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South Carolina Panel Recommends Broader Sales Tax and Lower Rate

2 min readBy: Joseph Bishop-Henchman

The South Carolina Taxation Realignment Commission (TRAC) voted yesterday to recommend some significant changes to the Legislature:

  • Eliminate the sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. for residential electricity, natural gas, and water bills and instead apply a 1.25% rate, after a 75% exemption.
  • Eliminate the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. exemption for prescription drugs and instead apply a 1.25% rate, with a maximum payment of $100 per year before an income 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. kicks in. Prescriptions for Medicare and Medicaid recipients would remain exempt.
  • Eliminate the sales 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. exemption for groceries and instead apply a 2.95% rate. Groceries bought with food stamps would be exempt. Before 2007, South Carolina taxed groceries at 3%. Republican gubernatorial candidate Nikki Haley has been criticized for her support of eliminating the grocery exemption to eliminate 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. .
  • Lower the general state sales tax rate from 6% to 5%. (Local sales taxes add a further 1.26% average).
  • Apply the 5% rate to some services: tanning/piercings/tattoos, salons/hair/nail care, weight loss counseling/spas, cleaning/maintenance/repairs, heating/cooling repairs, home appliance repairs, and computer repairs.
  • Two options for the currently 16.9 cent gasoline tax: either a 7 cent rate adjusted every 6 months with the wholesale price, or raising the current tax by 5 cents.
  • They dropped a proposed limit the state’s sales tax holiday to just school supplies instead of clothing, shoes, and computers in addition.
  • The committee suggested some options for reducing income tax exemptions and exclusions, urging that the revenue be used for lowering the top income tax rate of 7%.

The proposals are revenue-neutral, except for the gasoline tax option that would adjust with wholesale prices. But they already have some critics. On one hand:

Sue Berkowitz, the director of the South Carolina Appleseed Legal Justice Center, was among a list of witnesses before the state Taxation Realignment Commission.[…] Berkowitz praised some of the proposals but said South Carolina’s poor would feel the sting of others. She warned that though the changes would not affect recipients of federal food stamps and Medicaid, which are exempt, they would harm residents struggling just outside the poverty definitions and the state’s 650,000 uninsured.

“You can’t receive food stamps if you are over 130 percent of the poverty level,” she said. “That means about $2,300 for a family of three. I have two teenage boys. I can tell you that’s practically our food bill every month.”

One the other:

Commissioner Don Weaver, who’s also president of the South Carolina Association of Taxpayers, told the other commissioners, “For me to turn around to my members and say, ‘We’re raising your grocery taxes. We’re raising your gas taxes and now we’re going to add a new tax on water and electricity that’s never been there’, I just, I can’t look my members in the face and tell them that. I just can’t.”

More on South Carolina here.

Update: The original post inadvertently linked to a satirical website to discuss opposition to Governor Haley’s proposal to reinstate the grocery tax. Those links have been changed.