serve a compelling public purpose, e.g., the sales tax exemption for groceries).

The revenues accruing to state government as a result of closing the sales-tax exemptions should then be used to reduce the property taxes on industrial property and commercial properties. And the brackets for the state income tax should be fully indexed to the Consumer Price Index to avoid automatic and hidden tax increases.

Tom Davis is state senator for Beaufort County.