Economic hardship poses challenges, but it also can present opportunities. With the worsening budget crisis in South Carolina, now could be the time for a comprehensive overhaul of the state's tax system.
State lawmakers have shown some willingness to take on this challenge. Unfortunately, the only solution proposed by Gov. Mark Sanford was his annual recycling of a plan to cut income taxes.
Sanford last week offered essentially the same plan that was quickly rejected by the Legislature last year. He would implement a 10-year phase-out of all corporate income taxes to be funded by a 30-cent increase in the state's cigarette tax. He also would create an alternate, flat income tax rate of 3.65 percent.
South Carolina collects about $300 million in corporate income taxes annually. While that is far less than what the state collects from sales and individual income taxes, the state can scarcely afford to eliminate any source of revenue at the moment.
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Earlier this month, a group of state economists concluded that South Carolina's current budget crisis stems more from the loss of revenues resulting from recently approved tax cuts than the faltering economy. And, they believe, the worst is yet to come as unemployment rises and fewer people pay income taxes.
Of the hundreds of millions of dollars in revenue shortfalls so far this year, economists estimate that two-thirds result from tax cuts -- especially the 2006 sales tax cut on groceries. The problem is exacerbated as hard-hit consumers spend more of their paychecks on non-taxed groceries than on goods that are taxed.
And last week, the problem intensified as the state's fiscal oversight board cut $383 million, or 7 percent across the board, from state agency budgets. That will have a severe effect on schools, agencies that serve the state's physically disabled and mentally ill, Medicaid, health clinics and disease prevention efforts.
The national recession would have brought hardship to the state under any circumstances. But South Carolina already had been suffering from high unemployment and dire revenue forecasts when the recent downturn occurred. And the state's dysfunctional tax system has helped turn a difficult economic slump into a crisis.
A sensible tax system is broad-based to provide support -- something like a three-legged stool -- whatever the economic climate. Traditionally, the state had relied for revenues on a proportionate mix of sales, income and property taxes.
Two years ago, however, the state approved so-called property tax reform that abolished most homeowner property taxes formerly used for school operations and replaced them with proceeds from a new penny sales tax. That made the state reliant primarily on revenues from the sales tax and income tax, both of which shrink during recessionary times.
Making matters worse, the Legislature over the years has approved an array of tax exemptions designed to appeal to different constituencies. The predictable result is a considerable drop-off in tax collections during hard times.
The governor's proposal to phase out corporate income taxes would be more piecemeal reform, not to mention a potential net loss in state revenues. Thankfully, it appears that some state lawmakers are committed to reforming the tax code this year. That would entail not just tweaking the current code, but instead overhauling the entire tax system to restore fairness and balance, and to ensure that the state has the money necessary to provide essential services.
Times of crisis can be an opportunity for substantive change. Many of South Carolina's budgetary woes are self-inflicted.
We hope this is the year state lawmakers resolve to get to the root of the problem and rewrite the tax system.