Lawmakers must step up to tax overhaul challenge

South Carolina's budget problems and its need for a tax system overhaul are so intertwined that one cannot be fixed without the other.

That makes key lawmakers' predictions that a report from a special commission on tax reform will go nowhere in the coming session particularly disturbing. With a budget shortfall estimated at $829 million and a tax system overly reliant on volatile sales tax revenue and rife with exemptions, it can't be business as usual.

Business as usual constitutes telling state agencies to absorb more cuts -- $2 billion and counting -- insisting on no new taxes and refusing to undo one of its biggest mistakes in recent years, Act 388, the 2006 Property Tax Reform Act.

As lawmakers start their legislative session this week, they must shake off the bad habits of the past and actually deal with the complex problems facing our state. No more studies on tax and education funding reform to forestall action. No more talk about the need to restructure state government. They must do something, preferably something that will make a positive difference.

The Taxation Realignment Commission's recommendations include reducing the sales tax rate but broadening the scope of what is subject to the tax. That includes closing about 60 of the more than 80 sales tax exemptions and caps. The commission also has recommended reducing the assessment ratio for manufacturers' property.

According to the commission and the S.C. Chamber of Commerce, the state's manufacturers pay the highest property tax rates in the country, and commercial properties pay the seventh highest rate.

The state's 6 percent sales tax rate is tied at 13th highest in the country. Only 38 percent of gross sales are subject to sales tax, the report states, because of exemptions on such things as Internet sales, prescription drugs, electric bills, unprepared groceries and a $300 cap on automobile sales taxes.

Interestingly, the state's corporate income tax rate -- which incoming Gov. Nikki Haley wants to eliminate -- is one of the lowest in the country, according to the commission. And overall, the state's tax burden is one of the lowest in the country.

Unfortunately, the commission did not address Act 388's exemption from school operating taxes for owner-occupied homes. The legislature forbade it.

That's particularly troubling because that is just one of several problems with this law. In addition to that shift in tax burden, the law has been criticized for its other provisions, including point-of-sale assessments, the 15-percent cap on reassessment values and a cap on tax rate increases for local governments.

Lawmakers should correct that act of bad judgment and get this key part of the state's tax system into the overhaul equation. Business leaders say the disproportionate tax burden on business makes it difficult to attract and retain businesses. That in turn fuels the state's high unemployment rate, which stood at 10.6 percent in November, the sixth highest in the country.

The commission's report doesn't hold all the answers to tax reform in South Carolina, but its treatment will tell us a lot about lawmakers willingness to tackle this very difficult subject in a timely and comprehensive manner. The status quo simply won't do.