Lawmakers know what to do on sales tax exemptions

info@islandpacket.comMay 19, 2013 

Lawmakers who thought the S.C. Supreme Court would give them political cover to remove dozens of state sales tax exemptions must have been disappointed when the ruling finally arrived.

Instead of knocking down the exemptions, which cost the state about $2.7 billion, the court said the case in front of them raised the wrong issue.

Columbia attorney Matthew Brodman challenged the exemptions based on their number -- 78 -- and said the court should throw out all of them because the number had grown to the point "where they no longer bear a rational relationship to the purpose of imposing the (sales) tax in the first place."

But the court said that wasn't a reason to challenge them. The content, not the number, was the issue. The exemptions must be weighed on their individual merits to see whether lawmakers still have a rational basis under the law and the state constitution to carve out exemptions for a particular type of sale.

Chief Justice Jean Toal singled out the $300 cap on the sale of vehicles as an example of an exemption that had outlived its purpose. Lawmakers put it in place in 1984 to make South Carolina dealers competitive with their counterparts in North Carolina, which already had a cap. North Carolina's cap is gone, but not so South Carolina's, an exemption Toal called one of the most regressive aspects of the state's sales tax code.

But she didn't stop there. "Many of these exemptions and caps could not withstand even a minimal level of scrutiny," she wrote in her separate, concurring opinion.

Now we'll see whether lawmakers have the political will to stand up to special interest lobbyists -- absent a hard push from the bench -- and do away with outdated and unreasonable exemptions to the state's 6 percent sales tax.

They should do it, and it won't be that hard. The heavy lifting already has been done by the committee lawmakers appointed in 2009 to review the state's tax system. The Taxation Realignment Commission studied the exemptions and recommended eliminating 60 of them, which could generate as much as $600 million.

Lawmakers last year made a pitiful attempt at following through on that suggestion. A list of 43 exemptions got whittled to 20 before the bill passed the House. It died in the Senate.

They must do better than that. If not, they should prepare for lawsuits challenging the individual exemptions, as suggested by the court.

State Sen. Tom Davis, who has his eye on the money that would come from following the commission's recommendation, says the court's ruling was a shot across the bow that could still shake loose the legislature's political inertia.

Davis would like to use the $600 million, coupled with a cap on state spending, to revamp how we pay for school operations. In particular, he wants to do away with the inequity of commercial and nonresident property owners paying for school operations, while resident homeowners get a pass.

He's convinced, and he's probably right, that lawmakers will never put the school operations tax back on resident homeowners. But he also recognizes the negative economic impacts of the current system.

Davis' solution: Take away the property tax for school operations for all property owners.

Not only would it be more fair, it would help Beaufort County when it comes to state education funding. Act 388 undermined using the "index of taxpaying ability" to determine a local school district's share of state money under the Education Finance Act, a primary funding source for districts. Beaufort County and other coastal areas, where property values are high, get short-changed on state EFA funding as a result.

Per pupil spending, with weighting to account for such things as poverty and special educational needs, is the direction we should be heading. That requires a new funding system.

The Supreme Court ruling certainly shows the justices don't think much of the current sales tax system. The court might not have offered complete cover for lawmakers, but it didn't leave them on the field alone.

Lawmakers can do the job they maintain is theirs to do, or they can expect a lawsuit on the merits of the individual exemptions.

The court has signaled its answer if it comes to that.

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