Senate finance chief backs governor on cigarette tax increase

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Sanford announced last Friday that he supported a 53-cent-per-pack increase in the state's cigarette tax to raise about $170 million in recurring tax revenue to provide a stable state match for the federal government's $3-for-$1 match. Sanford linked his support for the cigarette tax to a plan to cut individual income taxes to 5 percent from 7 percent over the next 15 years.

But the newly elected Republican governor unveiled his plan just one day after Wilkins and other House Republican leaders had proposed a different solution that did not involve a tax increase. Wilkins and House Ways and Means Committee Chairman Bobby Harrell said they would oppose the cigarette tax increase.

The issue has created an unexpected and sharp division among Republicans, who for the first time in more than a century, control both chambers of the General Assembly and the governor's office.

Sanford, who toured a Columbia hospital Wednesday to tout his tax plan, praised Leatherman and other senators for supporting his plan. He said he does not expect the cigarette tax to pass in the House and is taking his plan to the public instead of trying to lobby House members.

"I'll never have the degree of legislative strength as the Speaker will in his own body," Sanford said. "We're just trying to make our case directly to the people of South Carolina and hope that they in turn talk to their representative."

The governor told reporters that "we have a long way to go in this debate" and he was talking about the issue now to inject it into the "political bloodstream" before he leaves on Saturday for two weeks of Air Force Reserve officer training.

Reacting to Leatherman's statement, Wilkins reminded House members who had signed no-new-tax pledges that they might want to consider that promise when voting on the cigarette tax, which could be debated on the floor of the House as early as today.

But Leatherman scoffed at the pledges promoted to political candidates by anti-tax groups, saying, "I've never signed a no-tax pledge and I never will because I don't know what the future holds."

Sen. Mike Fair, R-Greenville, then stepped forward and said that even though he had signed the pledge, he had always made clear that he considered taxes on alcohol and tobacco to be exceptions.

Sen. Larry Martin, R-Pickens, said that in the current budget crisis, the cigarette tax increase makes sense.

"If this frees up some money for schools, its easier to sell the cigarette tax," Martin said.

Sen. Verne Smith, R-Greer, said the 53-cent tax increase is "an absolute necessity" to ensure healthcare services are available to the state's poor children and elderly.

"Medicaid is probably the best deal we get out of Washington. We just are not taking in enough money to provide the services we are obligated to provide," Smith said.

Leatherman pointed out that Medicaid is a medical safety net that covers half the babies born in South Carolina, 40 percent of the state's children and 75 percent of the elderly in nursing homes. Overall, about 22 percent of the state's population are eligible for Medicaid benefits.

Leatherman said failure to adequately fund Medicaid would amount to a "hidden tax" on health insurance premium payers, to whom the cost of hospital emergency room services for the poor are shifted. The Florence Republican said shifting that burden to hospital rate payers was "unacceptable."

But Harrell defended the House leaders' plan, saying that it fixes Medicaid without a tax increase and those who take the other side simply want to raise taxes.

"This is a dollars-and-cents proposal. People just need to do the math and decide which is the best," Harrell said.

Critics of the House leadership plan say it continues to rely on $45 million in non-recurring funds to pay for recurring programs, and takes $20 million away from public schools.

State Treasurer Grady Patterson, a Democrat, said in a letter to Harrell that selling the tobacco settlement bonds aimed to shift "the burden of risk associated with the volatile stream of payments from the tobacco settlement to investors who were willing to accept that risk in exchange for an interest premium on their investment."

Patterson concluded that "there is an inherent risk in accepting the recurring revenue projection as a permanent funding source for ongoing needs, in that this stream of revenues is not guaranteed."

"The (House) plan also has significant, negative economic and other consequences that outweigh the purported benefits," Patterson said.

Harrell said he believes the additional risks associated with his plan, including bankruptcy of the tobacco companies and decreased consumption of tobacco, are "negligible."

The current tobacco settlement bonds pay the state between $30 million and $50 million a year through 2010, and a total of $453 million in the years 2011-2018.

Harrell's proposal would flatten out the annual revenue stream, produce more money annually in the early years, and less money in the out-years. But he estimated the refinancing would produce an additional $185 million over the life of the bonds.

Leatherman, the Senate Finance Committee Chairman, said he did not think the refinancing was a good deal for South Carolina and that the cigarette tax would be preferable to stabilize Medicaid funding.

Sanford cautioned against reading too much into what House members do with his proposal, saying it was too early to judge his administration based upon the success or failure of the tax proposal.

"It is indicative of our approach, which is at times unconventional, at times outside the box," he said. "Not many folks would take this political risk but I think this is one that makes sense."

The governor called the swap idea the "ultimate litmus test" for tax reform, saying if this proposal cannot pass then any other reforms "are flat-out impossible."

Sanford said he understands the stance of Republicans who have pledged not to raise taxes. But he argued that his plan "holds the line" on taxes because the income tax decrease, which he estimates will eventually save taxpayers $7 billion, is much greater than the cigarette tax increase.

"What our plan recognizes is that not all taxes are equal," he said.

Sanford spent about an hour touring children's and adult facilities at the Palmetto Richland Hospital in Columbia. He met patients and talked with doctors about the significance of Medicaid funding at the hospital. The hospital serves as a major trauma center for the region. He said about half of the children and almost a third of all patients at the hospital are treated through Medicaid.