Scoppe: Finally, a tailor-made recession for South Carolina sales tax in the 1950s | Comment

Of course you know the cliché about the broken clock: it is useless almost all the time, but twice a day, it indicates the perfect time.

A report released last month by South Carolina’s top economic analysts suggests that the COVID-19 recession is the time to break South Carolina’s tax system.

Before explaining, a quick recap of our tax system. Although South Carolina uses a combination of sales, income and property taxes to pay the state and local government, as economists recommend, we rely heavily on the volatile sales tax. The income tax is designed in a way that makes it appear that our taxes are much higher than they actually are, which creates political pressure to further divert the system towards sales taxes. Companies, tenants and especially manufacturers bear a much higher tax burden than normal. And the sales tax itself, well, one of the reasons why it is so volatile is that it was born in a simpler time and works as if we still live in that time.

In the 70 years since the Legislature created the South Carolina sales tax, our economy has changed dramatically as we move from spending our money on goods to spending our money on services. But the tax was created to apply to stuff, then, although it applies to all things that the Legislature did not specifically exempt (and there are many of them, but that is a different matter, for another day), it only applies to services that the Legislature specifically decided to impose.

And the Legislature has not decided to tax many services: only 39 of the 176 categories of services that the Federation of Tax Administrators identify as taxable.

This means that, each year, a smaller portion of consumer spending is taxed, and we deviate from the ideal of taxing as much of the economy as possible with the lowest possible rate.

A 2010 legislative study estimated that we could raise an additional $ 1 billion a year by taxing “taxable” services. At the time, we were charging about $ 2.2 billion in sales taxes, so increasing the service tax could have allowed us to cut the 6% rate to about 4% and still collect the same amount of money. . Our move to services has only accelerated since then.

Expensive exemptions on things have caused budget problems in past recessions because they are for groceries, prescription drugs, electricity and gasoline – which people continue to buy during the recession as they stop buying clothes, books, electronics, jewelry and other items without which we can all live.

But coronary recession is not like past recessions and is therefore having the opposite effect.

Yes, people who have lost jobs have reduced what is necessary, which is not yet taxed. But the vast majority of us have not lost jobs, and with federal stimulus checks, we have more money to spend. And those responsible among us are no longer spending our money on trips to the spa or tanning salons or the gym, dance or tennis classes, cosmetic surgery, pet hygiene and all kinds of services than the state of Carolina. South does not charge. Even professional services are feeling the setback.

Instead, we are buying things: things for our homes, things for our cars, things for our pets, things to wear, read and play and consumables that are so sophisticated that they are not considered “groceries”. All sorts of things that the state of South Carolina charges taxes.

As SC’s Council of Economic Consultants noted in its December Revenue Digest, “The pandemic had a unique effect on the economy” because “consumers shifted their spending more to taxable items, resulting in higher sales tax collections than predicted “.

Sales tax revenue increased 12.5% ​​in November compared to November 2019. The revenue for the fiscal year that started on July 1 was 7.3% higher than last year – $ 85 million and more than half of which is why the general tax collection is 3.4% ahead of last year. It is nothing like the growth we were experiencing a year ago, but in the middle of a pandemic, it is extraordinary.

The Legislature cannot take full credit for it. We wouldn’t be doing so well if the U.S. Supreme Court hadn’t cleared the way in 2018 for states to levy tax on sales of taxable products sold over the internet – and if a decades-old SC law hadn’t made charging virtually automatic after that happened.

But it happened … and it happened … and so, for the moment, South Carolina is being rewarded for having a high sales tax rate that applies to the things that most of us are buying in this bizarre recession.

Of course, it is unlikely that we will have a maximum savings on minimum things and services after the vaccine goes into effect. The BEA still warns that it may not last until the rest of the recession, because “current trends in consumer spending are outside historical standards” and “the current pace of growth tends to be unsustainable, even with the recovery of the economy.”

Which means it wouldn’t be a bad idea for the legislature to think of taxing the non-material on which our pre-COVID selves were spending more and more of our money, so that this could reduce the sales tax rate and also make our tax system to better align with our modern economy. Because a broken clock is still right just two minutes out of 1,440.