The former chairman of the S.C. Board of Economic Advisors, Dr. Harry Miley, has added his two cents on the tax discuss and debate.

“What do we need to do? We need to do what everyone has been saying we need to do for the last several decades — undertake a thorough evaluation of our current system and redesign it from top to bottom. The recent proposals for the corporate and personal tax rates may be what are needed, but they need to be considered in the context of a comprehensive evaluation of the entire system. Whether it’s done by the Palmetto Institute, a special legislative committee, a business coalition or a mix of all the above, that is what we need to do.

“When we do it we need to be careful to distinguish discussions about how much government spends from discussions about how government raises the revenue to pay for the services. But we must stop doing it piecemeal in a vacuum. Please ….”

Take a moment to read all he has to say.

Just last week brought the announcement of a fourth round of budget cuts for the state, bringing the grand total to $1.2 billion. And this year’s economic forecast doesn’t look any better.

Listen to folks within state government and you’ll hear talk of program cuts, furloughs, and job losses. It almost makes you wonder how in the world lawmakers could cut more from state budgets. But they have to.

Reality is the 170 men and women we’ve elected to serve under the copper dome in Columbia are now facing the consequences of their less-than-economically-conservative decisions of the last 4 or 5 years. 

They’ve taken surpluses and spent them, instead of saving up for the inevitable rainy day.

They’ve expanded grants and programs to “bring home the bacon”, instead of moderating growth.

And they’ve made the state’s revenue stream dependent upon the most fluctuating income source… the sales tax, instead of taking on the hard task of real tax reform.

The passage of Act 388 did as much to exacerbate our state’s current financial condition as did this economic recession we’re in. By trying to bring “tax relief” to homeowners (i.e. voters), lawmakers did the old switch-a-roo… reducing property tax for a one cent increase in the state sales tax. But they failed to realize what that would do to revenue during economic anorexia.

Historically, South Carolina is slower at economic recovery than other states. Our economy is not as diverse, nor is our tax system as equitably distributed as it should be. It’s going to be tough times for state agencies for the next few years, but if lawmakers don’t make real tax reform a priority on Tuesday morning when they head back to work, it’s going to be even tougher for the state to recover from our economic woes.

As The State’s editorial said today…

“There is no question that tackling this monstrosity will be difficult — more this year than in a normal year. That’s why a growing chorus of business and civic leaders is calling for the creation of an independent panel, whose recommendations lawmakers would have to accept or reject as a package.”

Hopefully, lawmakers will realize they can’t piecemeal our tax system together in a vacuum. They must rely on outside expertise to come up with comprehensive, long-term solutions. If they don’t, this state will continue to hobble along, struggling to compete in a 21st century economy.

Economists say we’ve been in a recession for nearly a year now, and for many this has come as no surprise. South Carolina’s economy, not necessarily one of the most robust in the nation, is more susceptible to dramatic effects of the downturn than most.

Case in point… $625 million in budget cuts.

It has taken nearly 7 years for us to recover from the economic punch of the 2001 recession, and now that we’ve barely gotten back on our feet, we’re taking another blow to our economic gut.

Darla Moore drove home this point earlier this week at a meeting of the Upstate chambers of commerce.

In two studies on South Carolina’s tax structure commissioned by the Palmetto Institute the experts noticed, with regard to previous recessions, that South Carolina’s revenue performed worse than the national average in two of the last three recessions since 1980….

To emphasize the point, Sales Tax Revenue in FY 2001 was $2.7 billion. Seven years later, it is essentially the same. That tells me that the current trend in lagging income and sales tax revenue is likely to be the case for the next several years.

It doesn’t help that two years ago the Legislature passed a tax-swap “reform” package – Act 388 – that essentially made state tax coffers overwhelmingly dependent on the most fluctuating revenue source – sales tax.

Now state leaders in Columbia are prepping for a third round of budget cuts this month. It wouldn’t be surprising if we face a fourth before we end Q1 of 2009.

Darla Moore brings up a valid point in recommending a BRAC-style commission to reform our state’s taxing structure. Hopefully, leaders in Columbia will take her recommendations to heart and realize that piece-mealing a tax system together just won’t work.

Here’s what she had to say…

This one came across the desk this morning. It’s a portion of letter going out today from John Allison, President & CEO of BB&T, to every member of the US Congress.

Key Points on “Rescue” Plan From A Healthy Bank’s Perspective

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.
2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.
3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.
4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.
5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.
6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.
7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.
8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.
9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?
10. The proposed bankruptcy “cram down” will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.
11. Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990’s the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.
12. The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.
13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.
14. Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the “rescue,” effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?

The name of our modest little website suggests that we promote conservative ideas.  Even dumb liberals can figure that one out.

Just because a politician calls a proposal “conservative” doesn’t necessarily mean that it is.  For example, the legislature in 2006 passed Act 388, which shifted the tax structure for school funding from local property taxes to a statewide penny increase in the sales tax.

The motive for attacking this problem was laudable.  In some parts of the state, reassessment sent property taxes soaring.  The legislature essentially was trying to fix problems created by local bureaucrats and slap stupid council people.

But there are serious unintended consequences of the legislation.  Legislators said it was a conservative move.  But was it?  Independent studies suggest that businesses are taking it on the chin.  In fact, this year alone business will shoulder an additional $250 million in sales taxes… $409 million by the end of next year.  What’s conservative about shifting the tax load to businesses?

That’s the kind of tax policy you’d expect from Obama.

Economics 101 says that every dollar business carries in additional costs eventually makes its way down to the consumer. Just look at the effects of gas prices on trucking, shipping, the cost of food, and extra baggage fees for airlines.

The South Carolina Policy Council, in a recent study of the Act 388 “tax swap” by the Beacon Hill Institute, noted that the additional tax burden on business will stifle the creation of nearly 6,600 new jobs and $852 million in investments over the next two years, while personal income will fall by $321 million and real disposable income per capita by $79 by 2010.

A stable tax system must have the broadest base of taxable entities, each with the lowest rates possible. According to that philosophy, Act 388 may not have been the best move for tax reform in SC.

The Palmetto Institute, an independent research foundation in Columbia, proposes creation of a broad-based, independent tax study commission to review the state’s tax structure top to bottom.

Had an independent tax study group been in place, it could have not only looked at the short-term economic impact of Act 388, but also look at long-term budget forecasting for the state.

As the Palmetto Institute puts it…

Armed with sufficient research pointing out potential consequences for the changes being considered, the elected officials could at least approach the need for reasonable tax reform in an enlightened manner.  Otherwise, real tax “reform” is nothing more than an illusion.

The SC Policy Council drove home the importance of a “dynamic” perspective on the tax structure in our state.

A static analysis simply looks at the immediate revenue impact to government, without examining the inevitable changes in the private sector as a result of either a tax increase or decrease…. [T]ax swaps ultimately lead to higher taxes, fewer jobs and less money for investment.

South Carolina’s local and state tax laws are a mess.  They’ve been cobbled together over many decades, usually with the most powerful lobbying interests prevailing.  Many of the tax laws were enacted when manufacturing ruled and our biggest competitors for jobs were Georgia and North Carolina.

Today we compete globally in the knowledge-based economy.  Our tax laws should reflect modern-day reality.  The idea of an independent tax commission to recommend to the legislature such a tax structure should get serious consideration next year.