tax – PurpleSage41

Many of my rr readers are South Carolinians. Even if you are not, a similar tax “reform” proposal may be coming to your state, as it has elsewhere. . So here’s the South Carolina version of the latest Republican plan to tax the middle class, and cut fores for the rich proposal.. South Carolina’s new proposal for a flat income tax, H. 4216, seems to be on the fast track for what is billed as a tax cut. Maybe. But not for most of us.

The federal standard deduction, expanded in the first Trump administration, would be cut for state tax purposes from $15,000 ($30,000 for a married couple) to a miserly $,6000 and $12,000, respectively. Then it is phased out until it disappears at an adjusted gross income of $40,000.

But wait, there’s good news. The tax rates would be changed from a two-step schedule of 3% and 6.3% to a single flat rate of 3.99% (just so we can claim to be lower than our neighbors). That’s a tax cut, isn’t it?
Yes and no. The General Assembly giveth and the General Assembly taketh away. The federal standard deduction, which was also followed in South Carolina’s state income tax, gives people at the bottom a little relief and makes the income tax just a little bit progressive.
That’s “economist-ese” for taking a smaller percentage of income in taxes for poor people than rich people. Our other state and local taxes on sales and property, and our fees and charges for government services, are regressive. They take a larger share of income from the poor than from the rich. So, the income tax has provided a partial equalization of the total tax liability across households at different income levels.
According to estimates by the S.C. Department of Revenue and Fiscal Affairs, if your family is in the median income range of $50,000 to $75,000, more than 80% of you will discover that your income taxes will go up, not down. Less than 10% of households in the income range of $300,000 to $500,000 will have that same sticker shock, but most will see a steep reduction.
Revenue from the individual income tax is expected to decline by about $216 million in the first full year. Bottom line: This is a tax cut for the wealthy, plain and simple. And unlike the usual justification – attracting business – the personal tax rate will now be lower than the business tax rate.
That’s not the only problem with this bill. With no chance to itemize, citizens with heavy medical expenses and/or generous charitable contributions or lots of interest on their home mortgage and/or student loans will have to rethink their priorities. Medical expense deductions are important for many disabled or elderly citizens, especially if there is a family member in a nursing home. Medicare is not much help there—and the future of Medicare is uncertain.
South Carolina is riding a wave of revenue growth that is overdue for correction. The stock market is flailing, consumer confidence has dropped, tourism prospects (important to our state) are dismal as people from other nations are reluctant to come here, and tariffs are likely to revive inflation that has just returned to more normal levels (not counting eggs).
The state’s definition of income for tax purposes will still be tied to the federal definition of adjusted gross income but that may change if Congress, worried about ballooning deficits, fails to extend the tax cuts from the first Trump administration. The legislature has made a number of commitments, such as higher teacher pay and a larger state contribution each year to protect the soundness of the retirement fund. Legislators may not be able to fund these priorities if revenue from the income tax falters, as it does with either tax cuts or recessions.
This bill needs to go in the circular file and start again.

Monday, April 15th is Income Tax Day. I expect many of you are devoting part of your weekend to filling out tax returns now that March Madness (with a bit of April thrown in) has come to its final conclusion. Some of us actually enjoy the challenge of preparing our taxes, but most people dread the looming deadline.

My field of specialization as an economist is state and local public finance, so I take a deep interest in tax policy. Earlier this month I participated in an educational program for the North Carolina League of Women Voters on tax policy, and I have a return engagement in May as they try to figure out what constitutes good tax policy.

Some forty years ago economists formulated the basic guidelines. A good tax system should be adequate, generating enough revenue to pay for the services that citizens need and want. It should be equitable, fairly distributing the cost of government among citizens according to their ability to pay. The revenue should keep pace with inflation because when prices rise, it affects the goods and services purchased by government. It should be designed to encourage people to do “good things” like buying electric vehicles and insulating their homes and getting an education and contributing to charity, and discourage them from doing “bad things” like smoking and driving gas guzzlers. Or things that the government wants them to do, like spend their tourist dollars in your state and resist the urge to shop in other states with lower sales taxes. All those incentives come under the heading efficiency.

Back in the 1800s, an economist named Henry George was a big proponent of the single tax on land. Most contemporary economists would disagree, affirming the need for a variety of taxes. Why? You have probably heard of portfolio theory, the basic idea being that you can reduce your risk without reducing your return on investment by having a variety of assets in your portfolio instead of just one. Some assets are reliable and steady in the earnings, others have the possibility of great returns. Some are stable and steady in value while others are volatile. Some are easily converted to cash (liquid) while others are not. !) Some taxes are better suited to the federal level, others to the state level (all but five states have sales taxes), and mostly the property tax and fees for services at the local level. !) Some taxes are better suited to the federal level, others to the state level (all but five states have sales taxes), and mostly the property tax and fees for services at the local level.

Like an investment portfolio, a tax system needs to resist using too many kinds of taxes, because that would increase the state’s cost of collection and the individual’s or firm’s cost of compliance. (Cost of compliance is what you are encountering this weekend.,)

The income tax keeps pace with growth and inflation but drops sharply in recessions. It can be made progressive so that more of the tax burden falls on those more able to pay. The sales tax is more stable and ensures that everyone contributes, but it is more burdensome on low-income households. The property tax is the best source for local government because you can’t escape paying it by moving away—the land doesn’t move with you! It is also used to pay for local services that benefit local property owners, including education, road maintenance, streetlights and law enforcement. Excise taxes target particular products or people—gas taxes paid by drivers are used to maintain the roads they drive on, tobacco taxes discourage smoking, alcohol taxes discourage drinking (maybe). Business taxes (and tax breaks) figure into state to state competition to attract and retain business firms.

Justice Oliver Wendell Holmes said that “Taxes are the price we pay for a civilized society.” I mentioned that to one of my conservative economist colleagues and he said, “The price is too high.” “Or perhaps,“ I said, “The amount of civilization is too low.”

How much civilization do you want, and how much are you willing to pay for it? Think about that the next time someone seeks your vote with a promise of a tax cut. What services are we going to give up, or what debt burden will we increase to pass on to our grandchildren?

Tag: tax

The Taxman Is After You

Many Happy Returns