Tax cuts largely to blame for S.C. budget crisis, economists say

By John O'Connor - The (Columbia) State

COLUMBIA -- The hundreds of millions of dollars that have been cut thus far this year from the state budget have more to do with recently approved tax cuts than the faltering economy, state economists say.

Ominously, they think the worst of the nation's economic problems have not yet hit South Carolina.

More than two dozen states, including South Carolina, are facing budget deficits. South Carolina's inclusion in that group is unusual. The state typically trails national economic trends, meaning its budget problems normally appear later in an economic cycle.

Still, the state already has been forced to cut its budget by $621 million, with more cuts to come. Economists say those cuts largely result from tax cuts by the state and are not the result of the economy.

Those tax cuts include the Legislature's elimination of the sales tax on groceries, at an estimated cost of $375 million, which took full effect a year ago, as well as the $81 million cost of eliminating the state's lowest-income tax bracket.

University of South Carolina economist Doug Woodward said the tax cuts have created an "exaggerated crisis" for the state budget.

The worst, perhaps, is yet to come.

A recent report from the Nelson A. Rockefeller Institute of Government concluded state budget problems will worsen early next year. Second-quarter state revenues were "superficially strong," the report said, and states will begin to see income tax revenues fall by April.

As unemployment increases, Woodward said, fewer people pay income taxes.

State lawmakers said they have no plans to rescind the sales tax exemption on groceries.

"There're a lot of states that don't tax groceries," said Rep. James Smith, D-Richland. "I don't think we can blame it entirely on the sales tax."

However, the state's budget problems have many legislators reconsidering more than $2 billion in items that now are exempt from sales tax.

Others, led by Gov. Mark Sanford, believe there are budget woes because the state has been spending above its means.

A telling month

Since July, the state has been running $113 million behind its revenue estimates. Sales tax collections alone are $72 million behind expectations.

William Gillespie, the state's chief economist, said the lost tax on groceries makes up almost the entire decline in sales tax revenues 10 percentage points of the 10.8 percent decrease.

As a result, the state's Board of Economic Advisors earlier this month lowered its revenue estimates for the fourth time since May.

Of the $600 million in revenue shortfalls, roughly two-thirds are a result of tax cuts.

Many think the grocery sales tax cut has cost more in lost state revenue than originally estimated in 2006. Gillespie said the estimate has been accurate.

However, consumers have been spending more of their paychecks on items groceries and gas not subject to the sales tax.

The price of many grocery items, for example, has increased by a third in the past year, according to federal data. And while the price of gas has plunged in the last month, $4-a-gallon gas this summer also might have affected tax collections.

Economists told the Board of Economic Advisers last month that anecdotal evidence suggests S.C. families are dining out less and eating at home more -- another shift away from a taxable sale, since restaurant food is taxed.

The downturn has puzzled state leaders and economists, who typically see signs in other states before they affect South Carolina. But the tax cuts, coupled with slowing growth, meant South Carolina was among the first states to experience budget deficits.

USC's Woodward said lawmakers were hoping revenue growth would make up for the tax cuts.

Still, he noted, retail sales were up in September and, adjusted for inflation, are up for the year. Likewise, S.C. employment is strong despite an 8 percent jobless rate, he said.

Business officials point to New York Conference Board data showing 55,000 S.C. help wanted ads were on the Web in October.