CHAPTER 5: SPECIFIC TAX REFORMS

73 13

Presumably the original intent of imposing a tax rate schedule with graduated marginal tax rates was to make the income tax progressive. However, what progressivity exists in the state’s income tax structure is due to the zero tax on the first $2,630 of income, and because of the graduated marginal tax rates. However, since the marginal tax rate increases over such small steps in income, as shown in Figure 5.5, most of the progressivity occurs at lower income levels, not higher levels of income. At higher income levels, the average tax rate hardly increases at all. This nature of the current tax is directly contradictory to the goal of progressivity. So although on the surface it appears that the tax satisfies the vertical equity condition, it really does this only at the lower income levels reducing the wealth of these lowest income taxpayers, not the intended consequence.

4

WHEN IT COMES TO TAXES IN SOUTH CAROLINA: FOCUS ON REMAINING COMPETITIVE
Justin M. Ross, Joshua C. Hall, and Peter T. Calcagno

Figure 5.5: South Carolina income tax: Current tax rates compared to inflation-indexed rates, 2009
Income Tax Rates/Brackets if 1959 Tax Current Income Tax Schedule was Inflation Adjusted to Rates/Brackets 2009 A common misperception is that the burden of taxes on an economy is simply equal to Tax Tax Average is Rate theTaxable Income tax revenue generated. In reality, taxes Rate society much more than Taxgenerated in Average Tax cost Amount Amount revenue. The additional costs come in many forms, including: administrative costs, enforcement costs, compliance costs,1.42% burdens,’ and costs associated with resources ‘excess $5,000 $71 $125 2.5% spent by individuals and groups to avoid the tax, both before the tax is implemented $10,000 $290 $250 (lobbying) and afterwards (evasion). 2.90%taxes are extremely costly to 2.5% High a state’s economy. $15,000 $377 4.03% 2.51% Countless studies find $604 higher taxes lead to significant reductions in economic growth. that The purpose of this chapter is to explain the true costs of taxation, review the empirical $20,000 $954 $527 4.77% 2.63% literature on taxation and economic growth, and to examine South Carolina’s overall tax $30,000 $1,654 $834 5.51% 2.78% burden relative to other states.1 $50,000 $3,054 $1,695 6.10% 3.39% $75,000 $4,804 $3,127 6.41% 4.17%

WHY TAXES COST MORE T6.56% THEY $4,877 HAN TAKE $100,000 $6,554

4.88%

$8,377 $150,000 $10,054 6.70% 5.58% Just because a tax is levied on one specific group of individuals does not mean they $200,000 $13,554 6.77% 5.94% will be the ones who bear the eventual burden of $11,877 This concept is known in the the tax. economics literature as ‘tax shifting.’ A tax imposed on business assets, for example, might lead to Figure 5.5 also for consumers, shifting somerates the burden forward to consumers. higher prices shows what the average tax of are for various incomes and taxes Similarly, a tax tax system in South Carolina. of a right columns it to reduced demand, under the currentimposed directly on consumers In theproduct will lead also shows what the shifting some of the burden backward onto 1959 tax tables were indexed for inflation. that taxes and average tax rates would be if thethe companies producing the good or service The is taxed.2 figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, One higher levels of however, keeps tax rates taxes are borne the lowest income especially at thing is certain, incomes. It and that is: all extremely low for by individuals. A ‘business’ cannot state.taxes. Instead, business taxes fall on the owners, employees, suppliers, individuals in the bear or customers of thealso shows that the current tax system charges all income groups more in Figure 5.5 business. taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain 1 stagnant, the based onbecomes Hallrelatively high-tax state. This has a negative impact on This chapter is state Ross and a (2007).
2

For additional information on where the actual burdens of different taxes fall, see Pechman (1985) and Fullerton and Rogers (1993).

3

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UNLEASHING CAPITALISM

manufacturing property tax in Census Bureau,Figureand local governments around the nation According to the U.S. the country. In state 5.8 we present the effective property tax rates in more than $1 trillion in combined tax revenue duringgiven for the states are out of4.1 took data for Southeastern states, for comparison. The ranks fiscal year 2005-06. 3 Figure all 50 states. The ‘net tax’ and ‘effective taxfor South calculatedin 2005-06. Combined state $25 summarizes the sources of tax revenue rate’ are Carolina based on property valued at and million ($12.5 million revenue in South Carolina was over million in inventories, and $2.5 local government tax in machinery and equipment, $12.5 $12 billion, with $7.75 billion millionatin fixtures). Notice that South Carolina’s effective tax rate on industrial property is levied the state level. over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware is listed in the figure because it isSouth Carolina 2005-06 Tax Revenue by Source Figure 4.1: the lowest-tax state.)
State Tax Revenue State Rank (of 50) Property South Carolina 1 Sales and gross receipts Mississippi General sales 4 Texas Selective sales 6 Motor fuel Tennessee 10 Alcoholic beverage West Virginia Tobacco 14 products Louisiana Public utilities 17 Other Georgia 20 Individual income Florida 24 Corporate income Alabama vehicle license 35 Motor North Carolina 37 Other taxes Local Total

Figure 5.8: Industrial Property Taxes in Southeastern states*, 2007
Net Tax

$7,759,797,000 $4,684,355,000 $12,444,152,000 Effective Tax Rate $9,808,000 $3,950,238,000 $3,960,046,000 $1,864,900 3.73% $4,200,121,000 $286,839,000 $4,486,960,000 $1,291,050 2.58% $3,186,306,000 $95,908,000 $3,282,214,000 $1,013,815,000 $190,931,000 $1,204,746,000 2.53% $1,264,358 $511,834,000 n/a $511,834,000 $1,033,544 2.07% $143,034,000 $186,000 $143,220,000 $833,234 1.67% $32,056,000 n/a $32,056,000 $783,407 1.57% $44,173,000 $71,663,000 $115,836,000 $282,718,000 $119,082,000 $401,800,000 $760,381 1.52% $2,727,251,000 n/a $677,683 1.36% $2,727,251,000 $296,753,000 n/a $296,753,000 1.11% $533,776 $156,077,000 $21,604,000 $177,681,000 $491,071 0.98% $369,787,000 $425,674,000 $795,461,000

Kentucky

47

$327,100 $241,498

0.65% 0.48%

Source: U.S. Census Bureau (2009). 49 Virginia

Delaware 50 $238,840 0.48% What these revenue numbers exclude, however, are the many distortions in economic Source: National Association of Manufacturers (2009) activity, and in the behavior oflargest city only. that occur in response to these taxes. Figure 4.2 * Taxes measured in the states’ individuals, helps to illustrate these costs. The direct cost of taxation is the obvious accounting cost– individuals who pay South Carolina’s less moneytax spendis almost goods and services. than Importantly, the tax will have effective to rate on other 2.5 times greater The tax revenue generated doestimes greater than North Carolina’s. economic South Carolina at a Georgia’s tax, and almost 4 measure this reduction in private This puts spending resulting from the tax. However, terms of its ability to attract and serious disadvantage, inthere are other significant costs. keep industry. Since South Carolina has the The firsttax in the country on industrial from the political process surprise that it has highest hidden cost of taxation comes property, it should be no itself. The indirect costs the lowest per capita incomes and economic box) rates in the resources one ofof lobbying and rent seeking (upper left growth reflect the country. devoted by individuals attempting to alternot critical that South Carolina the its tax rate to the lowest in Although it is probably tax policy decisions within set political process. Interest groups will devote substantial time make it at least competitive the imposition of a tax, or the country, it should definitely and effort into fighting against for the Southeast. Since an increase in is rates, as well as to secure reductions in tax rates, or their repeal. Georgia’s ratetax effectively 1.52 percent and North Carolina’s is just under 1 percent, a rate To illustrate, might the legislature attract more a proposal to levy a reduce on at around 1 percent supposebe sufficient to is considering industry. Working to new tax the unhealthy fast food. Further suppose that Hardee’s estimates this new tax will various taxes applied to industry would seriously improve the state’s competitiveness.cost the company $2 a significantthis point, in taxes on industrial property would up to $2 million to Such million. At reduction Hardee’s would be willing to spend obviously lead to a prevent the tax revenues on industrial property, at least make campaign contributions, reduction inimposition of the tax. They may hire lobbyists,initially. However, the overall attempt may in media attention, or attempt to rate the legality of the to in court. Once the revenue to securefact increase once the growth fightin the state begins tax pick up and more industry moves into the state. Furthermore, if the official tax rates are lowered, then the state
3

Available at http://www.census.gov/govs/www/estimate06.html.

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Presumably the original intent of imposing a toward schedule to graduated tax is imposed, they will continue to devote resources tax rate attempting withget the tax marginal tax rate lowered, make secure an exemption from the tax. Resources progressivity repealed, the rates was to or to the income tax progressive. However, what spent in this exists inare wasteful for precisely the reasons discussed intax on the first $2,630taken away manner the state’s income tax structure is due to the zero Chapter 3—they are of income, and because of the graduated (which includes investments in capitalthe marginal tax rate from other productive activities marginal tax rates. However, since equipment, buildings, increases over such small steps inthe terminology of Figure 5.5, most ofis ‘unproductive or hiring more workers). In income, as shown in Chapter 3, this the progressivity occurs at lower incomeimportant to higher levels ofcosts are present even if the levels, not entrepreneurship.’ It is levels, not note that these income. At higher income tax is the average by the legislature. Simplyat all. This of imposing a current tax is directly costs. enacted tax rate hardly increases the threat nature of the new tax creates these contradictory to the goal see progressivity. So although on the surface it appears that the tax satisfies the To of the magnitude of these exemptions in practice, one only needs to skim vertical equity Tax Exemptions Fiscal Year 2008-2009 which outlines levels reducing the Sales & Use condition, it really does this only at the lower income the exemptions to wealth of these lowest and Garrett (2002) not the intended consequence. specific taxes. 4 Sobel income taxpayers, estimate the level of rent seeking to be somewhere between 3.8 to 5.4 percent of the state’s total tax revenue, implying an additional indirect cost of $473 to5.5: South Carolina income tax: Current devoted to altering policy.to Figure $672 million in wasted resources in South Carolina tax rates compared To reduce these costs, many economists advocate broad-based uniform taxes rather than allowing inflation-indexed rates, 2009 rates and exemptions to vary across different goods and services (Holcombe 2001). Without the ability to individually reduce their own tax rate, any one particular industry is less likely to expend effort to lobby for changes. A tax that targets one specific industry, if 1959 Tax Income Tax Rates/Brackets such as South Current Income Tax Carolina’s beer tax, tends to generate larger indirect rent-seeking costs. Schedule was Inflation Adjusted to Rates/Brackets 2009 Taxable Income

Figure 4.2: The Cost ofTax Taxation* Tax Average Tax Rate Average Tax Rate Amount Amount
$125 1.42% Political Process 2.90% 4.03% 4.77% $250 $377 $527 2.5% 2.5% 2.51% 2.63% 2.78% 3.39% 4.17% 4.88% 5.58% 5.94%

$5,000 $71 Indirect Cost: Lobbying $10,000 and $290 Rent-Seeking Cost $604 $15,000 $20,000 $30,000 $50,000 $75,000 $100,000 $150,000 $200,000 $954 $1,654 $3,054 $4,804 $6,554 $10,054 $13,554

$834 5.51% Tax Levied Action: $1,695 6.10% 6.41% 6.56% $3,127 $4,877

$8,377 Effect: 6.70% Prices Change $11,877 6.77%

Figure 5.5 also shows what the average tax rates are for various incomes and taxes under the current tax system in South Carolina. In the right columns it also shows what the taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The Direct the 1959 indexed tax rate structure is more uniformly progressive, figure clearly shows that Cost: Indirect Costs: Tax Revenue Collected especially at higher levels of incomes. It keeps tax rates extremely low for the lowest income Behavioral Changes individuals in the state. Compliance Cost Figure 5.5 also shows that the current tax system charges all income groups more in Enforcement Cost taxes than an indexed rate schedule. The only exception Administrative Cost is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain stagnant, the state becomes a relatively high-tax state. This has a negative impact on
4

This report is available at http://www.bcb.sc.gov/BCB/bea/exemptions.pdf.

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UNLEASHING CAPITALISM

manufacturing property tax in the country. In Figure 5.8 we present the effective propertyyou Furthermore, unlike private markets in which you must pay prices for the things tax rates data with government states, for comparison. The ranks benefits ofthe states are programs purchase, for Southeastern it is often possible to receive the given for government out of all 50 states. The ‘net tax’pay. ‘effective taxwill be additional lobbying and rent-seekingat $25 while making others and Thus, there rate’ are calculated based on property valued costs million ($12.5 million in machineryprograms will be funded, or whoin inventories, and $2.5 associated with the fight over which and equipment, $12.5 million will obtain the benefits, million in revenue is Notice that example, the American Associationon industrial property is when the fixtures). spent. For South Carolina’s effective tax rate of Retired Persons was over 7.8 times higher than the most industry-friendlyfundingDelaware. (Delaware million for among the groups that successfully lobbied for the state, of a one-time $2.9 is listed in the figure because it is theand community based services such as home delivered meals in seniors to receive home lowest-tax state.) 2009.5 To secure this funding they had to compete against other groups who also wanted additional government funding. The existence of this opportunity for rent seeking, and a tax system that allowsIndustrial Property Taxes up allocating state resources to those with Figure 5.8: for frequent amendments, winds in Southeastern states*, 2007 the most political power, and not necessarily to welfare enhancing programs or to those most State Rank Net Tax Effective Tax Rate in need (Holcombe 2001). (of 50) South Carolina Figure 1 the tax itself will cause additional indirect costs, highlighted $1,864,900 3.73% Returning to 4.2, in the lower right box in 4 figure. The $1,291,050 the first of these costs, the 2.58% behavioral changes, is Mississippi associated with distortions in the behavior of producers and consumers in response to the tax. 2.53% Texas 6 To economists these costs are known as the $1,264,358 cost’ or ‘excess burden’ of taxation. ‘deadweight Tennessee 10 Whenever a tax is imposed, individuals will $1,033,544away from the2.07% that is taxed to substitute activity otherWest Virginia are now14 activities that comparatively cheaper. As an illustrative 1.67% suppose South example, $833,234 Carolina imposes a new $100 tax on each candy bar sold in the state. Further assume this Louisiana 17 $783,407 1.57% would drive the price so high that candy bar sales would fall to zero. The tax would collect no Georgia 20 $760,381 1.52% revenue, but it clearly would still have a cost to society. Consumers who like to eat candy bars are now worse off because 24 are not consuming them, and the producers of candy bars are they Florida $677,683 1.36% worse off as well due to the lower number of candy bars sold. 1.11% Alabama 35 $533,776 Consumers may also change where they make their purchases to avoid the tax, or if North Carolina 37 $491,071 0.98% possible, where they live. South Carolinians living on the Georgia border might now drive to Georgia to buy candy bars,47 chocolate lovers might even decide to move to another state. or 0.65% Kentucky $327,100 These are all costs of taxation that must be considered, and the easier it is for consumers to Virginia 49 $241,498 0.48% find substitute goods, move, or shop across the border the larger are these indirect costs. Delaware 50 $238,840 It is important not to forget that business firms will also have0.48% an incentive to change their Source: National Association of Manufacturersa(2009)reduces the profitability of any one use of a behavior in response to taxes. When tax * Taxes measured in the states’ largest city business’s resources, it means that other only. become more profitable by comparison, and the uses firm will make adjustments as a result, further increasing the behavioral costs of the tax. Like Importantly, South Carolina’s effective tax rate is taxes. 2.5 times greater than the consumer, firms can also move to areas that impose lower almost Again, the easier it is for Georgia’s tax, and almost 4 times greater than a tax, the larger will be the South Carolina at a firms to change their behavior in response to North Carolina’s. This puts indirect behavioral serious disadvantage, in terms of its ability to attract and keep industry. Since South Carolina costs of taxation. has the The other indirect costs on industrial4.2 are the should be no surprise that it and highest tax in the country in Figure property, it compliance, enforcement, has one of the lowest per Every tax must andadministered and enforcedthe country. authority, and administrative costs. capita incomes be economic growth rates in by a taxing Although it is probably not critical that South Carolina set its tax rate to the lowest in there will be costs associated with these activities. These are the least expensive indirect costs the a country, ittax revenue, generally amounting to less than three percent (Payne 2003). as share of should definitely make it at least competitive for the Southeast. Since Georgia’s rate is effectively 1.52considerable at 22.2 Carolina’s dollar of tax revenue (Moody, Compliance costs, however, are percent and North cents per is just under 1 percent, a rate at around 1and Hodge 2005). This cost includes themore industry. Working the reduce the Warcholik, percent might be sufficient to attract hours of book keeping, to time spent various taxes applied theindustry would seriously address changes in tax laws, etc. filling out tax forms, to hiring of accountants to improve the state’s competitiveness. Such a significant reduction in taxes on industrial property would obviously lead to a reduction in tax revenues on industrial property, at least initially. However, the overall 5 Legislative update March 17, 2009 vol. 26, no. 09 http://www.scstatehouse.gov/reports/hupdate/lu2609.htm#e3 revenue may in fact increase once the growth rate in the state begins to pick up and more AARP Carolina industry moves into the state.South Furthermore, if the official tax rates are lowered, then the News state
http://www.aarp.org/states/sc/advocacy/articles/general_assembly_continues_to_protect_older_south_carolina.ht ml

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77 13 7

Presumably the original intent of imposing a $0.82rate every $1.00 of tax revenue All told, these costs add up to between $0.60 and tax for schedule with graduated marginal tax rates was to make the incomecosts progressive.Carolina economy somewhere raised. In other words, one dollar of taxes tax the South However, what progressivity exists in the state’s income tax structure is due to the zero tax on thecost/benefit analysis of between $1.60 and $1.82. This has significant implications for first $2,630 of income, and because projects graduated marginal tax rates. However, benefits of marginal tax rate government of the funded through taxation. A project with since the $150 million that increases$125 million in taxes toin income, as shown to undertake once these additional costs requires over such small steps fund is not efficient in Figure 5.5, most of the progressivity occurs at lower income levels, not higher levels of income. At higher income levels, the of taxation are considered. averageWhile total state and local all. This nature of the current tax amounts tocontradictory tax rate hardly increases at tax revenue in South Carolina is directly around $12 to the goal true cost of these So although on the Carolinaiteconomy is in the tax satisfies the billion, the of progressivity. taxes on the South surface appears that the range of $19 to vertical equity condition, it really does this only at the lower income levels reducing the $22 billion. wealth of these lowest income taxpayers, not the intended consequence.

SOUTH CAROLINA’S TAX BURDEN: A COMPARISON Figure 5.5: South Carolina income tax: Current tax rates compared to In 2006, South Carolina’s total state taxes per capita2009the 47th highest in the nation inflation-indexed rates, were

at $2874 according to the U.S. Census. This was lower than Georgia’s $3321 and North Carolina’s $3384. This is not the best measure of tax burden Income Tax Rates/Brackets if 1959 simply though, because some states are Tax Current Income Tax Schedule was Inflation Adjusted to richer than others. Thus, a more appropriate measure of tax burden is tax revenue as a percent Rates/Brackets of state income. Using this measure, South Carolina’s tax burden 2009 is higher. According to calculations by the Federation of Tax Administrators, Tax Carolinas’s total state and local South Tax Average Tax Rate taxTaxable Income Amount Average Tax Rate Amount nation. 6 As a percent of income, burden as a percent of income is the 44th highest in the South Carolina has the lowest tax burden of our neighboring states. $5,000 $71 1.42% 2.5% Figure 4.3 shows South Carolina’s taxes as a $125 of personal income compared to share $10,000 $290 $250 2.90% 2.5% the overall U.S. average. The first set of columns show the comparison for state taxes only, while the final set of columns show combined state and local taxes. A positive number in the $15,000 $604 $377 4.03% 2.51% ‘difference’ column means South Carolina’s taxes are higher than the U.S. average. $20,000 $954 $527 4.77% 2.63% $30,000 $50,000 $75,000 $100,000 $150,000 $200,000 $1,654 $3,054 $4,804 $6,554 $10,054 $13,554 5.51% 6.10% 6.41% 6.56% 6.70% 6.77% $834 $1,695 $3,127 $4,877 $8,377 $11,877 2.78% 3.39% 4.17% 4.88% 5.58% 5.94%

Figure 5.5 also shows what the average tax rates are for various incomes and taxes under the current tax system in South Carolina. In the right columns it also shows what the taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, especially at higher levels of incomes. It keeps tax rates extremely low for the lowest income individuals in the state. Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain stagnant, the state becomes a relatively high-tax state. This has a negative impact on
6

http://www.taxadmin.org/FTA/rate/06stl_pi.html.

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manufacturing property taxas a Percent In Figure 5.8 we present the effective property tax Figure 4.3: Taxes in the country. of Personal Income: South Carolina rates data for Southeastern states, for comparison. The ranks given for the states are out of all 50 states. The ‘net tax’ andversus the U.S. are calculated2006 on property valued at $25 ‘effective tax rate’ Average, based million ($12.5 million in machinery and State Only $12.5 million State and Local and $2.5 equipment, in inventories, million in fixtures). Notice that South Carolina’s effective tax rate on industrial property is S.C. US Avg. Difference S.C. US Avg. Difference over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware is listed in Tax Revenue 5.97 6.48 -0.50 9.58 10.89 -1.31 the figure because it is the lowest-tax state.)
Property 0.01 Sales and gross receipts 3.23 General sales 2.45 Selective sales 0.78 State Motor fuel (of 50) 0.39 Rank Alcoholic beverage 0.11 South Carolina 1 Tobacco products 0.02 0.03 MississippiPublic utilities 4 Other 0.22 Texas 6 Individual income 2.10 Tennessee income 10 Corporate 0.23 Motor vehicle license 14 0.12 West Virginia Other taxes 0.28 0.11 -0.10 3.03 0.20 2.07 0.39 0.97 -0.19 0.33 0.07 Net Tax 0.04 0.07 $1,864,900 0.13 -0.11 0.10 -0.07 $1,291,050 0.36 -0.14 $1,264,358 2.24 -0.14 $1,033,544 0.43 -0.20 0.17 -0.05 $833,234 0.49 -0.20 3.05 3.27 3.45 3.75 2.53 2.57 0.93 1.18 0.39 Effective 0.34 Rate Tax 0.11 0.05 0.02 3.73% 0.14 0.09 2.58% 0.22 0.31 0.45 2.53% 2.10 2.45 2.07% 0.23 0.48 0.14 1.67% 0.19 0.61 0.75 -0.22 -0.30 -0.04 -0.26 0.06 0.06 -0.11 -0.13 -0.14 -0.35 -0.25 -0.05 -0.13

Figure 5.8: Industrial Property Taxes in Southeastern states*, 2007

Louisiana Florida

17

$783,407

1.57% 1.52% 1.36%

Georgia Sources: U.S. Census Bureau (2009) 20 Bureau of Economic $760,381 and Analysis (2008). 24 $677,683

1.11% Alabamastate taxes as a percent of personal income in South Carolina are approximately 35 $533,776 Total nine North half percent, just less than one and $491,071 and a Carolina a half percent lower than the U.S.average.This 37 0.98% difference is relatively small—South Carolina’s state taxes are just under the average state. 0.65% Kentucky $327,100 When examining individual47 state tax sources, nine out of the thirteen categories fall below the $241,498 0.48% U.S. Virginia most notably 49 property taxes, state income taxes, and state corporate taxes. average, state However, these differences 50 less than half a $238,840 are percent from the U.S. average. Delaware 0.48% When localAssociation of Manufacturers (2009) taxes are included, the picture remains mostly unchanged, with the Source: National exception that becausethe states’ largest city only. local option sales taxes, South Carolina’s state * Taxes measured in many other states have and local sales tax burden is below the U.S. average. In addition, because of South Carolina’s relatively low local South Carolina’s effective we fall further below the U.S.greater than Importantly, residential property taxes tax rate is almost 2.5 times average on relative property almost times greater than North Carolina’s. that relative to other states Georgia’s tax, andtaxation.4Nonetheless, the conclusion remainsThis puts South Carolina at a South disadvantage, in terms or at the U.S. average. keep Carolina tax South Carolina seriousCarolina is just under of its ability to attract andSouth industry. Sincepolicy needs to continue to focus on remaining a relatively low property, has the highest tax in the country on industrialtax state. it should be no surprise that it has one of the lowest per capita incomes and economic growth rates in the country. Although it is EDGE LIVING ON THE probably not critical that South Carolina set its tax rate to the lowest in the country, it should definitely make it at least competitive for the Southeast. Since Georgia’s rate is effectively 1.52 percent and North Carolina’s is just underlarger when it is Earlier we discussed how the behavioral costs of taxation become 1 percent, a rate at around people to avoid the tax. According attract U.S. Census, 40.9 percentto reduce the easier for 1 percent might be sufficient to to the more industry. Working of the state’s various taxes applied to industry would seriously improve This is up competitiveness. 1990 2008 population lived in counties bordering other states. the state’s from the 2000 and Census Such a the share in border counties was 40.8 and 40.4 percent, respectively. South when significant reduction in taxes on industrial property would obviously lead to a reduction in tax revenues has increased over the last decade nearly twelve percent, but it has Carolina’s total population on industrial property, at least initially. However, the overall revenue may in fact border counties. growth rate in the state begins to pick up and more grown even faster in increase once the industry moves into two state. Furthermore, if Metropolitan Statistical Areas (MSA’s), which In addition, the of South Carolina’s the official tax rates are lowered, then the state are defined in part by the magnitude of mobility within the area, spill directly across the

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79 13 9

Presumably The implication is of imposing tax rate schedule easily rise with border of the state.7 the original intentthat the indirectacosts of taxation can with graduated marginal in the tax was to make the income taxportion of the However, what progressivity increases tax rates rates because a considerable progressive. state’s consumers, producers, exists in the can easily crosstax structure is due to the taxes. on the first $2,630 of income, and workers state’s income the border to escape high zero tax and because of the graduated South Carolina’s tax burden is essentially atmarginal average, While we have seen that marginal tax rates. However, since the the U.S. tax rate increases over such small how South Carolina shown in Figure neighboring states. Figure 4.4 let’s take a closer look at steps in income, as compares to our 5.5, most of the progressivity occurs total taxesincome levels, not higherincome for income. At higher income levels, The shows at lower as a percent of personal levels of South Carolina and its neighbors. the average taxthe table includes onlyat all. taxes,nature of the current includes both state and local left half of rate hardly increases state This while the right half tax is directly contradictory to the goal of progressivity. So although on the surface it appears that the tax satisfies the taxes. vertical equity condition, it really does this only at the lower income levels reducing the wealth of these lowest4.4: Taxes as anot the intendedPersonal Income: South Figure income taxpayers, Percent of consequence.

Carolina versus Neighboring States, 2006 Figure 5.5: South CarolinaState Only tax: Current tax rates compared to income State and Local inflation-indexed rates, 2009 Tax Tax Burden
Burden % Difference % of Difference of Income from SCIncome Tax Rates/Brackets if 1959 Tax Income from SC Current Income Tax Georgia 5.66% -0.32% Schedule was Inflation Adjusted to 10.31% 0.73% Rates/Brackets 2009 North Carolina 7.22% 1.25% 10.51% 0.94% South Carolina 5.97% 9.58% Tax Tax Average Tax Rate Rate Taxable Income Average Amount Average Tax0.46% Amount 0.83%
Sources: U.S. Census Bureau (2009) and Bureau of Economic Analysis (2008).

$5,000

$71

1.42%

$125

2.5%

$10,000 $290 $250 2.90% 2.5% When only state taxes are considered, South Carolina’s tax burden 2.51% than North is lower $15,000 $604 $377 4.03% Carolina, but not Georgia’s. Both North Carolina and Georgia have slightly higher taxes as a $20,000 $954 $527 4.77% 2.63% percent of personal income. On average, our neighboring states have tax burdens that are .46 $1,654 $834 5.51% higher $30,000 as a percent of income. When both state and local taxes are2.78% considered, South Carolina’s tax burden $3,054 average,6.10% is, on 0.83 less than $1,695 surrounding states. The combined state $50,000 3.39% and local tax burden in South Carolina remains slightly lower than our neighbors. $75,000 $4,804 $3,127 6.41% 4.17% $100,000 $6,554 $4,877 6.56% 4.88% $150,000

Figure 4.5: Comparison of 2006 State Tax Rates
$10,054 6.70% $8,377

5.58%
Sales 5.94%

Corporate Income $200,000 Individual Income 6.77% $13,554 $11,877

Tax Rates Brackets Tax Rates Brackets Tax Rate Food Exempt GeorgiaFigure 5.5 1.0-6.0 6 the average6 tax rates are for various incomes and taxes 1 4* Yes also shows what North the current 6.0-7.75 3 6.9 1 under Carolina tax system in South Carolina. In the right columns 4.25* shows Yes the it also what South and average .0.-7.0 Carolina 6 be if the 1959 tax tables were indexed for inflation. The 5 1 6.0 Yes taxes tax rates would

figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, Notes: * Georgia and North Carolina food sales are It keeps tax rates extremely low for Administrators at especially at higher levels of incomes. subject to local sales taxes. Source: Federation ofthe lowest income http://www.taxadmin.org/fta/rate/tax_stru.html. individuals in the state. Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain 7 stagnant, the MSA’s becomes a areas of high high-tax and social interaction,awhere component counties negative impact on The purpose of state are to identify relatively economic state. This has
must have either 25 percent of employed residents commuting to the central county or at least 25 percent of the employment filled by a resident of the central county (Hammond 2003).

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manufacturing property tax in the country. In Figure 5.8 we has a highereffective property tax Finally, Figure 4.5 demonstrates that South Carolina present the or the same tax rates rates its neighbors in two ofstates, for most visible taxes: individual income,states are out of all over data for Southeastern the three comparison. The ranks given for the corporate income, 50 states. The ‘nettaxes.and ‘effective taxhas a are calculated based on property valued at $25 and general sales tax’ South Carolina rate’ lower state corporate tax rate than both of its million ($12.5 million in machinery and equipment, $12.5 million in inventories, andSouth neighboring states, but the individual income tax and sales tax are higher than both. $2.5 million inhas the highest state sales tax rate at least two percent higher than neighboring Carolina fixtures). Notice that South Carolina’s effective tax rate on industrial property is over 7.8 and North Carolina. most industry-friendly state, Delaware. (Delaware is listed in Georgia times higher than the the figure because it is the lowest-tax state.)

TAX DIFFERENTIALS WITHIN SOUTH CAROLINA Figure 5.8: Industrial Property Taxes in Southeastern states*, 2007
Let us now take a closer look at the tax burden in South Carolina by Rate State Rank (of 50) Net Tax Effective Tax examining local tax burdens by county.8 Figure 4.6 shows the tax quotient for each county in South Carolina 1 3.73% fromSouth Carolina Census of government $1,864,900 the most recent finances, which was in 2002. The tax quotient is Mississippi $1,291,050 2.58% calculated as the amount of 4 county’s revenue generated through county and local taxation the relative to the same measure6for all counties $1,264,358 A tax quotient greater than one, for in the nation. 2.53% Texas example, would imply that the county has an above average reliance on tax collections Tennessee 10 $1,033,544 2.07% relative to other counties in the United States and is likely at a competitive disadvantage in West Virginia 14 $833,234 1.67% terms of business and household location decisions. Louisiana Florida Alabama North Carolina Kentucky Virginia Delaware 17 24 35 37 47 49 50 $783,407 $677,683 $533,776 $491,071 $327,100 $241,498 $238,840 1.57% 1.36% 1.11% 0.98% 0.65% 0.48% 0.48%

Figure 4.6: Comparative 2002 Tax Burden by County Tax Quotient Georgia 20 $760,381 1.52%

Source: National Association of Manufacturers (2009) * Taxes measured in the states’ largest city only.

Importantly, South Carolina’s effective tax rate is almost 2.5 times greater than Georgia’s tax, and almost 4 times greater than North Carolina’s. This puts South Carolina at a 0.5 > serious disadvantage, in terms of its ability to attract and keep industry. Since South Carolina 0.5 1.0 has the highest tax in the country on industrial property, it should be no surprise that–it has one of the lowest per capita incomes and economic growth rates in the country. 1.0 – 1.5 Although it is probably not critical that South Carolina set its tax rate to the lowest in 1.5 the country, it should definitely make it at least competitive for the Southeast. < Since Georgia’s rate is effectively 1.52 percent and North Carolina’s is just under 1 percent, a rate S.C.: 1.12 at around 1 percent might be sufficient to attract more industry. Working1.00 reduce the to U.S.: various taxes applied to industry would seriously improve the state’s competitiveness. Such a significant reduction in taxes on industrial property would obviously lead to a 8 reduction Carolina, municipal governments are fiscally more at least initially. However, the overall In South in tax revenues on industrial property, important than county governments. The figure above aggregates municipal taxes up to the county level. rate in the state begins to pick that have a tax revenue may in fact increase once the growth Thus there may be areas within a countyup and more quotient above or into the state. average. However, for the purpose rates are lowered, then the vary industry moves below the county Furthermore, if the official taxof examining how tax differentialstate
geographically within South Carolina, as well as their impact on employment and number of business establishments, the county level is an appropriate unit.

CHAPTER 4:CHAPTER 5:OMES TO TTAX RIN SOUTH CAROLINA WHEN IT C SPECIFIC AXES EFORMS

81 13 11

Notes: TBi represents share of original intent of imposing comes from county and local tax revenue. TBN Presumably the total county government revenue that a tax rate schedule with graduated represents the average of this same calculation for all U.S. counties. Each county’s tax quotient (TQi) is then determined by marginal tax rates was to make the tax burden tax progressive.Source: Authors’ calculations from U.S. income (TQ = TB ÷ TB ). However, what progressivity dividing the county’s tax burden by the nation’s i i N exists Bureau (2009). income tax structure is due to the zero tax on the first $2,630 of income, Census in the state’s

and because of the graduated marginal tax rates. However, since the marginal tax rate increases over quotient below one, income, would indicate a tax5.5, mostlower than the U.S. A tax such small steps in which as shown in Figure burden of the progressivity occurs atislower income of the 46 counties in South Carolina. Nonshaded income levels, the average, found in 19 levels, not higher levels of income. At higher counties are those average tax rate hardly0.5 or lower all. ThisThe average county in South Carolina has a tax with tax quotients of increases at (0.5>). nature of the current tax is directly contradictory to the goal of progressivity. So although Bamberg County with 2.90 and Marlboro County quotient of 1.12, with the largest being on the surface it appears that the tax satisfies the vertical equity condition, Across alldoes this only at the lower incomenegativereducing the being the lowest at 0.05. it really South Carolina counties, there is a levels relationship wealth of the tax quotients and both 2002 employment and Census reported business between these lowest income taxpayers, not the intended consequence. establishments. A one-percent increase in the county’s tax quotient is associated with a -0.07 percent decline South Carolina income tax: of businesstax rates compared to Figure 5.5: in that county’s reported number Current establishments and a -0.02 percent decline in employment.

inflation-indexed rates, 2009

TAXATION AND ECONOMIC GROWTH: THE EMPIRICAL EVIDENCE

Income Tax Rates/Brackets if 1959 Tax Current Income Tax Schedule economic research has Over the past thirtyRates/Brackets years a considerable amount of was Inflation Adjusted to been 2009 undertaken in an effort to understand the relationship between taxes and economic growth. Tax Average institutions of While some minimal Tax ofAverage Tax Rate necessary to support theTax Rate level government is Taxable Income Amount Amount capitalism, governments generally grow way beyond this optimal level. This is an issue explored in more detail $71 in Chapter 12.1.42% $5,000 $125 2.5% In a study for the Joint Economic Committee of the U.S. Congress, Richard Vedder $10,000 $290 $250 2.90% 2.5% and Lowell Gallaway (1998) examine the relationship between the size of government and $15,000 $604 $377 4.03% 2.51% economic growth. They found that the amount of state and local spending that maximized economic growth to be 11.42 percent of Gross Domestic Product. In 2007, South Carolina $20,000 $954 $527 4.77% 2.63% state and local spending was 12.15 percent of State Gross Domestic Product, suggesting that $30,000 $1,654 $834 5.51% 2.78% South Carolina state and local government exceeds the size necessary to maximize economic 9 $50,000 $1,695 6.10% 3.39% growth. In terms of $3,054 percentage points, that may not seem like a lot of difference, but it represents over a billion dollars in state and local spending in South Carolina. However, state $75,000 $4,804 $3,127 6.41% 4.17% and local spending has increased by 41 percent between the years 1997-2007 (adjusted for $100,000 $6,554 $4,877 6.56% 4.88% inflation), while overall State Gross Domestic Product grew at only 24 percent. Thus, state $8,377 $150,000 6.70% 5.58% and local government$10,054 nearly double the rate of growth over roughly the last decade. grew at Looking there $200,000 specifically at taxes,6.77% is a large literature showing a strong negative $13,554 $11,877 5.94% relationship between taxes and economic growth. Mullen and Williams (1994) find that higher marginal income tax rates hurt economic growth. Jay Helms (1985) finds that taxation Figure 5.5 also shows what the average tax rates are for various incomes and taxes used to fund transfer payments significantly retards the right columns it also (1992) what the under the current tax system in South Carolina. In economic growth. Bartik shows provides an excellent summary of the research on state and local taxes and economic growth and taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The concludes that state and local taxes have a consistently negative effect on state and city figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, economic at higher levels of business location decisions, it is not low for the lowest income especially growth. In termsof incomes. It keeps tax rates extremely surprising that he finds tax decisions play a much larger role in studies that look across suburban jurisdictions than across individuals in the state. Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the 9 Vedder and Gallaway (1998) looked at state and local spending over time, and thus used Gross Domestic table. As South Carolina income taxes appropriate to use State Gross Domestic Product whatremain continue to climb while the tax brackets used to Product (GDP). Looking at South Carolina, it is stagnant, to as Gross State Producta(GSP). State GDP in 2007state. This the Bureau of Economic Analysis the state becomes relatively high-tax according to has a negative impact on be referred
(2009) was $151,703,000,000 and state and local government expenditures were $18,410,000,000. For a more recent look at the size of government and growth, see Taylor and Brown (2006).

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manufacturing property tax in the country. In determines we present the effective property tax states. Taxes are one part of the package that Figure 5.8 business location, including climate, rates data for Southeastern states, for comparison. The ranks given for the decide are out of all local amenities, workforce quality, and public infrastructure. Once firms states on a region, 50 states. taxes‘net tax’ and ‘effective tax rate’ are calculated based on property valued at $25 however, The can play a much larger role in their location choice. million A recent study in machinery and equipment,(2004) providesin inventories, and $2.5 ($12.5 million by Holcombe and Lacombe $12.5 million strong evidence of the million in fixtures). of taxes. BySouth Carolina’s effective taxacross state borderproperty is cross-border effect Notice that comparing counties located rate on industrial from one over 7.8 Holcombe and Lacombe are able to effectively control for geographic similarities another, times higher than the most industry-friendly state, Delaware. (Delaware is listed in the figure because it is the lowest-tax state.) markets leaving only differences in state policy. such as climate, workforce, and proximity to Looking at the 30-year period from 1960 to 1990, they find that states raising their income tax rates faster than their neighbors had slower economic growth, leading to an average decline in per capita income Industrial Property Taxes looks at the relationship between taxation Figure 5.8: of 3.4 percent. Reed (2008) also in Southeastern states*, 2007 and income growth at the state level from 1970-1999 using several different methodological State Rank (of 50) Net Tax approaches. He finds ‘robust’ evidence that taxes used to fund Effective Tax expenditures are general fund Rate South Carolina 1 $1,864,900 3.73% negatively related to growth. Plaut and effect Mississippi Pluta (1983) find that high taxes have a negative2.58% on employment 4 $1,291,050 growth. Interestingly they find a positive relationship between property taxes and industrial 2.53% Texas 6 $1,264,358 growth. They hypothesize that firms prefer locally-dominated tax systems to state-dominated Tennessee 10 $1,033,544 tax systems that are more prevalent in the South because the benefits 2.07% to the high local related 10 property taxes are likely to14 accrue locally. Conversely, firms may avoid states where most West Virginia $833,234 1.67% taxes are levied at the state level because there is not as clear of a link between taxes paid and Louisiana 17 $783,407 1.57% benefits received from the firm’s perspective. Georgia for the Federal Reserve Bank$760,381 20 1.52% Writing of Atlanta, Becsi (1996) examines how state and Florida local taxes affect relative state economic growth. He finds 1.36% a significant negative 24 $677,683 relationship between relative state marginal tax rates and relative state growth from 1961 to 1.11% Alabama 35 $533,776 1992. The effect of differences in marginal tax rates across states helps to explain not only North Carolina 37 short-run differences in growth across states, $491,071the persistence0.98% but also of growth differentials among states over time. 0.65% Kentucky 47 $327,100 More recently, Poulson and Kaplan (2008, 67) also look at the effect of taxes on state Virginia 49 $241,498 0.48% economic growth. They find the following: Delaware 50 $238,840 0.48% Source: National Association that higher marginal tax rates had a negative impact on The analysis reveals of Manufacturers (2009) * Taxes measured in the states’ largest city only. economic growth in the states. … Importantly, South Carolina’snegative impactrate income taxes on economic than The analysis underscores the effective tax of is almost 2.5 times greater Georgia’s tax, andthe states. times greater than North Carolina’s. This puts South Carolina at a growth in almost 4 Most states introduced an income tax and came to rely on serious the income taxin terms of its ability to attract and Jurisdictions that imposed an disadvantage, as the primary source of revenue. keep industry. Since South Carolina has the income tax to the country given level ofproperty, it should be no surprise that it has highest tax in generate a on industrial revenue experienced lower rates of one of the lowest per capita incomes and economic that relied on alternative taxes to economic growth relative to jurisdictions growth rates in the country. Althoughthe is probably not critical that South Carolina set its tax rate to the lowest in generate it same revenue. the country, it should definitely make it at least competitive for the Southeast. Since Georgia’s ratenot effectively 1.52 percent and North Carolina’s is just under 1 locate. If a rate Taxes is only impact where businesses locate, but also where people percent, taxes at around 1 relative to the benefits received from government spending from to reduce the get too high percent might be sufficient to attract more industry. Working government’s various taxes applied tomove elsewhere.seriously improveon this was by Cebula (1974) who activities, people will industry would An early paper the state’s competitiveness. Such a significant reduction to areas with low property tax levels. Cebula’s lead has found that migrants tended to move in taxes on industrial property would obviously work to a reduction in tax revenues on industrial property, at least initially. However, the overall revenue may in fact increase once the growth rate in the state begins to pick up and more 10 In 2006, 62.4 percent of South Carolina’s state and the tax revenue rates are lowered, This the state industry moves into the state. Furthermore, if localofficial tax came from state taxes. then places the
state right near the median of all states (62.2 percent). So South Carolina has a comparative advantage in this area over North Carolina (68.6 percent) in this respect but is nowhere near Georgia (54.9 percent).

CHAPTER 4:CHAPTER 5:OMES TO TTAX RIN SOUTH CAROLINA WHEN IT C SPECIFIC AXES EFORMS

83 13

Presumably the others intent Niskanen (1992). Conway, Smith with graduated been replicated by manyoriginal such as of imposing a tax rate schedule and Houtenville marginal taxatrates was to make the income tax progressive. However, what progressivity (2001) look migration by elderly Americans and find that elderly migration is motivated in exists in thepersonalincome tax structure is due to the zero (2009) the first $2,630 of income, part by low state’s income taxes and estate taxes. Cebula tax on updated his earlier work to and because of at the 2000-2005 period and he findsHowever, since namely that individuals look specifically the graduated marginal tax rates. similar results, the marginal tax rate increases over such smallwith their income, as shown in likely to5.5, most areas with lower tax during this period ‘voted steps in feet’ and were more Figure move to of the progressivity occurs at lower income levels, not higher levels of income. At higher income levels, the burdens. average tax rate hardly increases at all. This nature of the current tax is directly contradictory to the goal of progressivity. So although on the surface it appears that the tax satisfies the vertical equity condition, it really does this only at the lower income levels reducing the CONCLUSION wealth of these lowest income taxpayers, not the intended consequence. The aim of this chapter has been to clarify the true costs of taxation on the South Figure 5.5: South Carolina income tax: Current tax rates compared to Carolina economy, and to explore how South Carolina’s taxes compare to its neighbors and the nation. inflation-indexed rates, 2009 According to the best economic estimates, each dollar of tax revenue really costs the South Carolina economy somewhere between $1.60 and $1.82. Currently using these Income slight competitive advantage measures of tax burden Current CarolinaTax itself at a Tax Rates/Brackets if 1959 Tax in South Income puts Schedule was The important point attracting businesses and households when compared to other states. Inflation Adjusted to is to Rates/Brackets 2009 maintain this competitive advantage. However, this does not mean there is not room for reform to increase the productivity of South Carolina. As was discussed in Chapter 2, the top Tax Tax Average Tax Rate Average Tax Rate slightly Taxable Income state income tax rates are higher than Georgia and Amount lower then North Carolina, but Amount there are six tax brackets with an income of just over $13 thousand dollars placing you in the $5,000 $71 $125 top bracket for single or joint filing. 1.42%median household income in 2.5% Carolina for The South $10,000 $290 $250 2.90% 2.5% 2007 was $43,508 effectively placing over fifty percent of the population in the highest tax bracket. In North Carolina a single filer must earn at $377 $60,000 and $100,000 for a joint least $15,000 $604 4.03% 2.51% return to enter the top bracket of 7.75 percent. In addition, our state and local governments $20,000 $954 $527 4.77% 2.63% are growing faster than overall state growth. $30,000 studies have a long history of consistently finding that state taxation hinders $1,654 $834 5.51% 2.78% Empirical development and economic growth 6.10% by constraining$1,695 the forces of capitalism. To promote $50,000 $3,054 3.39% economic growth, South Carolina must find ways to keep its overall tax burden low. The next $75,000 $4,804 $3,127 6.41% 4.17% chapter will explore several specific tax reforms that can help to accomplish this goal. $100,000 $6,554 $4,877 6.56% 4.88% $150,000 $200,000 $10,054 $13,554 6.70% 6.77% $8,377 $11,877 5.58% 5.94%

Figure 5.5 also shows what the average tax rates are for various incomes and taxes under the current tax system in South Carolina. In the right columns it also shows what the taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, especially at higher levels of incomes. It keeps tax rates extremely low for the lowest income individuals in the state. Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain stagnant, the state becomes a relatively high-tax state. This has a negative impact on

84 18 14

UNLEASHING CAPITALISM

manufacturing property tax in the country. In Figure 5.8 we present the effective property tax REFERENCES rates data for Southeastern states, for comparison. The ranks given for the states are out of all 50 states. The ‘net 1992. The Effects of State and Local Taxes on Economic Development: A Bartik, Timothy J. tax’ and ‘effective tax rate’ are calculated based on property valued at $25 million Review million in Research. Economic Development Quarterly 6(1): 102-111.and $2.5 ($12.5 of Recent machinery and equipment, $12.5 million in inventories, millionZsolt. 1996. Do Statethat South Taxes Affect Relative State Growth? Federal Reserve Becsi, in fixtures). Notice and Local Carolina’s effective tax rate on industrial property is over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware is listed in Bank of Atlanta Economic Review 81(2): 18-36. the figure because it is the lowest-tax state.) Bureau of Economic Analysis. 2007. Gross Domestic Product by State [electronic file]. Washington: Bureau of Economic Analysis. Online: http://bea.gov/bea/regional/gsp/ (cited: January 15, 2007). Figure 5.8:J.Industrial Property Taxes in SoutheasternAnalysis for SMSAs Cebula, Richard 1974. Local Government Policies and Migration: An states*, 2007 in State the United States, (of 50) Rank 1965-1970. PublicTax Net Choice 19(l): 85-93. Effective Tax Rate Cebula, Richard J. 2009. Migration and the Tiebout-Tullock Hypothesis Revisited. American South Carolina 1 3.73% Journal of Economics and Sociology$1,864,900 68(2): 541-551. Mississippi 4 $1,291,050 2.58% Conway, Karen Smith and Andrew J. Houtenville. 2001. Elderly Migration and State Fiscal Policy: Evidence from the 1990 Census Migration Flows. National Tax Journal 54(1): 2.53% Texas 6 $1,264,358 103-123. Tennessee 10 $1,033,544 2.07% Feldstein, Martin. 1999. Tax Avoidance and the Deadweight Loss of the Income Tax. The West Virginia 14 $833,234 1.67% Review of Economics and Statistics 81(4): 674-680. Fullerton, Don and Diane Lim Rogers. 1993. Who Bears the 1.57% Lifetime Tax Burden? Louisiana 17 $783,407 Washington: The Brookings Institution. Georgia 20 $760,381 1.52% Hammond, George W. 2003. What’s in a Name? West Virginia Business and Economic Florida 24 $677,683 1.36% Review. Morgantown: Bureau of Business and Economics Research. Helms, L. Jay. 1985. The 35 Effect of State and Local Taxes on Economic Growth: A Time 1.11% Alabama $533,776 Series-Cross-Section Approach. The Review of Economics and Statistics 67(4): 574North Carolina 37 $491,071 0.98% 582. 0.65% Kentucky 47 $327,100 Holcombe, Randall G. 2001. Public Choice and Public Finance. In The Elgar Companion to Public William F. Shughart II and Laura Razzolini. Cheltenham: Edward Virginia Choice, eds. 49 $241,498 0.48% Elgar: 396-421. Delaware 50 $238,840 0.48% Holcombe, Randall G., and Donald J. Lacombe. 2004. The Effect of State Income Taxation Source: National Association of Manufacturers (2009) on Per Capita the states’ largest city only. * Taxes measured inIncome Growth. Public Finance Review 32(3): 292-312. Moody, J. Scott, Wendy P. Warcholik, and Scott A. Hodge. 2005. The Rising Cost of Complying South Federal Income Tax. Tax Foundation 2.5 times greater No. Importantly,with the Carolina’s effective tax rate is almostSpecial Report SSP than 138. Washington: 4 times greater Georgia’s tax, and almost Tax Foundation.than North Carolina’s. This puts South Carolina at a Mullen,disadvantage, in Martinof its ability 1994. Marginal Tax Rates Since South Carolina serious John K., and terms Williams. to attract and keep industry. and State Economic has the Growth. tax in the Science and industrial property, it should be no surprise that it has highest Regional country on Urban Economics 24(6): 687-705. Niskanen, lowest per capita incomes andfor a New growthConstitution. Journal of Economic one of the William A. 1992. The Case economic Fiscal rates in the country. Perspectives 6(2): 13-24. Although it is probably not critical that South Carolina set its tax rate to the lowest in Payne, James it should Costly Returns: The Burdens of the U.S. Tax System. San Francisco: the country, L. 1993. definitely make it at least competitive for the Southeast. Since ICS Press. Georgia’s rate is effectively 1.52 percent and North Carolina’s is just under 1 percent, a rate Pechman, Joseph A. might Who Paid theto attract more industry. WorkingThe reduce the at around 1 percent 1985. be sufficient Taxes: 1966-1985? Washington: to Brookings various Institution. to industry would seriously improve the state’s competitiveness. taxes applied Plaut, Thomas significant reduction in taxes on industrial property would obviously lead to a Such a R., and Joseph E. Pluta. 1983. Business Climate, Taxes and Expenditures, and State tax revenues on in the United States. Southern Economic Journal 50(1): 99reduction in Industrial Growth industrial property, at least initially. However, the overall revenue119. in fact increase once the growth rate in the state begins to pick up and more may Poulson, Barry W., and Jules Gordon Kaplan. 2008. tax Income Taxes and Economic industry moves into the state. Furthermore, if the officialStaterates are lowered, then the state Growth. Cato Journal 28(1): 53-71.

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Presumably the The Robust of imposing a tax rate schedule with graduated Reed, W. Robert. 2008.original intentRelationship between Taxes and U.S. State Income marginal tax rates was to make the income tax progressive. However, what progressivity Growth. National Tax Journal 61(1): 57-80. exists in the state’s income taxC. Hall. 2007. When zero tax onto Taxes:$2,630 of income, Ross, Justin M. and Joshua structure is due to the it Comes the first Focus on Being and because of the Chapter 5 marginal taxS.rates. However,Unleashing marginal tax Why Competitive graduated in Russell Sobel (ed.), since the Capitalism: rate increases over such small steps West Virginia Border in Figure 5.5,Fix It. of the progressivity Prosperity Stops at the in income, as shown and How to most Morgantown, WV: occurs Center forincome levels, not higher levels of income. At higher income levels, 69at lower Economic Growth, The Public Policy Foundation of West Virginia, pp. the average79. rate hardly increases at all. This nature of the current tax is directly contradictory tax to the goal of S. and ThomasSo although 2002. On the Measurementthat Rent tax satisfies the Sobel, Russell progressivity. A. Garrett. on the surface it appears of the Seeking and its verticalSocial Opportunity it really does this only at the115-136. equity condition, Cost. Public Choice 112(1-2): lower income levels reducing the wealth of these lowest income taxpayers, not the The Private Sector Impact of State and Local Taylor, Lori L, and Stephen P. A. Brown. 2006. intended consequence. Government: Has More Become Bad? Contemporary Economic Policy 24(4): 548-62. U.S. Census Bureau. 2009. State andincome tax: Current tax2003-04comparedfile]. Figure 5.5: South Carolina Local Government Finances: rates [electronic to Washington: U.S. Census Bureau. Online: http://www.census.gov/govs/www/estimate inflation-indexed rates, 2009 04.html (cited: August 11, 2009). Vedder, Richard K., and Lowell E. Gallaway. 1998. Government Size and Economic Growth. Washington: Joint Economic Committee. Income Tax Rates/Brackets if 1959 Tax Current Income Tax Schedule was Inflation Adjusted to Rates/Brackets 2009 Taxable Income $5,000 $10,000 $15,000 $20,000 $30,000 $50,000 $75,000 $100,000 $150,000 $200,000 Tax Amount $71 $290 $604 $954 $1,654 $3,054 $4,804 $6,554 $10,054 $13,554 Average Tax Rate 1.42% 2.90% 4.03% 4.77% 5.51% 6.10% 6.41% 6.56% 6.70% 6.77% Tax Amount $125 $250 $377 $527 $834 $1,695 $3,127 $4,877 $8,377 $11,877 Average Tax Rate 2.5% 2.5% 2.51% 2.63% 2.78% 3.39% 4.17% 4.88% 5.58% 5.94%

Figure 5.5 also shows what the average tax rates are for various incomes and taxes under the current tax system in South Carolina. In the right columns it also shows what the taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, especially at higher levels of incomes. It keeps tax rates extremely low for the lowest income individuals in the state. Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain stagnant, the state becomes a relatively high-tax state. This has a negative impact on

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