Cigarette tax increase considered to save SC’s failing pension fund

Could a tax hike on cigarettes help South Carolina lawmakers save the state’s employee pension fund?

Rep. Bill Herbkersman, a Bluffton developer and co-chairman of the state’s Joint Committee on Pension Systems Review, says it certainly might help.

“Nothing is off the table,” Herbkersman said Monday in reference to ideas that could give the pension fund — which is facing a $20 billion shortfall — a quick cash infusion.

“We are formulating a couple plans” to tackle the unfunded liabilities, including bumping taxes on items such as tobacco products, he said.

The unfunded liability is the difference between what the state must shell out to pay for retiree benefits and the dollar amount held in the pension fund.

“Some people in the state system wanted this can to be kicked down the road a while longer,” Herbkersman said. “But this isn’t for show; its for real.”

Currently, South Carolina taxes cigarettes at 57 cents per pack. Other tobacco products — such as cigars or pipe and chewing tobacco — are taxed at 5 percent of the manufacturer’s price, according to information from the S.C. Department of Revenue.

In terms of cigarette tax rates, South Carolina’s are the 45th highest in the nation. Taxes on other tobacco products are the country’s lowest, Megan Hicks, director of the South Carolina Tobacco-free Collaborative, said Monday.

Herberksman said he has heard some push-back on the tax increase proposal from tobacco users. Despite that, South Carolina’s relatively low rate could make raising taxes on cigarettes an easier sell to his constituents.

The state could raise the tax rate by a dollar or more and still be well below what other states charge. New York leads the country with a $4.35 per pack tax.

But, even if the rate was to be raised significantly, hiking taxes on cigarettes alone would probably not be enough to save the pension fund, which has “underperformed compared to other (public pension) systems,” Herbkersman said.

He “attribute(s) the under-performance to bad management in the past,” as well as the recent economic recession.

Aside from cigarette tax increases, one way to take a bite out of the $20 billion shortfall is to gradually reduce the overall number of state employees over a period of time and increase the amount the remaining employees pay into the pension, Herbkersman said.

Another possibility is to move new state employees away from the pension fund and toward a 401(k)-style retirement plan, he said.

Herberksman and other committee members are also in the process of trying to identify overlooked pots of money that could be injected in the pension system.

For example, he said, lawmakers recently discovered a fund of unclaimed lottery winnings. That money is now used to help fund public libraries.

Herberksman said the Joint Committee on Pension Systems Review, which met last week, will spend the next month or so working on ways to address the pension fund shortfall before presenting a fleshed-out plan to other lawmakers next year.

Regardless of what the revenue is used for, Hicks said tax increases on cigarettes and other tobacco products are a fairly effective way to encourage users to quit and discourage would-be users from starting.

But Hicks recommended lawmakers also increase taxes on the other types of tobacco products.

“We encourage them to increase the cigarette tax and look at increasing the other tobacco tax to an equivalent rate,” she said. “That would help generate additional revenue without driving (smokers) to other tobacco products because they are cheaper.”

Since South Carolina’s cigarette tax was last raised in 2010, “we have seen a trend that suggests kids using less cigarettes but other types of tobacco more,” Hicks said.

This story was originally published November 14, 2016 at 2:58 PM with the headline "Cigarette tax increase considered to save SC’s failing pension fund."