Sanford offers new trade on cigarette tax

e-mail this story

The income tax credits would only be available, Sanford said, in years in which there was growth in income tax revenue, so the plan would not damage the state's ailing budget.

"I'm simply saying, 'I'll trade you'," the Republican governor said.

The highest income tax rate in South Carolina is currently 7 percent.

House Speaker David Wilkins, R-Greenville, issued a skeptical response, saying he opposes a cigarette tax increase but will "work with the governor" on the issue.

Medicaid, the state-federal partnership that provides health care to the poor and elderly, brings in about three federal dollars for every state dollar committed to the program. But because South Carolina has used non-recurring funds to meet its obligation in past years, the state is facing a financial crisis in producing its share in the current economic downturn.

Sanford said he was making the offer now because he foresees a "collision" between the House and Senate over the $5 billion budget, with the Senate favoring a cigarette tax hike and the House opposed. He said he wanted to announce his proposal before leaving next week for Air Force Reserve officer training.

Cigarette tax supporters cheered the governor's plan Friday, while wary legislative leaders promised to study it.

Sue Berkowitz of the S.C. Appleseed Legal Justice Center said, "We are grateful that Governor Sanford's proposal acknowledges the need for a stable and secure source of Medicaid funding in the form of a cigarette tax increase. His leadership is vital on this issue, and we commend him for today's action."

Ken Shull of the S.C. Hospital Association said, "Both the governor and the legislature should be applauded for their attention and their commitment to adequate funding of Medicaid in a difficult budget year."

And Hunter Howard, president of the S.C. Chamber of Commerce, said, "The question has always been the best way to achieve a dedicated source of funding for Medicaid, and we look forward to continuing to participate in that debate as the legislative process moves forward."

House Speaker Wilkins finished late Thursday presiding over drafting of a state budget that does not include a cigarette tax increase.

"The concern with his plan at this stage is that it proposes a huge tax increase without a guarantee of a tax decrease. The House developed a proposal that provides funding of Medicaid without raising taxes and without taking additional revenue out of the general fund that must be used to meet other critical needs like education and corrections," Wilkins said.

"While I remain firmly opposed to a cigarette tax increase, I will continue to work with the governor on this and other important issues," Wilkins said.

State Sen. Verne Smith, R-Greer, said he was unfamiliar with Sanford's income tax reduction plan, but he welcomed the governor's backing for the cigarette tax increase.

The House's solution to the Medicaid shortfall relies on about $45 million in one-time revenue, $20 million taken from public schools, and a $20 million increase in taxes levied on the state's public hospitals.

In the House budget debate this week, House Democratic Leader James Smith criticized the Republican budget for "taxing sick people instead of taxing boats and airplanes," which have a cap on sales taxes.

Smith said the House Republican plan that relies on refinancing the state's tobacco settlement bonds to prop up the Medicaid budget would cut 6,700 families who currently receive services from the Medicaid rolls. About 22 percent of South Carolinians are eligible for Medicaid.

The House plans to debate in the coming weeks a bill to overhaul Medicaid rules and procedures, legislation that could become a vehicle for the cigarette tax increase.

Despite the House leadership's opposition, Rep. Rex Rice, R-Easley, and some other Republicans have said they would vote for the tax increase, but it remains unclear whether they can muster a majority of votes in the 124-member House to pass such a bill.

The Republican governor has previously said he would only support a tax increase on cigarettes if it were offset by a decrease in other taxes. He proposed during his campaign last year to eliminate the income tax over 18 years. He said Friday that totally eliminating the income tax was not feasible "at this time" due to an "unprecedented budget mess."

A 53-cent increase in the tax on a pack of cigarettes would boost the total tax to 60 cents, which is the national average. Advocates of the increase say it would generate about $170 million of recurring tax revenue that would put Medicaid funding on a solid footing for years to come.

Sanford said he would support any lesser cigarette tax increase under the same conditions.

He criticized a House plan to plug a shortfall in Medicaid spending by refinancing the state's tobacco bonds, saying it would amount to "borrowing from Peter to pay Paul."

He said he also didn't hold much hope of any reform proposal producing the necessary money to continue current services. He pointed to his first Medicaid reform proposal this year, a preferred drug plan that has been trimmed in House budget action.

The tax credit plan will work, he said, because while such revenue goes up and down each year, it consistently rises over time. He predicted that such a plan could reduce the income tax rate by half a percentage point within five years.

"By any objective measure over time, this is a very significant tax cut," he said.

The swap would benefit everyone from Medicaid patients to Republicans who have pledged not to support any type of tax increase. He estimated it also would bring the state as much as $400 million in federal matching funds that would be lost if lawmakers cut back the Medicaid program.

He said if lawmakers don't adequately address the Medicaid problem, the state will merely shift the burden to those who pay for health insurance, since the poor will go to hospitals for their treatment and those costs will be passed on to all patients.

Sanford said he will veto any free-standing bill to increase the cigarette tax.

"By any measure it is a tax cut over time," he said. "By any measure it (his income tax cut) would make us more competitive in growing business and jobs."

The House-passed plan also relies on about $45 million in non-recurring money.

In his State of the State Address on Jan. 22, Sanford called for an end to the practice of using one-time funds for ongoing programs.

"Let this be the year that we curb the annualization problem," he said. "No sensible family would use a one-time bonus to finance a new car — if they didn't have some other source for payments — not just this year's, but also each following year's payments.

"The principle should also hold true for our state," Sanford said.

In a briefing paper describing his income tax reduction plan, Sanford said: "The act does not obligate the state to any general fund reductions and only generates cuts in the income tax as we experience growth in tax collections. In this regard, everyone becomes a shareholder in growing the state's economy and derives an economic dividend."