South Carolina Sales Tax Reform Proposal is Flawed in at Least Two Important Ways

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It's encouraging that the South Carolina Taxation Realignment Commission (TRAC) is interested in broadening the state sales tax base and lowering the overall tax rate.  Nonetheless, testimony submitted by ITEP late last week makes clear that the specific proposal being considered by the Commission is seriously flawed in at least two ways.

The first flaw is what ITEP describes in its testimony as a "worrying focus on taxing the 'necessities' that represent a large share of low-income families’ spending."  While low-income families will be helped by the lower overall sales tax rate proposed by the TRAC, the new taxes those families will face on groceries, residential utilities, and prescription drugs may outweigh the benefits they see from the lower rate.  Lessening the impact of this change through the enactment of a state EITC or some other type of tax credit is of vital importance if South Carolina is to avoid pushing its impoverished residents deeper into poverty.

The second flaw relates to the TRAC's insistence that its proposal be revenue neutral.  South Carolina tax revenues — like those in most states — have taken a serious blow as a result of the economic recession.  Large-scale tax base-broadening of the type being discussed by TRAC would raise more than enough revenue to substantially lower the sales tax rate while simultaneously bolstering the state's weakened revenue streams. 

Refusing to pursue this latter goal would be a serious mistake.  And moreover, as ITEP's testimony points out, estimating the amount of revenue that can be raised by taxing a slew of previously untaxed purchases is much easier said than done.  As a result, it will be very difficult for lawmakers to know precisely what tax rate would be needed to ensure true revenue neutrality.  At the very least, this difficulty should encourage a more cautious approach to revenue neutrality than what the TRAC appears interested in pursuing.

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