EVERY TIME I write about revenue-neutral tax reform proposals, I get the same objections from those who want to cut taxes and those who want to raise them: Simply substituting one tax for another is nothing more than rearranging the deck chairs on the Titanic (this analogy is used at least half the time). None of that matters (the objectors object) unless you dramatically increase/decrease taxes.
The argument sounds good. And it’s completely incorrect.
The rate of taxation can easily be a separate debate from the one about how to distribute the tax burden. In fact, while you can either raise or lower taxes as a part of tax reform, in order to be real tax reform, a plan must do more than that: It must change the balance of various types of taxes, the exemptions for each tax, the balance of the tax burden between individuals and businesses, rich and poor, old and young.
You can generate some passionate arguments about whether our state needs to raise taxes or lower taxes, but it’s hard to argue that our state doesn’t need to reform its tax system. Consider just a few reasons:
• We have one of the highest automobile property tax rates in the nation.
• One tax exemption forces people whose houses cost less than $100,000 to subsidize the tax breaks school districts have to give to those whose houses cost more than $100,000.
• Another tax exemption — this one on the sales tax on automobiles — makes your rate of taxation fall as your spending increases. Meanwhile, we tax groceries, thus forcing poor people to pay a much higher percentage of their income in sales taxes than wealthier people do.
• We have the third-lowest cigarette tax in the nation, one that generates less than a quarter the amount of money South Carolinians are forced to pay in taxes each year to cover the medical bills of people injured by their own smoking.
• We tax huge new industries at a much lower rate than smaller industries, older industries and non-industrial businesses, even though those higher-tax properties employ the bulk of our workers.
• The sales tax, one of the three pillars on which our state and local tax structure is built, is becoming a less reliable source of funding by the minute, as consumers shift their spending to untaxed service and Internet purchases.
And these are just the problems we all know about. Our tax system has been amended and exempted and manipulated so many times and in so many ways that even experts can’t answer such basic questions as whether it’s progressive, regressive or flat or how it distributes the tax burden between businesses and individuals.
To say tax reform doesn’t matter as long as the total amount of revenue is unchanged is to say that the most passionate debates we hear in Washington — about how much of the tax burden should be borne by the wealthy vs. the middle class vs. the poor — are completely meaningless. Now, I’ll agree that they’re often deliberately misleading and manipulative, but I don’t see how anyone could consider such questions meaningless.
The tax debates we’re having here in South Carolina might not be as compelling as that — or built so clearly around class warfare — but they’re every bit as important: Should we fund our schools entirely with the sales tax, and abandon the property tax as a school funding source? Should we have one of the highest sales taxes in the nation? Should we do away with some of the special sales tax exemptions? Should we tax services? Should we lower our individual income tax rates? Should more of the taxes paid by people who live in wealthy school districts be sent to poorer school districts, and less kept at home? Should we get rid of some of the many income tax exemptions? Should we further limit cities’ and counties’ options for funding local services?
If we did all that, and didn’t change the total amount of tax money collected in this state, would it make any difference? Am I really asking such a silly question?
Of course it would make a difference; it would improve some people’s lot and make things tougher for others. It might or might not improve our state; after nearly a year I still haven’t been able to conclude which the current proposals would do. But there is no way you can argue that it wouldn’t make a difference.
Actual tax reform always makes a difference. If you do it right, it improves things, by creating a fairer system and a more sustainable source of revenue in the future. If you do it wrong, you can do far more damage — to individuals, to businesses, to the economy, to essential governmental programs — than can ever be done by collecting too much or too little money.
Ms. Scoppe can be reached at cscoppe@thestate.com or at (803) 771-8571.
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