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South Carolina is known as a “red state” and a “conservative” state, and so one might be led to believe it’s a place where non-“progressive,” free-market policies reign. Certainly South Carolina has a reputation for being a “low tax state.” But the reputation is unearned.
A brief look at the legislature’s record on tax policy – perhaps the most fundamental free market issue – reveals a profound disconnect between reputation and reality.
In recent decades the legislature has wedded South Carolina to an economic policy based on uncompetitive tax rates for the masses and special tax incentives for favored businesses. Special tax favors have caused South Carolina to exempt more in sales and income tax than it actually collects, while concurrently maintaining the highest marginal tax rate on the lowest level of taxable income in the Southeast (and third in the nation).
The S.C. Policy Council has documented some of the results of this policy; income growth rates that trail the rest of the nation and anemic employment growth.
Despite this long record of failure, the legislature has decided to stay the course, as some numbers from the current legislative session demonstrate.
In the 2013 legislative year, the first year of the current two-year session, legislators introduced 17 different bills to raise taxes and/or fees, 71 bills to create or expand tax favors (tax incentives for favored groups), and only three bills to provide general tax cuts.
Of the bills introduced to raise taxes, one became law, and three passed at least one chamber (the House or Senate). Of the tax favor bills, seven became law, two passed both chambers, 10 passed one chamber, and two were passed out of a full committee. Of the three tax cut bills, none passed even the subcommittee level.
In the current 2014 legislative year the trend is the same. Seventeen bills have been introduced to raise taxes/fees, 25 have been introduced to provide tax favors, and two have been introduced to provide general tax cuts. Two of the tax increase bills have passed one chamber, and one has passed a full committee. Three of the tax favor bills have passed one chamber, and one has passed a full committee. The general tax cut bills have again failed to pass even a subcommittee.
It’s unclear why legislators persist in advocating failed tax policies while ignoring an approach that numerous studies have shown to be an effective path to economic growth. The general consensus in the empirical literature is that high tax rates (whether at the state or national level) hinder economic growth and low tax rates aid it.
Organizations such as the Tax Foundation, the National Center for Policy Analysis, and the Cato Institute have all found links between higher tax rates and lower economic growth; indeed the latter two organizations have found this link specifically on the state level. The Mercatus Center at George Mason University, moreover, has found that states with lower tax rates tend to experience higher rates of in-migration while high tax states experience the opposite.
Recent research based on the American Legislative Exchange Council’s Rich States, Poor States report (which ranks states economic outlook based on the free market nature of their labor, regulatory, and tax policies) has found that from 2002 to 2012 states ranked in the top 10 for economic outlook have outperformed states ranked in the bottom 10 in gross state product growth, migration, and non-farm payroll growth.
South Carolina has been ranked 31st in the report for the last two years. The evidence is clear: South Carolina lawmakers have the power to both ease the burden of government on the average citizen and improve state economic growth with the same policies. So what’s holding them back?
Shane McNamee is a policy analyst at the S.C. Policy Council.