His proposal failed to win over lawmakers, but its defeat did not dissuade him from his conviction that income-tax relief is the surest way for government policymakers to improve the state economy.

Last week, with the next legislative session about two months off, Sanford was back at it again, this time with what he hopes legislators will see as a rock-solid case for easing South Carolinians' tax burden, a move he says will prime the state's economy and revive its job growth.

He said his revised income-tax relief plan, the details of which were revealed during a three-day, 12-city statewide tour, is not only feasible but affordable, with cuts offset by tax increases on discretionary products like cigarettes and lottery tickets.

The heart of Sanford's proposal is a 15 percent cut in the state's top individual income tax, reducing it from 7 percent to 5.9 percent.

Adopting that reduction, Sanford said, would provide about $222 million in immediate income-tax relief and significantly temper the state's relatively steep income tax, which is the highest in the Southeast and fifth-highest in the nation.

The state's average worker makes $25,395 a year. The change would reduce his state income tax from $1,777 to $1,498.

To replace the lost revenue, Sanford would increase the cigarette tax to 68 cents a pack, up from 7 cents, currently the fourth-lowest cigarette tax in the nation. He also would apply the state's sales tax to lottery tickets, which are now exempt from taxation.

"What we're basically saying is that we want to trade the highest effective income tax in the Southeast for an increase in the fourth-lowest cigarette tax in the nation," Sanford said. "There will be positive economic benefits from doing so."

The governor said lowering the income tax will encourage both capital investment and consumer spending, ultimately boosting business and job growth.

Combined with a marketing campaign aimed at underscoring South Carolina's favorable tax climate, the reduction could prove a powerful incentive to businesses worldwide to invest here, Sanford said.

As evidence, he points to states like New Jersey, New Mexico, Arizona, Colorado and several others where he said income tax cuts have correlated strongly with dramatic rises in employment and personal income.

According to the Beacon Hill Institute, a conservative think-tank whose studies Sanford has used to tout his proposal, New Jersey saw 25,000 new jobs created following a series of income tax cuts beginning in 1995.

The institute found that Massachusetts, which at one point raised its income tax from 5 percent to 7 percent, saw a corresponding loss of about 117,000 jobs.

While these figures might result largely from economic shifts not tied to taxes, Sanford said they indicate how tax policy influences the economy, especially in the case of income tax.

He said that while he concurs with critics who argue that many South Carolinians want property-tax relief more than an income-tax cut, he doesn't believe the economic benefits of lower property taxes justify their cost.

"While property tax reduction would certainly help a lot of homeowners, it wouldn't create the maximum growth in jobs and the economy," he said. Achieving economic growth "clearly points not to a popularity tax (a reduction in property taxes), but to a focus on incomes."

As evidence, Sanford said that from 1960 to 1993, residents in states with low or no income tax saw personal income, an indicator of economic growth, rise 25 percent faster than those living in states with higher income taxes.

Some experts, however, questioned whether that growth is tied to tax cuts or other factors.

Economist and author Paul Krugman has said that, historically, aggressive income tax-cutting has led more directly to budget deficits than to the economic gains touted by Sanford and other conservative politicians.

He also said that income-tax cuts tend to diminish overall revenue and in many cases strain government's ability to provide services.

While Sanford's plan has won support from area and state chambers of commerce, not all businesses support it.

"Being unsophisticated, I just can't see how taking less tax money is going to help pay for basic needs like education," said Murry Swartz, owner of A&E Digital Printing in downtown Charleston.

"As a business owner, I don't think Bush's tax plan, for example, has stimulated the economy," he said. "I think it was a quick burst up front and later on we'll see there isn't any money to pay for schools. I went through all this in the Reagan years, and feel like I'm listening to the same dance again."

Some in South Carolina's Legislature agreed with Swartz.

Within hours of its introduction, Sanford's proposal received criticism from several prominent Democratic lawmakers worried about funding of Medicaid, the health care program for the poor, elderly and disabled.

Those lawmakers said an increase in the cigarette tax should be dedicated to Medicaid, something Sanford tried to do last year but for which he won little support.

Rather than repeating his mistake, Sanford said the state can fund Medicaid just as easily through general funds.

"A cigarette tax is not the only way to provide a recurring income stream to fund (Medicaid)," he said.

What if many South Carolinians quit smoking or buying lottery tickets?

"That would be great," Sanford said, adding that smoking, especially among price-sensitive teenagers, could be expected to decline slightly because of a tax hike.

While the loss of smokers would reduce tax collections slightly, Sanford said it would more dramatically reduce the state's health care costs related to caring for ill smokers.

Citing one study, he said every $1 spent on cigarettes results in $6.50 in healthcare spending by the state.

As for the lottery tax, Sanford said he doesn't believe people will stop buying tickets just because they've been asked to pay a little more.

The size of the prize, not the cost of the ticket, is what determines how many chances people are willing to pay for, Sanford said. "I think what really drives participation at the end of the day is the sign out front that says $300 million rather than $3 million."

He also said that because cigarettes and lottery tickets are discretionary he decided they would be appropriate targets.

"We have the fourth-lowest cigarette tax in the nation, so we're just saying we're not going to treat you special anymore," he said.

And because the cigarette and lottery levies would be sales taxes, at least some of the state's income from those products would come from out-of-state visitors, he said.

Florida, for example, charges no income tax at all, partly because it is able to reap billions of dollars in sales tax revenues from the crushes of out-of-state and foreign tourists who flock there year-round.

While South Carolina tourists, by contrast, are often in-state travelers, Sanford said the potential draw from outsiders is still significant, noting the Palmetto State's tourism sector is similar to Florida's in proportion to its overall economy.

To complement his tax plan, Sanford included several economic stimulus measures aimed at attracting and retaining business by lowering the cost of doing business here.

The measures include:

-- A plan to lower the cost of workers' compensation to businesses by establishing a binding arbitration program to settle claims before they reach court.

-- A plan to run a cost-benefit analysis on any new regulation before its adoption.

-- Support of the Life Science Act, a proposal aimed at attracting pharmaceutical companies to South Carolina. It is expected to pass this year.

Click here to return to story:
http://www.charleston.net/stories/110903/sta_09taxes.shtml