An unfair fix for our taxes

In 2003, I e-mailed Sen. John Edwards, saying, “You cannot be elected President on a platform calling for ending poverty in the U.S. Americans must know that, if they don’t get up off the couch and work hard and reliably, they will be poor. (Of course, this doesn’t apply to children of the wealthy.) Government can, however, help the disadvantaged to have a fair opportunity to achieve a good standard of living. Government should also level the playing field some.”

If the Legislature abolishes the local government tax on owner-occupied homes, eliminates the state 5 percent sales tax on food, and increases the state sales tax on other goods by 2 percent or 3 percent, it would make it significantly harder for the disadvantaged to achieve a good standard of living. It would tilt the playing field drastically in favor of affluent homeowners by directing the overwhelming majority of the home property tax savings to affluent homeowners and directing greater food tax savings to the affluent.

About 20 percent of all South Carolina state and local taxes are property taxes. According to several measures, the tax burden on South Carolinians is not far from the average for residents of the 50 states. The General Assembly is not debating how much tax will be collected but by what taxes (and from what groups) the tax will be collected.

Alan Greenspan has recently warned that the United States will soon be encountering severe financial stresses as a result of the retirement of baby boomers. To meet these challenges, South Carolina government must encourage and protect working poor and lower middle-class wage-earners. This tax package would hinder that effort.

South Carolina law already provides a $100,000 exemption from taxes for school operation for all owner-occupied homeowners. There is a $50,000 homestead protection from property tax available to homeowners over age 65. It is obvious, then, that under the current package, property tax savings would increase as the value of the house goes up. Owners of some inexpensive homes would achieve little or no property tax saving.

Difficulty of owners of very valuable homes in paying property taxes is not a financial problem government should try to ameliorate. The current package would use a heavily regressive sales tax, often collected from families with more debt than assets, to keep affluent homeowners from having to sell their houses because of high property taxes.

Homeowners have many gigantic benefits as it is. Property taxes are deductible on income tax returns. As income goes up, the benefit from the deductibility of mortgage interest goes up, which is a severely regressive pattern. Generally, homes in South Carolina tend to appreciate in value. Renters have none of these benefits. There is no justification for making the advantages of homeowners over renters even greater. Also, increasing the tax load of businesses, which provide jobs, while enriching already affluent homeowners would be bad tax policy.

People in North Carolina generally pay 2 percent on food purchases. Some states have no sales tax on food. Because an affluent family’s grocery bill is generally higher than the grocery bill of a working poor family of equal size, greater benefits from the elimination of the sales tax on food would accrue to the affluent.

Changes in taxes change behavior. I expect that, if the sales tax on unprepared food is eliminated and the sales tax on restaurant purchases is increased, the sale of unprepared food will increase and restaurant sales will decrease, causing some restaurants to fail.

California is reported as having the highest state sales tax, at 7.25 percent. It is possible that the General Assembly will give South Carolina the highest sales tax in the country. Sales and excise taxes are the most regressive taxes. This change would severely pinch the working poor and lower middle-class workers.

One of the best government programs of the 1990s was moving adults from welfare to work through welfare reform. The current tax-change package could materially undermine that program in South Carolina.

During recent decades, the gap between the poor and the rich in the United States has been widening. Republican-controlled Congresses have provided tax relief for the very wealthy. Congress has recently reduced various types of benefits for the poor, including the working poor, and is considering further benefit cuts. Millions of high-paying manufacturing jobs have been lost in the United States. In this context, making it financially harder for the working poor, other poor persons and the lower middle class will produce much more unhappiness than the happiness resulting from making it a little easier for the affluent and wealthy.

Dr. Memory is a retired criminal justice professor and retired Army Reserve lawyer living in Columbia.