Gov. Nikki Haley’s obsession with cutting state income taxes is one of the main reasons the General Assembly failed to pass a credible plan to fix crumbling state roads. State lawmakers, cowed by Haley’s threat to veto any plan that doesn’t contain significant tax cuts, will have failed to do the job that was at the top of virtually everyone’s priority list.
When Haley finally unveiled her road plan during her January State of the State address, she surprised legislators by endorsing a 10-cent-a-gallon gas tax hike, a move she previously had promised to veto. But, in a move that essentially doomed the issue, Haley also insisted that any gas-tax hike be tied to a much larger cut in the state’s income taxes.
Under her plan a 10-cent-a-gallon increase to the gas tax, to be phased in over three years, would be paired with a 2 percentage point reduction to the state’s top-end 7 percent income tax, to be phased in over 10 years. While the plan would raise an average of $353 million a year during the next 10 years, the proposed income-tax cut would reduce state revenues by $1.8 billion a year when fully implemented in 2025, forcing drastic cuts in state spending on education, health care and law enforcement.
Haley has said the cuts would be offset by natural growth. But lawmakers have been skeptical.
Unfortunately, those in both houses of the Legislature who tried to produce an alternate plan had their hands tied by Haley’s threat to veto any bill that didn’t offset a tax increase with a disproportionate cut in the income tax.
Haley justifies her call for slashing the income tax with claims that South Carolina’s 7 percent top rate is the highest in the Southeast. But, as a recent report by the Associated Press notes, that simply isn’t true.
The AP – and numerous other sources in recent years – reports that South Carolinians already pay less in income taxes than taxpayers in both neighboring North Carolina and Georgia, as well as many other states that collect the tax. The AP report states that South Carolina’s effective rate – what people actually pay after subtracting home mortgage interest, property taxes and various other deductions and personal exemptions – is not 7 percent but more like 3 percent on average.
That puts the state at the rank of the 10th lowest nationwide among the 41 states that tax wages, according to the state’s Revenue and Fiscal Affairs Office. Likewise, the nonpartisan Tax Foundation ranks South Carolina’s income tax rates as 41st out of 50 nationwide, with its overall tax system ranking 37th.
In short, the notion that South Carolina’s income tax rate puts the state at a disadvantage to other states in burdening taxpayers and competing for business is a fraud. In reality, drastic cuts to the state’s income tax could seriously deplete needed revenues, forcing onerous cuts in state services.
That is not just hyperbole on the part of “tax and spend” liberals. Kansas presents a real-life example of the consequences of ill-considered tax cuts.
A story in last month’s Atlantic magazine reports that deep income tax cuts enacted during Kansas Gov. Sam Brownback’s first two years in office have produced deficits as high as $600 million as revenues plummeted much faster than the economy has expanded. Now, confronted with a yawning budget deficit brought on by those tax cuts, Kansas Republicans, who control the state legislature, are talking about raising taxes to fix the problem.
Kansas reduced personal income taxes from 6.45 percent to 3.9 percent for upper income earners, and from 3.5 percent to 2.3 percent for lower-income people over a period of several years. But instead of attracting investment, creating jobs and spurring revenue growth, revenues steadily fell.
That forced the state to slash spending, including millions of dollars allocated for education. But even with the cuts, the state last month faced a $400 million budget shortfall.
Lawmakers now are talking about slowing the income tax cuts while raising taxes on cigarettes and alcohol, overhauling school funding and – take note South Carolina – diverting money from the state’s highway fund to balance the budget.
This session, the S.C. House produced a road plan – with Rep. Gary Simrill, R-Rock Hill, playing a key role – that would increase the gas tax by 10 cents and hike the cap on the sales tax on vehicles to $500 from $300. To placate Haley, the plan also included a small income tax cut, averaging $48.
But any hope of passing a bill this session died in the Senate, where libertarian-leaning Republicans blocked any proposal that included a tax increase. They claimed enough money already exists in the state budget if lawmakers reorder spending priorities and agree to use state surpluses, such as the $400 million surplus certified last month.
Haley also would approve using the surplus for roads – or tax cuts. But that money and other general fund revenues will be needed to help cover, among other things, education reforms mandated by the state Supreme Court and a variety other state services. Raising the gasoline tax is the only feasible way to even begin attacking the problem of crumbling roads.
If you think that cutting taxes and reducing net revenues is the best approach to fixing roads, you might want to move to Kansas.