Sales tax proposal could slam South Carolina residents

COLUMBIA -- South Carolina consumers would pay more for food, water, electricity and prescriptions in exchange for a lower overall sales tax rate under a tax revision proposal given preliminary approval Wednesday.

And the proposed sales tax increases don't stop at necessities. The state's Tax Realignment Commission recommends that the state for the first time charge sales taxes on digital purchases from online stores, such as iTunes and Amazon.com, and pay more to buy a car as part of a massive makeover of the way the state collects taxes.

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No changes will happen unless the Legislature approves them.

Lawmakers created the commission, made up of 11 financial experts, to re-evaluate tax policies as a result of the recession that drained state coffers by more than $2 billion.

The state is so broke that lawmakers barely have enough money to provide core government services such as law enforcement, public education and health care. And more budget cuts are expected next year.

Some of the recommendations that call for taxing basic necessities, including water, electricity and food, will end up disproportionately hurting poor people because they spend more of their income on groceries and housing than those who are well off.

The commission's proposal is the latest in a series of changes lawmakers have made to the system of tax collections, and represent a reversal of recent legislative philosophies. During the past five years, lawmakers raised the state's sales tax to offset a big break on property taxes for homeowners and eliminated the sales tax on groceries to ease the hardship on the poor.

The commission wants to drop the overall 6-cent sales tax by a penny and add a 2.5-cent tax on unprepared food.

Property taxes on homes and businesses won't be reconsidered because lawmakers forbid the group from examining the 2006 property tax swap, despite the fact that school leaders, business executives and many financial experts have said that is a root cause of the state's financial woes.

The next step is for the commission to approve the recommendations and send the report to lawmakers for their consideration after they return in January.

The commission will meet again Aug. 13 to take public testimony, and it will vote in September on whether to send its recommendations to the Legislature.

The panel is then expected to take up other aspects of taxation outside of sales taxes, such as taxing services.

House Speaker Bobby Harrell, R-Charleston, said Wednesday that lawmakers are anxious to receive the recommendations.

"First of all, there is certainly an appetite in the General Assembly to do a major overhaul in tax reform," Harrell said.

However necessary it is, achieving a major overhaul will be no easy task, he said. Originally, Harrell and other legislative leaders wanted the lawmakers to take an up-or-down vote on the commission's entire report, to avoid special-interest coalitions and horse-trading on the chambers floors.

That strategy failed to generate enough support because some lawmakers were reluctant to hand over that much authority and risk upsetting a contingency. So the report will be picked apart and considered piecemeal, Harrell said.

Lawmakers likely will need the full two-year session to pass any significant reform, pushing any big changes until 2012 and beyond, he said.

"It will be incredibility difficult, but I hope it can be done because it needs to be done," Harrell said.

Burnie Maybank, chairman of the commission and a former head of the state Department of Revenue, said the new way of taxing people will result in some people paying more in taxes and others paying less, depending on their buying practices.

From the state standpoint, the plan would not result in a net gain or loss in state revenue, he said. As the economy recovers, however, the new taxation practices would generate more cash for legislators to spend on government services.

The proposal is made up of dozens of recommendations to repeal individual sales tax exemptions. Within the proposal are recommendations to charge 2.5-percent sales tax on prescription drugs (except for Medicaid and Medicare patients); remove the $300 sales tax cap on motor vehicles, excluding boats and planes; begin taxing digital items purchased and downloaded online; and tax water and electricity.

All told, the sales tax exemptions -- some of which have been on the books since the 1950s -- that the commission wants repealed could generate nearly $700 million in cash for the state.

Conversely, less money would be generated on the sale of most purchases from stereos and flat-screen televisions to refrigerators and kitchen utensils.

Maybank said the goal is to have a broad, diversified tax base to result in overall lower tax rates.

What you would pay more for

The state Tax Realignment Commission is preparing a list of previously exempted items for which sales taxes could be charged. Some have been exempt since the 1950s. Among the list of about 100 recommendations are:

--Restore tax on groceries.

--Charge 2.5 percent sales tax on prescription drugs (although purchases made by people on Medicaid and Medicare would continue to be exempt).

--Tax water and electricity used in homes at 2.5 percent.

--Remove the $300 sales-tax cap on motor vehicles, excluding boats and planes. Car, truck and SUV buyers would pay up to $1,200 in sales tax until 2014, when the cap is eliminated altogether and consumers would pay according to the value of the vehicle they purchase.

--Begin taxing music, books and movies, among other digital items, downloaded from the Internet.

--Limit the August sales tax holiday to just school supplies, excluding all other items such as wedding dresses and towels.

--Remove the tax break on sweetgrass baskets.

--Eliminate the sales tax holiday on guns.

--Repeal the 1-cent sales tax exemption for people older than 85.

--Charge sales tax on the purchase of newspapers.

--Add sales tax to the purchase of supplies, machinery and electricity to television and radio stations.

--Remove the exemption on the sale of plants and animals sold to zoos and gardens.

--Tax vacation time-shares.

--Remove the exemption on hearing aids.

--Charge tax on sales at some festivals.

--Tax containers bought by international shipping lines that have contracts with the State Ports Authority.

--Tax sales made to motion picture companies.

--Charge sales tax on building supplies used to construct housing for chicken coops and livestock.

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