Forecast for S.C. remains gloomy

COLUMBIA -- Roughly half a million adults in South Carolina are unemployed, underemployed or have given up looking.

That is nearly 1 in 4 eligible workers in the state. And the months ahead look grim to John Rainey, South Carolina's chief economic forecaster.

"I don't feel hopeless, but it's hard to feel hopeful," Rainey said. He is chairman of the state Board of Economic Advisors, which tracks tax collections and unemployment filings and sets revenue forecasts for government spending.

Economists tend to agree that the economic picture for South Carolina won't start to get better until after next summer when unemployment is projected to reach its highest rate of 13 percent, Rainey said. The picture is even more grim if measured by the U.S. Department of Labor's broader unemployment numbers, which include the underemployed and the discouraged. By that gauge,

South Carolina could top out at 23 or 24 percent in June, Rainey said.

By the standard measure, the current jobless rate in South Carolina stands at 12.1 percent, or 263,000 people, but the broader measure puts unemployment around 20 percent, or roughly 500,000 people, Rainey said.

The work force in South Carolina is nearly 2.2 million people.

The calculation of unemployed and underemployed isn't a perfect measure because it is an estimate that relies on surveys.

But getting a measure of the problem is important for the state's economic advisers because state revenue relies largely on income and sales taxes.

Rainey said the recession combined with tax cuts over recent years and the shift from property tax to sales tax for school funding approved in 2006 has created the perfect storm in South Carolina.

Since 2007, the recession has forced nearly $1.6 billion in budget cuts, or about 24 percent of general funds. The state is in its third consecutive year of revenue decline, which is unprecedented. In the previous 50 years South Carolina has experienced only two other years of revenue decline.

In an effort to deal with part of the problem, the Legislature created the South Carolina Tax Realignment Commission this year to study the tax laws and recommend changes. The commission is expected to focus on the law's 75 sales-tax exemptions that give breaks worth $2.75 billion for such items as newsprint, hearing aids and musical instruments.

Rainey said he does not see how the commission could produce a quick turnaround. And, he said, he doesn't want to see any hasty change in tax law because of the potential for unforeseen bad consequences.

The Legislature can't afford to tinker with the tax policy, Rainey said. Taxation in South Carolina needs a major overhaul that is carefully vetted and designed, he said.

Lead Senate budget writer Hugh Leatherman, a Florence Republican and one of the top three most powerful men in the state, introduced the bill to create the tax study commission.

As the commission works on taxation policy, Leatherman said, his focus is on getting people working again. That is the first solution, he said.

The commission is made up of business leaders, economists and tax and accounting experts. It will report back to lawmakers by March 15.

"I have no idea what they will come up with, but I am not optimistic anything is going to happen," Rainey said. "Which special interest group do you think is going to roll over and let their sales tax exemption be taken over? This is an election year, right? You need money to be re-elected."

Out of balance

The issue: State revenue is out of whack. The recession forced massive budget cuts worth nearly $1.6 billion, or about 24 percent of general funds, since 2007. General funds pay for public schools, higher education, prisons and social welfare programs and come primarily from sales and income taxes. Total government spending is about $20.2 billion in South Carolina, when including federal money and other sources such as tuition and license fees.

The problem: Since 2006, the Legislature has made many changes to the way taxes are levied in South Carolina, including the elimination of the tax on groceries, a cut in incomes taxes and a shift from property taxes to sales taxes. Some economists call those tax cuts and swaps, coupled with the recession, a perfect storm. The revenue problem has been lessened temporarily by federal stimulus dollars.

What's next: The Legislature has formed the South Carolina Tax Realignment Commission, made up of business leaders and experts in taxation, economics and accounting, to study taxation policy, tax exemptions and related issues. The commission will report back to lawmakers by March 15. Meanwhile, analysts are recommending additional fixes to cut spending, free up revenue and pull the state out of the prolonged economic slump.

Reach Yvonne Wenger at 803-926-7855 or ywenger@postandcourier.com.