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South Carolina Governor Proposes Tax Reform in State of the State Speech

4 min readBy: Joseph Bishop-Henchman

South Carolina Gov. Mark Sanford (R) gave his State of the State address last night, and urged that taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform be a key part of improving his state’s economic competitiveness:

First, given the economic times in which we live, and given the global competition that we’re in for jobs, capital and way of life, we need to do things each year to make our business climate more competitive.

At the top of the list on this front is the tax reform proposal that we rolled out last month. It was premised on not waiting on Washington, D.C., for an economic stimulus package or a bailout, and instead focusing on the things that we can do here in South Carolina to grow our economy – and the opportunities that will come with it.[…]

Sanford emphasized that a state that uses targeted tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s to reward a couple businesses is losing out on the benefits of a simple and neutral tax code that benefits all businesses:

This tax proposal is also premised on the belief that government shouldn’t be picking the winners and losers in the business marketplace and, therefore, government should treat businesses the same.

Too often government will hand incentives to the new business in town, but offer no help to the business producing the exact same product while that business has been paying taxes for years here in the state. Too often if you’re a big business you get the red carpet rolled out in incentives, but if you’re a little business you get nothing.

This was the case in the special legislation that offered $9 million for Cabela’s to come to South Carolina. I’m a hunter and would love for them to expand in our state, I just don’t believe that little businesses who have been here for years selling the same kinds of things should be forced to subsidize them coming here. As much as that legislation would add one store, it would wipe out many more small ones that have been here for years. It turns out there are a fair number of special exemptions that have long outlived their usefulness, and our proposal takes what we spend on those incentives and redeploys these monies to phasing out the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. .

Sanford also discussed a proposed optional flat individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. :

The second leg of what we have proposed to stimulate the economy is a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. of 3.65 percent in one’s individual income tax return. Every South Carolinian would have the chance each year to pick between paying our current seven percent income tax rate, or forgoing their exemptions and paying a flat 3.65 percent. A report by the Atlanta Federal Reserve Board said that “relative marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s have a statistically significant negative relationship with relative state growth.” In everyday English that means high income tax rates slow the growth of people’s paychecks and low rates raise them.

Confronted with momentum to raise South Carolina’s cigarette tax, Sanford proposed using the revenue (and revenue from a garbage tax) to improve the state’s tax climate:

To pay for this part of the tax cut, we would raise our lowest in the nation cigarette tax from seven cents to 37 cents. We would concurrently raise our state’s tipping fee on garbage because last year 30 percent of all the garbage buried in South Carolina came from other states. There is something wrong with mega dumps being proposed in Cherokee, Williamsburg, Marlboro and other rural counties across our state to handle garbage from places like New York and New Jersey.

Not all taxes are the same, and in taxes and fees associated with cigarettes and garbage, we are lowest and low, when measured against other states. There is a real cost in health care and the look and feel of our state that goes with not changing anything.

Sanford then estimated how these changes would improve South Carolina’s economic competitiveness (one measure of which is the Tax Foundation’s State Business Tax Climate Index):

The net effect of these changes is that South Carolina’s ranking on the state business tax climate index would be that we would move from 25th to the 6th most competitive state in the country. We’ll never really outpace other states in growing our economy if we’re but average in our tax policy – but I think we would, if we were 6th in the country. I ask for your help in passing this jobs-creating proposal.

More on South Carolina here.