Legislators cut taxes, increased spending
Economists had warned that recession possible
Economic storm clouds already were forming over the nation in the early months of 2007, when South Carolina's Legislature approved the largest tax cut in state history.
Former Federal Reserve Chairman Alan Greenspan warned that February that the nation could slip into recession by year's end; but in South Carolina, state spending was rising substantially, and revenues were rising even faster.
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"Over the past four years, as revenues have continued to climb, we have maintained that these large surpluses should be returned to where they came, the taxpayers," Gov. Mark Sanford told the House and Senate in June 2007.
Sanford was commending the Legislature for eliminating the state's 3 percent sales tax on unprepared food and zeroing out the state's bottom income tax bracket, tax cuts that together cost the state treasury $221 million. Lawmakers approved smaller tax cuts as well, such as the $15,000, two-day sales tax holiday for gun purchases.
But it's difficult to sustain increased spending and reduced taxes at the same time, particularly when a balanced budget is required; and there were warnings of what might be ahead. When the Legislature convenes today for the start of the 2009 session, South Carolina's budget crisis will take top billing.
Startling deficits
During the same month in 2007 when Sanford congratulated the Legislature on cutting taxes, John S. Rainey, chairman of the state's Board of Economic Advisors, warned that a recession was possible by the start of 2008, and the spending increases and tax cuts could "produce startlingly significant deficits."
"That was in everybody's hands in June of 2007," Rainey said. "We said 'if you do nothing else, you'll be short $1 billion in 2010.'"
About the series
South Carolina is deep in a historic budget crisis, affecting everything from higher education to the monitoring of sex offenders. The Post and Courier examines the causes and potential solutions in a three-day series.
TUESDAY: Sub-prime lending, mortgage-backed securities and a spike in the price of oil all helped precipitate South Carolina's downturn, but public policy also had a role to play. How much of the blame should be placed on the state's taxing and spending policies?
WEDNESDAY: The statewide property tax changes approved in 2006 were popular, but they are proving to be expensive, and those policies are adding to the state's budget woes.
THURSDAY: State estimates are forecasting budget gaps, and the need for more spending cuts, through 2012. Where do we go from here, and what is the solution to ending South Carolina's cycles of boom-and-bust budgeting?
The warnings from Greenspan and Rainey proved correct, and the $1 billion deficit predicted by Rainey arrived two years early.
The Legislature that sliced taxes and raised spending in 2007 was busy cutting services to the bone by the second half of 2008, as revenues evaporated.
During the economic expansion, the state had set aside little money for hard times.
Rainy day, no umbrella
The Government Finance Officers Association recommends that states keep a reserve fund equal to 10 percent of the annual budget, more than triple the reserve in South Carolina.
"That (10 percent) might get you through a bad recession year, though not this one," said Holley Hewitt Ulbrich, economist and senior fellow of the Strom Thurmond Institute.
The $168 million in South Carolina's budget reserve fund at the start of fiscal 2008 was quickly consumed.
Many agencies then saw their budgets slashed by more than 20 percent.
Employees were furloughed and services were eliminated or greatly reduced. From school funding to hospice care for the dying poor, no corner of the budget was spared, and this year the state will be cutting deeper still.
The state is in the grips of an historic downturn, but South Carolina's budget crisis also reflects a boom-and-bust cycle driven by politicians' desire to cut taxes when times are good and their tendency to save little for the bad times.
"I think the General Assembly's failure over the years to connect the dots between tax relief and revenue shortfall is absolutely mind-boggling," said Rep. Gilda Cobb-Hunter, D-Orangeburg.
House Majority Leader Kenny Bingham, R-Cayce, said that if the Legislature had not cut taxes, the state would have just spent the money, leading to deeper budget cuts.
Senate Finance Chairman Hugh Leatherman, R-Florence, has no regrets about his push to eliminate the sales tax on groceries.
"Some would say it's not really a shortfall, but it's money we returned to the taxpayer," he said.
Giving until it hurts
Unlike the stimulus checks the federal government mailed to taxpayers in 2008, South Carolina's tax cuts give money back to the taxpayers, and reduce state revenues, every year, regardless of whether the state has money to spare.
The reduction in 2006 and elimination in 2007 of the grocery tax, the 2007 income tax cut, and costs associated with paying for property tax cuts approved in 2006 add up to $521 million in lost revenue.
The 2008-09 budget gap is projected to be $535 million.
"Well, it's crazy to blame it on tax cuts," said Joel Sawyer, press secretary for Sanford. "The problem is that we ramp up (spending) so rapidly in so short a time."
"Now, you're having to cut right past muscle into the bone of state government," he said.
Not cautious enough
Sawyer notes that in February 2008, Sanford cautioned the state's chief economist, William Gillespie, against being too optimistic about revenues.
"I think the hardships many people will experience in our state as a result of cuts in government rests not only with legislators who were more than exuberant in their efforts to spend every last dollar that came into Columbia, but also with economic leaders like yourself who would not more vociferously argue the need for restraint in spending when times were good," Sanford said in a letter to Gillespie.
For more information
Historic state budget data, 1994-2008 (104 page PDF)
Sawyer said that while the Board of Economic Advisors warned of recession in 2007, they didn't deeply cut revenue estimates for the state budget.
Rainey said no one predicted such a severe recession.
"I admit, it was too high, but I don't think anyone thought it was $919 million too high," he said. "Look, we were wrong, but we had forecast a number that we thought accurately reflected the sentiments of our letter of June, 2007."
Like the governor, Otis Rawl, president of the S.C. Chamber of Commerce, pins the fiscal crisis on overspending.
"If you look at history, you know that every five to seven years you're going to have a slowdown," he said. "We spent more money than we could expect to collect on an ongoing basis."
"No doubt if they hadn't given those tax cuts we would have $200 million more in the state budget than we have now, but the revenue estimate was supposed to account for that," Rawl said.
A matter of perspective
From fiscal 2005 through 2008, state general fund appropriations soared, from $5.1 billion to above $6.6 billion.
"We didn't cut expenditures when we cut taxes," Rainey said. "The only way that works is if you're in a growing economy, and you can grow your way out of the difference."
House Speaker Bobby Harrell, R-Charleston, has responded to the criticism from the governor's office by pointing out that over a longer period of time, state spending has increased less than inflation and the state's population growth.
In fiscal 2005, when spending began to increase sharply, the state was just emerging from the grips of the last recession. From 1999 through 2004, state revenues were essentially flat, and spending was cut four years in a row.
Even now, adjusted for inflation alone, the state's general fund is lower than 10 years ago, when the state had about a half-million fewer residents.
Before the 2008 budget cuts, the total number of state employees stood 10 percent below the levels of a decade ago.
"Some people in the Legislature say we've got a lot of catching up to do," Rainey said.
At Clemson, Ulbrich serves on a committee that collects private donations for some of the low-wage workers suffering from furloughs instituted because of the budget cuts.
She said the state needs to craft a more sustainable way to pay for services. Relying on sales and income taxes is certain to produce shortfalls during economic downtowns, she said.
"I think what's going on has scared some legislators, and I think a significant number are looking at changing the way they do business," she said.
Cobb-Hunter isn't so sure.
"I don't have any inkling that this economic downturn will be used as the opportunity it presents us to make fundamental change in how we fund government," she said.
WHAT'S NEXT IN THE GENERAL ASSEMBLY
While the state budget is expected to be the dominant issue when the Legislature convenes today, there are other matters on the table, including:
• Creation of a commission to study tax exemptions granted by the state. The idea is for the commission to propose repeal of a package of exemptions that would have to be voted up or down as a whole. A deadline for the completed study might not be set until January 2011. If the state eliminated about 100 of the exemptions, one study estimates, it could bring in $1.5 billion in additional revenue.
• An increase in the 7-cent per pack cigarette tax, the lowest in the nation. This matter has been debated and voted on in past years, but the Legislature can't agree on how to spend the money. Most want it to go toward health care coverage for more people, but legislators need to decide whether it should be applied to Medicaid or used as a tax credit for businesses to help purchase insurance for employees. Generally, a 50-cent increase is supported.
• A second look at property tax reform that was passed in 2006. Depending on who is talking, legislators need to fine tune or overhaul the plan that swapped property taxes on homes for a penny increase in the sales tax as a means to pay for education. The business community feels unfairly penalized. The plan also creates problems with taxation when a property is sold.
• Restructuring government. Gov. Mark Sanford wants to leave future chief executives with more control in this legislatively dominated state. His plan is for the creation of a Department of Administration to take over responsibilities now held by the Budget and Control Board, a one-of-a-kind agency controlled by a five-member board.
• Require more roll-call votes in the House and Senate. Critics in recent months have pushed for legislators to record how they vote more often in the interest of accountability and transparency. The House responded during an organizational session in December, but some felt changes did not go far enough.
• Continued study and debate over the way South Carolina pays for its public schools. The education funding formula is considered unduly complicated and inequitable. But the issue is politically charged, and given the budget issues, it probably won't see significant change, at least in the next year.
Yvonne Wenger contributed to this report.
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Comments
This article has 26 comment(s)
Posted by Tides on January 13, 2009 at 6 a.m. (Suggest removal)
Moore proof that we have a ton of idiots in government positions. Sanford is not to blame. These talkative heads like McConnell who tries to make everything sound so nice and just fine, ARE!
Posted by sig on January 13, 2009 at 6:04 a.m. (Suggest removal)
All agencies need to be audited at least every 3 years to stop the Fraud, Waste and Abuse. Start with DHHS and DSS. At least a $100 million a year in Fraud alone. Then go to the other agencies.
Stop the good-old-boy network and solve the problem. The problem is our taxpayer dollars are being wasted. How about the welfare folks that receive $60.00 monthly gas cards? How about the state and local employees that drive that official plated car to Wal-mart with their families to shop? What about the other employees that we pay that pick their kids up at school in official vehicles?
I am sure most have saw something like the above. Report Fraud to any agency and see what happens. Not a Thing! I was told by DHHS that if I think Fraud was committed then I need to get a lawyer!
Just be doing the audits they would not have to cut any services.
Posted by justmyview on January 13, 2009 at 7:30 a.m. (Suggest removal)
Looks like both Governor Sanford and members of the General Assembly are trying to blame each other for South Carolina's budget mess. I am surprised that with so many intelligent successful business people in our state government that nobody can develop a plan to balance the budget and think of ideas to generate revenue and bring jobs to the state.
Posted by Larz13 on January 13, 2009 at 7:38 a.m. (Suggest removal)
Basket weaving classes at the College of Charleston
The Hunley
Funding at SC State that goes to Rep. Clyburn's wife and cronies.
..and the list goes on..
All big WASTES of $$.
Who's the blame? All of those vetoes overturned by the Legislature, THAT'S WHO! I would hold the Speaker of the House and Majority Leader of the Senate most responsible.
Posted by Funky_Winkerbean on January 13, 2009 at 7:54 a.m. (Suggest removal)
Got to Feed the PIG ! However, I'm more along the lines of trimming the fat!
Lots Lard in that House ...
The Winkerbean
Posted by gaitor66 on January 13, 2009 at 8:35 a.m. (Suggest removal)
What is Sanford and the house contributing to the economic downturn.Im contributing 4 days of furlough.If each of the politiciand in columbia were to take a 10 percent cut,it would help the economy,put your mouth where the money isnt.
Posted by nappyd on January 13, 2009 at 9:04 a.m. (Suggest removal)
So everyone made a problem, and instead of ignoring the who caused it and trying to fix it, they're going to do a circlejerk and blame each other.
Ladies & Gentlemen, your tax dollars at work!
Posted by dawhetsell on January 13, 2009 at 9:15 a.m. (Suggest removal)
From school funding to hospice care for the dying poor, no corner of the budget was spared, and this year the state will be cutting deeper still.
At Clemson, Ulbrich said the state needs to craft a more sustainable way to pay for services. Relying on sales and income taxes is certain to produce shortfalls during economic downtowns.
legislators need to fine tune or overhaul the plan that swapped property taxes on homes for a penny increase in the sales tax as a means to pay for education, was stated.
This shows that everyone doesn't know what they are talking about on the tax RELIEF in 2006. The bill did take sales tax off food,that is less taxes that everyone pays. The tax SWAP for school operating cost was only 3% of the total funds collected for schools. IT WAS NOT A TAX CUT, but a swap. The taxpayers need to call their Legislators and thank them for saving their homes. Businesses are crying because the greedy schools are jacking up their taxes and not primary homeowners. A lot of States have RAISED home property taxes by as much as $5,000 dollars per home. The bill in 2006 stoped schools fom doing this to homeowners. Businesses have the ability to pass the cost, most homeowners are on fixed incomes. Thank God the cap had to be voted on. We need to put the rest in the consitution so they can not change it. They can only up it for CPI and growth. Call Legislators, tell them not change the property tax RELIEF only make it permanent.
Posted by zekemire on January 13, 2009 at 9:20 a.m. (Suggest removal)
YES THEY SHOULD HAVE LISTENED TO SANFORD! AGAIN! This proposed commission to put forth a tax policy for only an up or down vote of the legislature is illegal constitutionally! ONLY THE ELECTED LEGISLATORS HAVE THAT POWER! Best thing for SC is to eliminate the property tax completely, put a stop to all the various add on taxes like prepared foods, accomodations, rental car, and others touted to make vistors pay! THEY ONLY PENALIZE LOCAL CITIZENS! In Newberry there is almost a 10% tax on prepared foods only to support the Opera House, a place that would not exist on it's own! It is ridiculous that someone who will never go to that facility is made to pay 10% tax on foods bought at a restaurant to support it! the "FAIR TAX" model is the only viable, fair option!
Posted by RPSERV on January 13, 2009 at 9:31 a.m. (Suggest removal)
Hopefully, the story tomorrow on the 2006 property tax changes will show which taxpayers really benefited from the "relief" granted by the general assembly. Isn't it true that the expensive homes on the islands (Kiawah, Sullivan's, IOP, etc.) received tax reductions in the thousands of dollars while the lower valued homes around the county got little to no tax relief ? Yet everyone had to pay the higher sales tax.
Posted by captivated on January 13, 2009 at 9:44 a.m. (Suggest removal)
johnny holmes-What color are these "CP"? Gasoline and corndogs?
Posted by yird on January 13, 2009 at 9:52 a.m. (Suggest removal)
"the state needs to craft a more sustainable way to pay for services. Relying on sales and income taxes is certain to produce shortfalls during economic downtown"
========================================================
Crafting (read, more cunning, deceitful ways to tax) is what legislators and bureaucrats excel in.
Sales taxes may decline during an "economic downtown" so it makes sense not to spend at levels that depend so strongly on them.
I didn't know property taxes were reduced during an "economic downturn" but that must be the case otherwise that income level to the state would be fairly constant, meaning the state would have a benchmark by which reasonable spending could be anchored to.
I'll have to reexamine my tax bills.
Maybe the mindset of state government works just like my own, if I were a complete fiscal idiot that is.
I want a Mercedes. I can afford a Chevy. The hell with it, I'll buy the Mercedes and worry about how to pay for it later.
Problem solved!
Posted by tc1 on January 13, 2009 at 10 a.m. (Suggest removal)
RPSERV,
they also Paid thousands of dollars More. I did NOT benefit "thousands of dollars" but as it stands now I no longer worry about the government extorting me out of my home because of a tax system I have no control over as I grow older. The eagerness to stick it to the rich trickles down and kills us in the middle class while merely aggravating the rich.
"She said the state needs to craft a more sustainable way to pay for services. Relying on sales and income taxes is certain to produce shortfalls during economic downtowns, she said."
Why should government be shielded from the pain that its citizens are subject to???! If they are immune to what can destroy us why would they worry much about it. If their boat sinks the same as ours it will bring some restraint.
Posted by Zod on January 13, 2009 at 10:06 a.m. (Suggest removal)
dawhetsell, Business can no longer offset the cost with pricing. The internet is killing that option on a daily basis.
This is what has happened in a nutshell. The US congress cut taxes. This was a good thing. Too much of our money was going to other states in the distribution pie. The percentage allocated to each individual state did not change. So the amount of federal money coming into South Carolina was reduced also.
Meanwhile, South Carolina government was busy cutting state taxes on top of the loss of income for projects sponsored by the US government. South Carolina government income was cut two fold pushing the honus upon localities to raise taxes neccessary to provide services. In other words, the crunch was placed upon your county and city. They searched for income everywhere. The State government turned the local government away from property taxes through state law. The only form of taxation left came in the form of the local option sales tax.
Where are we now?
The US Government has the largest debt ever.
The State Government is broke.
The County Government is broke.
Cities are the only enitity left with any financial stability and even they are on shaky ground. What's the big deal with placing that city park on hold anyway?
How did we get here?
The two party system. One party cuts taxes without even considering the expense of services provided. The other party spends and doesn't have the guts to tell you that they want more taxes.
Posted by aimpulsive on January 13, 2009 at 10:16 a.m. (Suggest removal)
We can all see where this is going.
In 2009 they will go back to the old way of doing property taxes AND keep the 1% sales tax.
Those of you who think only the rich were helped by the property tax relief act are nuts. I am solidly middle class, with three kids in public schools. I am not a CEO or executive -- I am a civil servant. However, when the tax reassessment was done several years ago the taxes on my house went up by $2,000 a year (over a 100% increase).
I had done NOTHING except live there. No improvements. I did not have a 2nd mortgage. I did not have an equity line. I did nothing to take advantage of the rising "value" of my home (which has since declined by 40%, by the way).
So why should I pay more property taxes for something I bought many years ago?
The property tax system was like paying income taxes on what you are capable of earning, compared to what you actually earn.
The tax relief act simply brought my taxes back to where they were before the reassessment, and, now I'm paying 1% extra in sales tax for that benefit!
The property tax solution is simple:
1. Houses are appraised at their value at the time of sale.
2. Values can not rise more than the CPI each year.
3. When a home sells, it is reassessed.
4. If a homeowner takes advantage of an increase in home value by taking cash out for improvements, school, whatever (in the way of a refinance, 2nd mortgage, equity line, etc.), then the new total amount of loans is used to calculate the value of the home. For instance, if the home was purchased for $100,000 in 1980 it is valued at 100,000 (plus CPI increases) forever. However, if the owner refinances the house for $250,000 (a cash out) in 1999, then the new value is $250,000 + whatever is left on the original first mortgage.
Everyone has talked about steps 1-3 above. But by adding step 4 it provides a way to tax the value of the home based on the value it brings to the homeowner. If the homeowner simply lives there and pays off the mortgage one day, then his taxes would never go up by more than the CPI each year. He can even refinance as often as he likes, as long as he does not increase the value derived from the home by taking out a larger loan.
With everything being kept in computers these days, this type of system should be simple to implement.
Posted by Zod on January 13, 2009 at 10:18 a.m. (Suggest removal)
Zekemire, you are such a tool. What in the heck does the local tax for the "opera house" have to do with the "fair tax"? The fair tax is a proposal for federal income. The opera house is a local tax. Let me break down your federal tax for you...
Your family makes 100,000 per year.
Your tax rate is somewhere around 11-12%.
You claim three exemptions (Wife, two kids).
The exemptions bring your tax rate down to 7-8%.
YOU PAY 7000-8000 IN FEDERAL TAXES PER YEAR ON 100,000 DOLLARS WORTH OF INCOME.
Now your "fair tax" gang loves to chant the "fairness" of the fair tax. I say that you are (A) stupid or (B) single and rich. Either way, there is nothing "fair" about your tax.
.......and gimini crickets, the "Fair" or "Flat" tax proposals have nothing to do with your state or local tax!!!!!!
Posted by tc1 on January 13, 2009 at 10:38 a.m. (Suggest removal)
aimpulsive, that idea sounds promising. Send it to your Senator, Representative.
Posted by RPSERV on January 13, 2009 at 11:52 a.m. (Suggest removal)
tc1,
Wouldn't you like to see the results of the 2006 act analyzed and published. You might be happy with the reduction you received as a result of this act, but what if you found out that expensive properties realized a 50% plus tax reduction while yours was only 30% ? And, what if lower valued homes only received a 10% reduction ? Is this really fair ? Perhaps a more equitable distribution of the sales tax proceeds to homeowners is in order.
I agree that the government must suffer with the rest of the economy. I just wish the we the taxpayers would take more interest in government spending when times are good. Perhaps that would alleviate some of the more dire consequences of economic downturns.
Posted by rahard on January 13, 2009 at 12:39 p.m. (Suggest removal)
Good grief. We hope the state legislature is NOT now considering raising taxes!!! This is definitely NOT the time to do that, at least for the lower percentage of income earning taxpayers.
now more than ever before we need what little money we have to cope with the weekly increase in food and gasoline prices. Not to mention prescription drugs too.
If socialism for AIG and General Motors and bankers is good for the country, it should be good enough for low income South Carolina taxpayers too. By low income, I mean anyone below 30,000 per annum!
Posted by crankyyankee on January 13, 2009 at 12:44 p.m. (Suggest removal)
Zod, read the book!
Posted by eyfigueroa on January 13, 2009 at 1:31 p.m. (Suggest removal)
For the uninformed: www.fairtax.org
Posted by tc1 on January 13, 2009 at 4:10 p.m. (Suggest removal)
RPSERV,
Please refer to post by aimpulsive above at 10:16AM. My biggest worry was that even though I did nothing but basic maintenance to my Home the old system presented the VERY real possibility that the government would take my home from me at some point in retirement because of absurd tax increases do to situations I had No Control over and on Value that I Did Not realize or wish to realize (read sell).
That is NOT FAIR and I am !@#$ sure NOT rich and in the old system the rich would always still have their House.
Posted by Zod on January 13, 2009 at 5:23 p.m. (Suggest removal)
cranky, I do not have to read the book. I could make my own book about the fallacies in the system.
The entire premise rests on the fact that YOU will receive the income taxes by your employer for employing you. The question becomes "Who is enforcing that?" You say the "magic market". I say market preasure (both internal and external) have been forcing wages down. So all of sudden, the newfound income discovered by business will be passed down to labor. I find that difficult to swallow.
Having said all that, the fairtax gang loves to preach that I pay 15% of my income to federal income tax. They say that I will realize the same 15% from my generous employer once he realizes the cost savings from the passing of the fairtax. All of a sudden my household will see a 30% increase in revenue. Well, this is a lie.
The fact is that I do not pay 15% in federal income tax. You see, I have had kids and a wife in my household for 20 years and god willing, I will continue to have a child in my household for another five years. This means that for a period of 25 years of my life I will not pay anywhere near the 15% that the fairtax gang likes to hang their hat on. The facts gathered by me (for me) over the past 20 years provides the following information. I have paid an average of 7% annually in federal income taxes.
Let us review: Fairtax says that I will receive a 15% raise from my employer through the magical ways of the market. That is the first measure that I highly doubt. I will not pay 15% in federal income taxes. I have never paid 15% in federal income taxes. Their figures are skewed to say the least. I say that I pay 7-8% in federal income taxes annually. I have the tax records to prove it.
For me to accept any change as rational I would first have to trust the fact that I will see a gain of 15% provided by my employer in the year that the fairtax is enacted. If I do not see that, this is all a lie. Even if I see such an increase, my rate of spending relegates the fairtax to just breaking even with my present income tax. Although I have read more and have a good many more questions as to the passage of the bill without bureaucratic BS, why would I continue discussing the issue when the facts already show that I will realize no monetary gain at all.
Posted by goodkarmasc on January 13, 2009 at 5:27 p.m. (Suggest removal)
Eliminate the $300 cap on vehicle sales tax. Raise the cigarette tax, raise the alcohol tax (sin taxes). Eliminate discretionary spending, no new parks until infrastructure needs are met, freeze state hiring, eliminate all legislative perks, freeze school building funds redirect funds to classrooms, zero base budgeting, drug testing for all state/local funded salaries/benefits including WIC, welfare, etc.
Posted by havesense on January 13, 2009 at 10:49 p.m. (Suggest removal)
aimpulsive HIT IT RIGHT ON THE NOSE!
Posted by crankyyankee on January 14, 2009 at 10:04 a.m. (Suggest removal)
Zod, ignorance is bliss and you seem very happy! Read the book, then tell us all about it!