Gov. Mark Sanford's plan to revamp the state's tax structure would provide a timely economic stimulus. His proposed 15 percent reduction in the state income tax rate would encourage capital investment, business creation and development and more jobs for South Carolina.
The governor pitched his program while visiting 12 cities across the state last week, correctly emphasizing this "bottom line": "If South Carolina continues with its high, anti-job state income tax, its economy will continue to fall far behind that of other states."
But if South Carolina stirs economic growth by taxing income at a lower rate, it will have more income to tax thanks to a predictable boost in overall income for both businesses and individuals. That doesn't mean the state can simply cut income taxes and rely on income increases to fill the revenue gap prompted by the change. The continuing budget crisis that has forced painful spending cuts by state agencies over the past three years won't go away anytime soon.
The governor's proposal would offset the income-tax-rate reduction gradually, over 15 years, by raising the state tax on cigarettes from 7 cents per pack (fourth lowest in the nation) to the national average of 68 cents per pack -- and would extend the state's 5 percent sales tax to lottery tickets.
Though predictable objections have been raised to those cigarette- and lottery-tax hikes, the need for them is clear to provide for a reduction in income-tax rates in a state that now ranks 14th highest in the nation in that category. When businesses must choose between a site for expansion or relocation, income-tax rates are often a major factor in the final decision. In this case, business as usual limits our state's economic potential.
Another objection to the Sanford plan targets its lack of a solution to the problem of Medicaid funding. But as the governor pointed out, his attempts to fund Medicaid last year by raising the cigarette tax failed to win sufficient support in the Legislature. That's why he's advancing his tax-reform initiative on a separate track while vowing to handle the Medicaid need through the general fund. As reported in Wednesday's Post and Courier, Gov. Sanford said: "We will have a plan that fully funds Medicaid, period."
The governor's economic-stimulus strategy also includes changes designed to promote small-business loans and contain worker's-compensation and health-insurance costs.
Tax reform is expected to be uppermost in the minds of lawmakers next year, including proposals to increase the sales tax and abolish the property tax. The Legislature should join the governor in recognizing that our state's income-tax rates are counterproductively high.
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