Selective Fiscal Responsibility in South Carolina

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South Carolina Governor Mark Sanford vetoed a bill this week that sought to increase the state's cigarette tax rate, which is currently the lowest in the nation. While the Governor supported the cigarette tax hike (as most people in the state do), he criticized the bill for linking the new revenues to a Medicaid expansion that would ultimately be unsustainable.

The cost of providing health care is constantly on the rise, and the real value of tax collected on each pack of cigarettes continuously declines as a result of inflation and other factors. The Governor, perhaps correctly, pointed out that the bill "virtually ensures future tax increases" in order to maintain consistent Medicaid funding. Interestingly, this is precisely the problem the legislature tried to address in attempting to index the amount of tax to the rate of medical cost inflation (as was discussed in a previous Digest).

The Governor's complaints about the bill's lack of sustainability seem suspect when one considers the purpose to which he would like to see the revenue dedicated: an optional flat income tax that (primarily wealthier) taxpayers could use to avoid the state's graduated rate structure. If the Governor wants a tax cut that neatly offsets the cigarette tax hike, then his plan would fail this test dramatically. While cigarette taxes exhibit some of the slowest growth (or even decline) of any tax, income taxes on the wealthy are among the most quickly growing revenue sources. This is in part because income is becoming increasingly concentrated in the hands better-off individuals who pay at the top marginal tax rate. Reducing the rate at which this income is taxed would almost certainly come to cost more than what the cigarette tax could provide.

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