State needs to eliminate the property tax in favor of a sales tax

e-mail this story discuss this issue in our forums Guest column • Mary Nesbitt: Community can work together on scourge of cancer (09/30/03) • Daniel Gough: U.S. needs to stop complaining and start competing with China (09/29/03) • Danny Varat: State should focus on school choice, not SAT scores (09/29/03) • Jerry Fountain: Helping others key in building community (09/27/03) • Les Sternberg: Politicians ignore parents when crafting school reform (09/27/03) More details Alex Saitta, a resident of Pickens, is an independent bond and stock market investor. A graduate of New York University, he spent 16 years as a bond analyst in the economics departments of Salomon Brothers and Citicorp.

The Legislature should go all the way and abolish property taxes. In addition to raising the state sales tax rate from 5 percent to 7 percent to cover school operations, lawmakers should let county and city governments set their local sales tax rates to fund their operations, and their future borrowing.

Existing debt would continue to be paid by property taxes. Once that debt is retired, those residual property taxes would disappear.

Sales tax financing will force elected leaders to run government more efficiently, like a business. When the economy enters its down cycle and sales fall, a company can't raise its prices or they'll price themselves out of the market and their sales will fall further. Therefore, management trims the fat, and the company produces the same with less and becomes more efficient.

When the economy enters its down cycle and sales tax revenues fall, if government leaders raise sales tax rates, then that will further weigh on business sales and sales tax revenues. Instead, government managers will be compelled to cut wasteful spending, causing government to become more efficient.

A company's bond rating is determined by the strength of its business sales. Similarly, the bond rating of local governments would become dependent on the tax revenues generated by local business sales. Local governments, in order to preserve their ability to borrow, would work to keep their sales tax rates competitively low and cultivate a pro-business environment that keeps business vibrant.

Under the property tax system a taxpayer has little choice to be taxed or not, and by how much. With a sales tax, taxpayers have a choice and this will foster competition among nearby cities and counties, and keep downward pressure on sales tax rates.

For example, I could choose to buy a new 32" TV and pay a sales tax, or keep my current 27" TV and not pay a tax. Every time I get in my car, I'll have a choice to shop in city ABC with its 11 percent sales tax rate, or go to city DEF with its 9 percent rate.

The more than 100 sales tax exemptions should also be eliminated, including the sales tax maximum on motor vehicles. This will add about $1,800 to the price of a new car. Ending property taxes, however, will save buyers more than that over the life of the car. Eliminating all exemptions will also ward off the cries of unfairness, and the extra revenue will lessen the increase in the sales tax rates.

This revenue neutral plan shifts taxation from property to sales. A shift in taxation is never perfect, so some may pay more taxes and some may pay less. Many will argue low-income earners will pay more, because sales taxes are more regressive than property taxes. (A regressive tax is one where low-income earners pay a greater percentage of their income in taxes, than higher-income earners.)

High-income earners tend to purchase relatively more services. Expanding the sales tax to services, would make the sales tax less regressive. Given this plan to eliminate property taxes is revenue neutral, this will also lessen the amount the sales tax rate will rise.

Eliminating property taxes will lower the overhead costs of local merchants. This will put downward pressure on retail prices and work to offset the sales tax increase.

Turning to manufacturers, their buildings, land and equipment are taxed at the staggering rate of 10.5 percent of their market value, while commercial and residential property are taxed at 6 percent and 4 percent respectively. Abolishing property taxes will cut their cost of production, making South Carolina manufacturers more competitive. This will also attract new industry to the state and end the unfair tax abatements some manufacturers have, but others do not.

Finally, ending property taxes will raise the market value of all property — increasing the wealth of property owners, and it'll eliminate the unfairness of an inconsistent appraisal system.

Taxing spending is objective, plus sales taxes are paid by everyone (all residents and visitors), nor will anyone have to worry about their property being confiscated for not paying their taxes. Thus, our constitutional right of property ownership will be strengthened.