Posted on Wed, Dec. 20, 2006

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Sanford tax plan should open door to actual reform

IT’S GOOD TO see Gov. Mark Sanford return to the cigarette tax, which he has tried twice before to increase as part of an overall tax-reduction package. In doing so, he reminds lawmakers and the public that all taxes are not created equal.

Our state would be better off collecting $100 million — or $250 million — in cigarette taxes than collecting the same amount from just about any other tax.

There’s a downside to nearly every tax: A sales tax that’s too high can send shoppers scurrying to the Internet or across state lines, hurting local merchants. An income tax that’s too high can discourage job creation.

But a higher cigarette tax pushes the cost of cigarettes out of reach for some teenagers, saving them from a lifetime of addiction that the rest of us will pay for in higher taxes and medical insurance costs. At 7 cents a pack — the nation’s lowest, 93 cents below the national average — we practically beg kids to smoke.

The deterrent effect of a higher cigarette tax is so dramatic — each 10 percent increase in the cost of cigarettes reduces youth smoking by 6.5 percent — and the cost to taxpayers to treat smoking-induced illnesses so high that our state would benefit financially even if we burned the money from a higher cigarette tax.

Of course that would be irresponsible — just as it would be irresponsible to adopt Mr. Sanford’s entire plan, which calls for reducing income taxes by twice as much as he proposes to raise cigarette taxes.

Mr. Sanford’s argument is that income taxes and taxes in general in South Carolina are too high. His justification for both claims is unconvincing.

Our top income tax rate is, as he says, the highest in the Southeast and fifth-highest in the nation. But our effective rate — the one real people pay after they factor in exemptions, credits and deductions — is among the lowest in the Southeast and between the middle and the bottom nationally, depending on how it is calculated.

As for our overall tax system, depending on how you calculate that, South Carolina ranks anywhere from 24th to 44th nationally in total state and local taxes and fees, with most rankings hovering in the 20s — average.

The problem with our tax system isn’t that we collect too much money, but that we collect it in the wrong ways. Our tax system is a senseless amalgam of special exemptions and exceptions and fixed rates that don’t track inflation and policies that neither reflect public preferences nor hold their own in a changing economy.

Our cigarette tax is clearly too low; it should be at least the national average of $1 a pack — not the paltry 37 cents the governor proposes. In many areas, the sales tax will be too high once the statewide levy increases to 6 percent this summer. We reward people for buying expensive cars by capping the sales tax at $300 rather than forgiving the first $300 (which generates the same amount of money), or simply taxing cars like other products. We don’t tax most services, which amounts to a tax break for upper-income residents who spend a large portion of their money on services, but we do tax groceries, which increases the effective tax rate on the poor and middle class, who spend most of their income on such essentials. And the list goes on.

There are two responsible things to do with the tax code: Simply increase the cigarette tax for reasons that have nothing to do with raising money, or perform a top-to-bottom overhaul. Any other course would make a bigger mess of our disjointed tax system.