South Carolina voters should have no problem drawing distinctions this fall when it comes to their gubernatorial candidates’ visions for the state’s tax structures (or lack thereof) in a year when the issue of fairness in state taxation is likely to loom large.
Republican Gov. Nikki Haley continues to tout her income-tax elimination plan on the campaign trail, while challenger Vincent Sheheen, currently a Democratic state senator, is pushing a multifaceted recalibration of numerous state and local taxes to, as he says, restore fairness to the tax system.
The linchpin of Gov. Haley’s campaign is the eventual elimination of the state’s income tax. Her attempt to repeal South Carolina’s tax in order to “bring jobs and investment to the state” has been years in the making. In 2010, then-candidate Haley campaigned on the promise of lowering income taxes. This year, the governor’s proposed budget included eliminating the state’s 6 percent income tax bracket, which applies to income between $11,520 and $14,400 (estimated to cost $27 million for the year), a provision that state lawmakers did not approve. Haley previously signed a bill in mid-2012 reducing the tax rate on “pass-through” business income from 5 percent to 3 percent over three years.
Critics have characterized the governor’s income tax proposal as a fantasy, taking issue with the fact that Haley has given no timetable for implementation and has presented no viable options for replacing lost revenue from the tax, which is currently the source of over half of the state’s general fund revenues. Eliminating the tax outright would be catastrophic for the state’s fiscal picture and even with a pay-for mechanism, repeal would mean the loss of the state’s most progressive revenue source, exacerbating income inequality in the state.
Challenger Vincent Sheheen bookends his comments on tax reform with the word “fairness.” Sheheen’s plan seeks to preserve important revenue sources and targets multiple taxes in an attempt to rebalance the distributional effects of the overall state tax levy. He calls the state’s current tax system “a giant mess littered with special interest loopholes.”
On the topic of the income tax, Sheheen proposes to adjust the brackets (presumably by revising the thresholds upward) to create a structure appropriate for the 21st century and to reinstate a measure of balance. Sheheen would also enact a refundable Earned Income Tax Credit to reward low-income working families. The state currently lacks such a credit, a mechanism ITEP has frequently endorsed as one of the most effective ways to combat regressivity in the tax code and pull low-income families out of poverty.
Sheheen’s income tax plan is likely to come with its own significant costs, some of which may be offset via his proposal to eliminate loopholes for special interests and corporate tax breaks – revenue losers that both complicate the tax code and reduce the fairness of the overall tax system. Another reform proposed by the candidate is the broadening of the sales tax base, using revenue gains from such a move to reduce the overall state sales tax rate, currently at 6 percent. South Carolina is one of several states that currently fail to tax many services, creating unfair advantages for sellers and purchasers of goods and leading to a narrowing of the tax base over time. Sheheen’s plan would also eliminate local property taxes that go toward funding schools and institute a uniform statewide property tax in their place, which he says would allow for a lower rate, incorporate the entire state property tax base, and allow property values to be calculated in a uniform and fair way. In particular, the candidate is proposing to lower the industrial property tax rate, which he says currently disadvantages South Carolina manufacturers who pay the highest rates in the country.
The outcome of this fall’s election may determine whether South Carolina goes the way of states like Kansas and North Carolina, whose governors have placed all of their proverbial eggs in the basket of supply-side economics by implementing heavy income tax cuts and who continue to see their fiscal and economic health falter as a result.