LEGISLATORS preparing to plunge once again into a review of our state’s Byzantine tax structure might want to add a new report to their summer reading list.

“Faulty Foundations: State Structural Budget Problems and How to Fix Them” lists South Carolina among the 11 states “most at risk” of developing a structural budget deficit. That’s defined as “the chronic inability of state revenues to grow in tandem with economic growth and the cost of government.”

As the report explains: “States have structural deficits largely because they have failed to modernize their revenue systems to reflect far-reaching changes in the economy. Several states have changed their revenue systems little since the 1930s or 1940s; others have revenue systems that are twenty or thirty years out of date. While tax reform can be a difficult undertaking, failure to modernize state revenue systems can cause substantial problems.”

There’s nothing new about that statement; nor should it be surprising. You won’t find many businesses that still try to make or sell products the same way they did in the 1930s; either they’ve been forced out of business or else they’ve adjusted to the times — accepting credit cards instead of just cash, for instance, or sending products by Federal Express rather than demanding that customers come to a company store to purchase them.

Although this particular report is from the left-leaning Center on Budget and Policy Priorities, it isn’t pushing a “raise taxes” mentality. Its analysis is based on standard economic theory that is embraced by just about everybody in the country who thinks seriously about tax policy: A sound tax system is one that allows a government to provide the same level of services, without increasing tax rates, as the population grows and prices increase.

The biggest problem, as regular readers of this column may recall, is that most states rely heavily on a sales tax that was designed back when income almost entirely went to purchase products (instead of services) in person (rather than over the Internet).

The report cites 10 factors that create structural deficits, nine of which South Carolina suffers from. Among the problems that put us at greater risk than most states:

• The portion of sales in South Carolina subject to sales tax declined by 13.4 percentage points between 1990 and 2003, compared to an average 8 point decline nationwide.

• Our sales tax covers fewer household services than the U.S. average.

• Corporate income taxes as a share of total taxes declined by 6.6 percentage points from 1979 through 2002, 20 percent more than the U.S. average. The tax also has significant loopholes.

• The growth of e-commerce is projected to reduce sales tax revenues by $252 million to $395 million by 2008, greater than the national average as a share of total state revenue.

• Our income tax breaks for seniors exceed the U.S. average, and we also provide breaks to seniors on their property, regardless of income. The report paints such breaks as ticking time bombs because of the aging of the U.S. population. (The report might also have noted that with our large and rapidly growing elderly population, our sales tax is more susceptible than most states’ because of the trend it identified of seniors spending less money than younger people on taxable goods.)

• The top income tax bracket starts at a relatively low level, making it less progressive than many states’ tax.

• South Carolina faces greater spending pressures than other states from a growing elderly population, a high number of non-elderly disabled people and a high number of students with special needs.

• Our income tax is linked to the federal income tax. That means that when the federal standard deduction is increased, ours is increased; and as the federal estate tax is phased out, state revenues are declining by an estimated $49.5 million per year on what has been a rapidly growing tax.

When a structural deficit becomes unmanageable, states usually respond either by cutting services or by raising taxes. But as the report notes, those actions “tend to reduce public confidence in government.”

“When taxes must be increased simply to maintain current services rather than provide new ones, or when taxes remain constant but services deteriorate, the public may conclude that government is being wasteful,” it says.

Instead, the report suggests several ways to modernize a tax system to keep up with economic and population changes, among them extending the sales tax to cover more services, reducing or eliminating age-based tax breaks, strengthening the administration of property taxes and reducing property tax exemptions. Along with that, other taxes can be reduced or eliminated.

Suggestions along those lines are particularly important for our legislators to keep in mind, because their primary motivation for any type of tax review seems always to be finding a way to reduce property taxes. There’s no question that property taxes are unpopular, but simply exchanging them for a higher sales tax is a recipe for disaster.

To read the report, go to http://www.cbpp.org/pubs/sfp.htm. Ms. Scoppe can be reached at cscoppe@thestate.com or at (803) 771-8571.