• Opinions

State’s Tax Structure Needs Work, Not Praise

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October 1, 2015
By Andy Brack | Contributing Writer

The sad thing about a new study of state tax systems is that people are going to believe it when, in fact, it is pretty misleading and relatively pointless.

WalletHub, a website that offers consumer information and tools geared toward personal finance, frequently runs rating studies on everything from credit card debt to financial literacy for states. But some of their work gets a little squishy with studies like on best- and worst-run cities, school systems and active lifestyle communities or reports on happy states and the most and least energy-efficient states.

Now in focus is the new offering that highlights the most and least fair state tax systems. According to WalletHub, South Carolina has the third fairest tax system in the country behind Montana and Oregon. But dig into the study’s methodology and you realize quickly that it relies on what people think a fair tax system should be, not whether it is empirically fair according to economic principles. To make these opinions look more scientific, WalletHub’s exercise in confusion then compares people’s thoughts about what they should pay in taxes to actual tax burden data.

The gaping hole in this logic is as big as the Grand Canyon: Who really believes they should pay more taxes than less? As the late U.S. Sen. Russell Long of Louisiana once noted, “Don’t tax you. Don’t tax me. Tax that fellow behind the tree.”

Simply put, the flawed WalletHub study doesn’t rely on basic economic tax fairness principles like equity (ability of people to pay), adequacy (whether the system raises enough money for people’s needs), neutrality, transparency and simplicity. In fact, noted Clemson economist Holley Ulbrich poked lots of holes in this publicity stunt in just a few minutes.

“It’s pretty simplistic,” she said, noting that opinions on fairness have a high degree of subjectivity. “It doesn’t consider the distribution of the tax burden in other ways, most notably between renters and homeowners since Act 388” which swapped property tax revenue for more regressive sales tax revenue.

Ulbrich listed four indicators of unfairness in South Carolina’s current tax system, which generates $7 billion a year in general fund revenues. (The state also pulls in another $8 billion in federal funds plus $9.3 billion in “other funds,” such as college tuition, health reimbursements, sales taxes for education, lottery proceeds, car license fees and cigarette taxes.)

• Adequacy: “It doesn’t provide enough revenue to adequately fund education (K-12 and secondary), roads, prisons and DSS, all of which matter to all our citizens.”

• Equity: “It puts too much of the burden on commercial and rental property and favors homeowners.”

• Balance: “It relies too heavily on the sales tax, which is more of a burden on the poor, made worse by our very limited taxation of services, which would make it less regressive.”

• Preference: “It especially favors retirees over working people with generous income tax exemptions for pensions and Social Security.” For example, South Carolina exempts $56,000 from all income from tax for everyone. Seniors, however, can get up to $63,000 more in income tax breaks.

Despite continuing inequities identified in a much-ignored 2010 report by a blue-ribbon state panel of tax experts, South Carolina has a relatively competitive income tax, according to figures gleaned from the S.C. General Assembly. Since 2006, the General Assembly takes credit for reducing income taxes for individuals and small businesses by $1.6 billion. And the state’s income tax is generally much lower than in neighboring Georgia and North Carolina thanks to substantially lower effective (or real-world) tax rates. Overall, South Carolina has one of the lowest tax burdens — amount of taxes people actually pay — in the nation, according to reputable organizations like the Tax Foundation.

Bottom line: Politicians are likely to showcase the WalletHub study to highlight how they don’t need to do anything (sound familiar?) to fix the state’s tax structure.

Hooey. Don’t be fooled. Rather than having the “third fairest” tax structure, South Carolina’s system is riddled with billions of dollars of sales tax exemptions and an income tax structure that can use some more work from the bottom up, not top down.

Andy Brack is editor and publisher of Statehouse Report. He can be reached at: brack@statehousereport.com.

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