South Carolina: New Tax Cuts are Bad for Business

It hasn't been a good year tax-wise for South Carolina lawmakers, who quarreled for weeks over how to deal with the state's rapidly growing property taxes. The unnecessarily expensive (and regressive) tax shift they came up with (eliminating most homeowner property taxes for schools, and making up some of the revenue loss by hiking the sales tax rate) prompted justifiable complaints from the business community almost immediately upon its passage.

Now bond rating agencies are weighing in. State economist Bill Gillespie warned last week that agencies are likely to drop the state's credit rating because this year's property tax "reform" increases the state's reliance on an eroding revenue source (the sales tax) even as it makes the sales tax more unstable (by cutting the sales tax rate on groceries).

It's hardly a news flash when economists and bond rating agencies recognize tax policy goofs that legislators don't. But Gillespie's most interesting prediction is that even lawmakers are going to figure out quite soon that what they've done is unsustainable:

[C]hanges both enacted and proposed are likely to make businesses pay more. Gillespie said he did not know the solution to the problem, but he said the S.C. General Assembly is likely to make changes in the new law when it feels its effects. “They’re not going to let the process harm the business community. I think there will be a reaction.”

The glass-half-full way of looking at this is to note that South Carolina lawmakers will likely get another shot at doing the right thing-- something they flirted with earlier this year. But to hear Gillespie tell it, we'll likely find out whether the glass is half-full or half-empty as early as this winter, when lawmakers convene for the 2007 legislative session.