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

January 15, 2009

South Carolina Gov. Mark Sanford (R) gave his State of the State address last night, and urged that tax 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 credits 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 tax.

Sanford also discussed a proposed optional flat individual income tax:

The second leg of what we have proposed to stimulate the economy is a flat tax 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 rates 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.

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