Ensuring a Competitive Revenue System for South Carolina November 18, 2005 Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu By Holley H. Ulbrich and Ellen W. Saltzman

The Research Team Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu Holley Ulbrich Ellen Saltzman Ada Lou Steirer and Jim Hite Strom Thurmond Institute Clemson University Donald SchunkMoore School of Business University of SC, Columbia Sanela PorčaSchool of Business Administration University of SC, Aiken

Essential Partners Palmetto Institute Board of Directors Palmetto Institute Staff Rockefeller Institute Fiscal Studies Program Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Our Charge Identify factors that affect state and local revenue streams. Evaluate methods for measuring state tax/revenue burdens. Review the operation of SC’s existing revenue system. Identify areas for improvement. Research team does not make recommendations. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Philosophical Framework Economic development and competitiveness broadly understood Quality of life Tax/revenue systems and competitiveness Systemic approach: > General revenue from own sources > State and local revenue combined Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Evaluation Criteria Criteria most widely used by public finance economists and policy analysts: Adequacy Equity Efficiency Stability and growth Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Basic Revenue Types SC Combined State and Local General Revenue, Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu Source: U.S. Census Total General Revenue = $21.2 billion

State-Local Revenue Shares SC Combined State and Local General Revenue, Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu Source: U.S. Census Total General Revenue = $21.2 billion

Where The Money Comes From SC Combined State and Local General Revenue, Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu Total General Revenue = $21.2 billion Source: U.S. Census

Where The Money Comes From SC Combined State and Local Tax Revenue, Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu Source: U.S. Census Total Tax Revenue = $9.8 billion

Comparing State Tax Systems Tax Capacity State personal income (or GSP) per capita Representative Tax System—tax capacity SC is relatively low in tax capacity by all three measures, about 82% to 84% of national average. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

South Carolina’s State Ranking Tax Capacity Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu Per Capita Personal Income 2002 Per Capita GSP 2002 RTS (US=100) nd ($25,343) DC=1 ($45,935) VA=10 ($33,018) MS=51 ($22,291) 42nd ($29,780) DC=1 ($118,971) VA=10 ($39,711) MS=51 ($23,905) 46th (SC = 84) AK= 1 (133) VA=20 (101) MS=51 (71)

Comparing State Tax Systems Tax Adequacy Taxes per capita; most widely-used measure. Population is the main driver of demand for public services & infrastructure. SC ranks very low on total tax revenue per capita—47 th among states and 76% of US avg. This is the result of low tax rates and low tax bases because income is low. Compare revenue systems, not individual taxes. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Comparing State Tax Systems Tax Burden and Tax Effort Revenue as % of personal income or GSP. Representative Tax System—tax effort. Our simplified measure of state-only tax effort. SC ranks very low in tax-only burden (42, 37). The burden from total own-source revenue is moderate due to non-tax revenue (24, 29). Low on combined state and local tax effort; moderate on state-only tax effort. Compare revenue systems, not individual taxes. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

South Carolina’s State Ranking Tax Burden and Tax Effort (State Taxes Only for Simplified Method) Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu Tax Rev. as % of Personal Income 2002 Tax Rev. as % of GSP 2002 Tax Effort RTS (US=100) 1997 Tax Effort Simplified State “RTS” (US=100) (9.4%) US=10.2% NY=1 (13.1%) WV=13 (10.7%) TN=51 (8.2%) 37 (8.0%) US=8.7% ME=1 (11.6%) WV=3 (10.3%) TN=49 (6.8%) 38 (SC=90) US=100 DC=1 (153) MS=17 (102) TN=47 (81) 27 (SC=99.2) US=100 LA=25 (101.4) TN=47 (69.0)

Evaluating South Carolina’s Tax System: Adequacy How much is enough? Per capita comparisons with other states (47 th, 76% of US average). Fiscal need based on poverty, road miles, urbanization, etc. Keeping pace with inflation & population growth. Adequacy as an issue in school funding. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Evaluating South Carolina’s Tax System: Efficiency What does the revenue system encourage people to do? Tax competition for firms, sales, and retirees in a global economy with increasing mobility of workers, shoppers, and residents. Tax exporting: shifting the burden out of state. Targeted vs. blanket incentives. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Evaluating South Carolina’s Tax System: Equity Progressivity and regressivity. Contributors to regressivity: sales tax, fees and charges. Distribution of benefits from state-funded property tax relief—75% of states base it on need or income. When tax rates and structures change, who benefits and who loses? Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Evaluating South Carolina’s Tax System: Equity Non-income issues in tax burden distribution: Between households and business (mirrors national average at 43% business) Between seniors and younger households (strongly favors seniors) Between homeowners and other types of property owners and renters Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu Source: Institute on Taxation & Economic Policy Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, January 2003

Evaluating South Carolina’s Tax System: Equity SC income and property tax structure favors seniors, homeowners, new industry, and agriculture. SC income and property tax structure disfavors renters, commercial property, and established industry. Contributing factors: classified property taxes, property tax relief, income tax. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Evaluating South Carolina’s Tax System: Stability and Growth Revenue volatility at the state level Policy stability Concerns about future growth in income and sales tax revenue Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Evaluating South Carolina’s Tax System: Stability and Growth Individual income tax: taxable income lags personal income because of shift to fringe benefits, pensions, dividends as larger share. Sales tax growth lags personal income growth because of limited coverage of the growing service sector, Internet sales. Excise taxes not adjusted for inflation. Corporate income tax is volatile. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Non-Tax Revenue: Fees, Charges, Misc. SC state rank in non-tax revenue: > 20 th in revenue per capita > 13 th in revenue as % of income SC state rank in tax + non-tax revenue: > 44 th in revenue per capita > 24 th in revenue as % of income (In tax revenue alone SC ranked 47 and 42.) At state level, most fees & charges are not available as general revenue to appropriate. Fees & charges are major revenue sources for cities and counties. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Non-Tax Revenue: Fees and Charges Fees and charges are regressive. Fees and charges have a role in efficiency but can be overused. Some increases in fees and charges are to replace reduced state funding. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Local Government Issues Adequacy and Equity: State share and distribution of education funding. Competitiveness: Local governments as partners in industrial recruitment in both taxes and services. Adequacy: State aid to local governments below US and SE averages. Flexibility and accountability in local revenue sources. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Structural and Budgetary Issues At the State Level Lack of a permanent, professional tax review commission. Continued practice of annualization in supplemental appropriations. Effect of off-budget transfers from the General Fund on the state’s reserve funds. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Information and Accountability Concerns Need for more timely collection and publication of local government fiscal data. Accountability for tax breaks. Develop information base and process to monitor distributional changes. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

The Larger Study: What It Is Comprehensive baseline of South Carolina’s tax and revenue system today. Views taxes/revenue as a system. Evaluates the state’s tax and revenue system on the basis of equity, adequacy, and efficiency. Supports development of some continuous independent evaluation method for any proposed changes. Strom Thurmond Institute of Government and Public Affairs Pearman Boulevard, Clemson, SC Phone: Fax: edu

Strom Thurmond Institute of Government and Public Affairs Clemson University Ensuring a Competitive Revenue System for South Carolina