Hasty change in S.C. tax system imposes predictable toll

Act 388, passed by the General Assembly in 2006, was an ill-conceived, piecemeal change to our tax system. That Act 388 has turned out poorly is widely accepted. It is unfortunate to hear so many critics of Act 388 deride the legislation's 'unforeseen consequences,' especially when many of those consequences were in fact completely foreseen.

The problem is not that Act 388 has had 'unintended' or 'unexpected' consequences; the problem is that the warnings were not heeded. Act 388 has tied more of our education funding to an inherently volatile revenue stream in the sales tax. Act 388 shifted the tax burden toward business and rental property. And now, as the effects of Act 388 play out in ways that were predictable and foreseen, the negative effects are conveniently labeled as 'unforeseen.'

The adverse effects of the piecemeal changes to the tax system within Act 388 have led to the following responses: the creation of the Tax Realignment Commission (TRAC), which itself cannot even directly consider the provisions of Act 388, and the urgent calls to revisit the point-of-sale (POS) provision. So, in order to deal with the negative effects of a previous piecemeal change to the tax system, we are seriously considering making even more piecemeal changes to our increasingly fragmented tax system? If we do, we will likely spend the next few years talking about the 'unforeseen consequences' of the next round of tinkering with the tax code.

In terms of point-of-sale, let me briefly visit a few issues. At the heart of the debate is the claim that the POS provision adversely affects real estate transactions. There may be anecdotal evidence that some deals fall through after prospective buyers are surprised to discover their property tax bill will be higher than expected, even though it is now incredibly straightforward to estimate that tax bill as soon as the purchase price is agreed upon. But is there any solid evidence demonstrating that this effect is either statistically or economically significant, especially in light of the fact that we have been experiencing a national real estate crash of historic proportions?

Let me concede the argument that parties are unwilling to close some transactions because of unexpectedly high property tax bills. To an economist, the solution to this is simple — prices should adjust to clear the market. The POS provision has the effect of informing buyers of the real cost of purchasing and owning property. If that cost is deemed to be too high, then the economic adjustment should occur not through reducing property taxes but through a downward adjustment in prices. Indeed, if the POS provision had been in place between 2003 and 2006, it likely would have worked to curb some of the speculation and rampant price appreciation that contributed to the real estate crash.

Given the macroeconomic realities, eliminating the POS provision will not have a significant impact on the real estate market or overall economy. Real estate markets are weak everywhere because of underlying weakness in the economy, and this will continue until we see a true improvement in both labor markets and credit markets. Eliminating POS is clearly not going to solve these underlying problems.

Ultimately, POS is but one piece of the larger story. The big picture involves our approach to tax policy and the need to end our practice of making rapid, piecemeal changes to our tax system, especially in the midst of a budget crisis. We need truly comprehensive tax reform, and it needs to be more comprehensive than what the TRAC is currently allowed to consider. We also need to recognize that the tax system is just one side of the equation. We also need to look at the spending side. We continue to face budget crises in part because we let tax collections determine spending.

Making sound public policy decisions is an incredible challenge and a tremendous responsibility. Changes to tax policy will create both winners and losers. However, it is possible to gauge the effects of policy changes through careful study of the issues so that the consequences are indeed 'foreseen.' Particularly in the current crisis atmosphere, we need to be very careful about making additional hasty piecemeal changes to our increasingly convoluted tax system.

Don Schunk, Ph.D., is a research economist at Coastal Carolina University.