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Article published Feb 24, 2005
Credit concerns may kill tax plan
Robert W. Dalton
Staff
Writer
COLUMBIA -- For more than two years, Gov. Mark Sanford has
pushed a reduction in the state's top income tax rate as a way to spur economic
development and job creation.But State Sen. Glenn Reese, D-Boiling Springs, on
Wednesday said Sanford's plan was essentially dead a day after one of the
nation's top credit rating agencies expressed concern over the proposal.Standard
& Poor's Ratings Service maintained South Carolina's AAA credit rating, but
cited Sanford's plan as one of the reasons for a continued negative outlook on
the state's borrowing power. Maintaining a AAA credit rating is important
because it reduces the amount the state has to pay to borrow money."Basically
this pretty much kills his legislation," Reese said. "The feeling now, at least
on the Democratic side, is to push for a 5 percent income tax for (limited
liability corporations), corporations and sole proprietorships phased in over
four years beginning in 2006."The House has passed Sanford's plan, which calls
for reducing the top income tax from 7 percent to 4.75 percent over 10 years.
The tax would be reduced .225 percent each year that the state's Board of
Economic Advisors predicted revenue growth of at least 2 percent. The plan would
cost the state about $900 million when fully implemented.One of Standard &
Poor's biggest concerns is how the state would react if it lowered the rate and
then the projected growth didn't materialize."The question is if there is
aneconomic downturn and the state cuts this major revenue source, how would it
balance the reduction," said Eden Perry, a credit analyst with Standard &
Poor's.Perry said that because of ongoing budget concerns and reserve levels
that remain below constitutional mandates, Sanford's plan could make the state
more vulnerable to economic downturns."We're not commenting on the policy of an
income tax cut. We're just commenting on how it could effect the credit
rating."Sanford spokesman Will Folks blasted the agency's report."I always
thought that Wall Street existed to stimulate economic growth," Folks said.Folks
said that when the income tax was cut in New Mexico, that state realized a 9.9
percent jump in income tax revenue and the unemployment rate fell from 6.2
percent to 5.1 percent."If you look at all the data that's out there, the simple
fact is that income tax reductions spurred economic growth, job growth and
revenue growth wherever they were implemented," Folks said.He said the BEA has
consistently predicted growth of about 5 percent, and that the governor was
confident that actual growth would never fall below the 2-percent
threshold.Folks also said it was inconsistent for Standard & Poor's to say
it had a problem with the state not balancing the reduction, while at the same
time recognizing that the reduction is paid for out of growth.Reese said it's
the Governor's Office that is being inconsistent. He pointed out that Sanford
last year said wiping out an unconstitutional $155 million deficit was crucial
to maintaining the state's credit rating, but now wants to attack a ratings
agency because it has questions about his plan."I thought he was just using that
as a crutch last year," Reese said. "He was using it politically to his
advantage to look like he was fiscally responsible."Folks said that Sanford has
"led the charge" on being fiscally conservative since taking office and that he
has proposed hundreds of millions in savings in his two executive budgets."I'd
ask Sen. Reese where he was on the governor's budget recommendations," Folks
said. "I don't recall him being supportive of those savings."House Speaker Pro
Tem Doug Smith, R-Spartanburg, said the Standard & Poor's report was a
convenient excuse for the Senate not to pass Sanford's plan."I appreciate that
Standard & Poor's is concerned," Smith said. "But we can deal with those
concerns and deal with the income tax. The fact is we're not competitive with
other states when it comes to income tax, and we didn't need another excuse for
the other chamber not to deal with the issue."Sen. Jim Ritchie, R-Spartanburg,
said maintaining the credit rating is crucial."I'm hopeful we can work with the
tax cut plan and the rating agency to ensure that we can boost economic
development and not jeopardize our AAA credit rating."Robert W. Dalton can be
reached at 562-7274 or bob.Dalton@shj.com.