SC study group gives sales tax increase initial OK

By JIM DAVENPORT

COLUMBIA, S.C.

South Carolina consumers would pay sales taxes again on groceries and start paying taxes on Internet music downloads, prescription drugs, electricity, water and a range of other items under a proposal that won initial approval Tuesday by a tax overhaul panel.

The Tax Realignment Commission expects to make its final decision in September on whether to send it to the Legislature to consider in its next session in January.

Burnett Maybank, the commission's chairman and a former state Revenue Department director, said the draft measure would leave state tax revenues about where they are but collect money from more sources and reduce the state's current 6 percent sales tax to 4.96 percent.

Maybank said that allows the state, over time, to collect more money from growing segments of the economy -- such as Internet music downloads, as other segments fade, such as music store CD sales.

While taxes would increase on a range of consumer items, they'd fall on others and leave the state collecting about the same amount in sales taxes, Maybank said.

"In terms of an individual consumer, I'm sure some will pay more and some will pay less," Maybank said.

While someone downloading music would pay more, "any time you bought a stereo, you'd be paying less," Maybank said.

It's who will pay more for necessities and how much of their income would go into higher taxes that has observers worried.

"You're adding sales tax back to a lot of necessities," said Don Weaver, a commission member and president of the South Carolina Association of Taxpayers.

"You're absolutely adding costs across the income spectrum -- but more across the bottom," said Matthew Gardner, executive director of Institute on Taxation and Economic Policy in Washington. Gardner's group studies state tax policies and is reviewing South Carolina's sales tax proposal. "It's hard to find items that you could tax that would have more of a regressive impact than groceries and utilities."

John Ruoff, research director for South Carolina Fair Share, said he was particularly concerned about the proposal to impose sales taxes on prescription drugs. "That has a real possibility of creating some real hardships," Ruoff said. That's particularly true for the state's uninsured.

Maybank noted prescription drugs are taxed when sold by a hospital or doctor's office, but not at a pharmacy. He said the only exceptions under the proposal would be for Medicaid and Medicare enrollees.

Ruoff said the tax argument is unnecessarily mired in the idea of avoiding an overall tax increase. "Revenue neutrality is not what we need today. We have a state that is facing a dire economic crisis," Ruoff said.

Instead, policymakers need to review the list of tax breaks and get rid of the ones the state doesn't need. For instance, he supports the panel's proposal to do away with a $300 sales tax cap on cars. "You're paying the same tax on a Chevy Aveo as you are on a Bugatti Veyron," a $1.7 million car, said Ruoff.

The car tax proposal would phase out the cap, raising it to $600 in 2011, $1,000 in 2012 and $1,200 in 2013 before it is eliminated altogether in 2014.

But Weaver thinks that's a bad idea, noting the sales tax on a $50,000 car would rise from $300 to $2,500. "To eliminate a cap completely, that's a huge tax increase," Weaver said. "I wouldn't vote for it today. I think it needs some tweaking."