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State’s coming of age raises questions about tax swap proposals
By CINDI ROSS SCOPPE
Associate Editor
SOUTH Carolina has turned into the dog that caught the car.
After years of tweaking our tax policy and touting our beaches and pursuing a plan to turn South Carolina into a retirement haven, we have caught the snowbirds.
Now what are we going to do with them?
Not literally, of course. What we’re literally going to do with the retirees who have flocked to South Carolina is what we do with all our new residents — welcome them to our state.
But what we do about them, and the dramatic changes they are making to our economy, will go a long way toward determining what kind of place South Carolina will be to live for years to come.
New Census estimates that put South Carolina’s median age above the national average for the first time in at least a century should make it clear to lawmakers that they need to start thinking about how an aging population affects state policy — starting with tax policy. This is particularly crucial as they consider changing the tax system.
Ideally, a tax system consistently generates the amount of money the public agrees is needed, and it’s broad but thin — that is, it includes enough different types of taxes that the entire population is covered and no one tax rate is too high.
Here are a few of the important things we know about senior citizens that have a direct bearing on how well a tax system meets those goals:
• They tend to have lower incomes.
• They tend to spend less of their money on taxable goods.
The Palmetto Institute’s study on South Carolina’s tax structure (online at http://www.palmettoinstitute.org/) lists the aging population as one of five economic trends — along with such factors as the shift from a manufacturing to a service economy and the increased mobility of companies and individuals — that are making our tax system less effective.
The graying population is reducing tax collections in every state. But the effects are multiplied in South Carolina because of the way our tax code is designed.
The most dramatic factor is the senior income tax break, which the report says is the most generous in the nation. That tax break, designed to make us competitive with Florida and Tennessee, which don’t collect income taxes, results in “an 80 percent differential in the average effective income tax” on seniors vs. younger people.
That’s not the only thing that results in seniors paying less in taxes than younger people.
“An aging population living on pensions, interest, dividends, and Social Security contributes less than working age residents to the income tax base,” the Palmetto Institute report says. “An aging population will also probably spend a larger share of income on health care and other untaxed services, reducing growth of sales tax revenue. In addition, South Carolina provides partial pension exclusion and full exemption of Social Security income on the income tax, and a $50,000 homestead exemption from property taxes for homeowners over age 65. As the population ages, a larger share of the population will qualify for these tax breaks.”
The report goes on to note that “even without some of the special tax advantages granted to senior citizens, this demographic shift (to an older population) would result in slower growth of income and sales tax revenue.”
Many seniors, struggling to pay rising property taxes, will dispute the idea that they get special treatment on taxes. But their property taxes aren’t any higher than those of younger people with similar property — in fact, they get a modest tax break.
The question at hand has nothing to do with whether it’s good or bad that our state is aging. Clearly, there are advantages and disadvantages.
The Palmetto Institute report points out that when you combine the tax breaks with the fact that many older native South Carolinians tend to be poor, the result is that “an aging population can place a strain on government budgets, reducing revenue while increasing service demands.”
And the strain isn’t just financial. I’ve talked as recently as last week to seniors who tell me they shouldn’t have to pay property taxes for schools because the state of South Carolina didn’t educate them or any of their children. I don’t think most retirees feel that way, but a sizable number do, and elected officials hear that message, and fear the electoral power of the most active group of voters.
But there are at least as many positive aspects to the influx of retirees. Many become active citizens, enriching the civic life in their communities and even the state as a whole. Many do spend a great deal of money on consumer products and services, helping to invigorate our economy.
What’s important is that we are attracting more and more retirees. And that means that, over time, the proposals to lower property taxes in return for a higher sales tax would likely result in less tax money being collected to fund state and local governments.
There are ways to reduce that effect and still do a tax swap, starting with taxing more services. And those ways should be explored. But even that won’t entirely keep tax collections from dropping off as a result of a swap.
We all need to be grown up enough to acknowledge that and talk about whether that’s what we want — rather than pretending to be surprised when it happens.
Ms. Scoppe can be reached at cscoppe@thestate.com.
