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Questions and Answers
A Word on Taxes One of the most frequently debated topics in
state legislatures is tax policy. In South Carolina, almost every
legislative session brings calls for tax reform. These tax reform
proposals often involve reducing property taxes or income taxes, and
shifting more towards sales taxes or other revenue sources. A variety
of statistics and figures can be used to support essentially any side of
any of these debates. For this reason, it is extremely useful and
necessary to have some solid background on the tax structure in South
Carolina, how it has changed over time, and how the state compares to
other states. There are many ways to compare the
tax burden in a state to other states. There are a few major choices
that need to be made before we can examine the tax burden in South
Carolina. First, do we look at just state level taxes? Do we also
consider local level taxes? States differ sharply in terms of the
division of responsibilities between the state and local government
levels. In some states, for example, the responsibility for providing
education can fall much more at the state level while in others it can
be primarily a function of local governments. Therefore, it is crucial
to consider tax burdens at both the state and the local levels;
otherwise, the result could be misleading given differences in what each
level of government is charged with. As such, an appropriate method for
analyzing tax burdens is to look at the combined state and local tax
burden. This way, we do not need to be specifically concerned with the
division of responsibility between the state and local governments.
Next, do we look just at tax collections, or should
we also consider non-tax sources of revenue? In many states, non-tax
revenues are an important, and often increasingly important, source of
government finance. Non-tax revenues can include such items as higher
education tuition, state park entrance fees, court fees, and hospital
charges paid to state or local governments. To gain a full
understanding of the burden of financing government operations, we need
to include these non-tax sources of revenue. Therefore, a preferred
approach to looking at tax burdens actually involves looking at the
overall government revenue burden, including both taxes ad these many
charges and fees.
Luckily, there is an excellent resource available
for people interested in analyzing the combined state and local
government revenue burden. The U.S. Census Bureau produces an annual
report that provides consistent and comparable data across all states on
the many detailed sources of revenue for both state and local
governments. The local governments include all counties, cities, school
districts, and other special purpose districts.
Having decided what revenues to look at, and for
which levels of government, we still need to determine how to analyze
them – that is, what kinds of calculations do we want to perform? One
way to consider revenue burdens is to look at actual tax rates. That
is, we could compare a state’s income tax or sales tax rate with rates
for other areas. This approach can be problematic because states will
likely differ in terms of the relevant tax base. That is, states will
differ in terms of what sources of income are subject to the income tax,
or what purchases are subject to the sales tax.
Rather than looking just at statutory tax rates, a
common approach is to look at average revenue burdens either per person
or relative to the size of the economy. Per capita measures of revenue
burden can be misleading because of the fact that states differ simply
in terms of income and wealth – the resources used to pay taxes. A
state could have high per capita taxes, but if it is also a very wealthy
state, then this really does not tell us much about the true tax burden
relative to people’s ability to pay. Ultimately, the best practical
approach to comparing revenue burdens is to look at actual revenue
collections relative to a measure of the overall size of the economy.
Typically, we look at revenue collections divided by total state
personal income. This provides a reasonable indication of revenue
burdens relative to the ability of a state’s citizens to pay.
Given a sound approach for comparing revenue
burdens, how does South Carolina compare with other states? The most
recent year for which the Census Bureau government finance data are
available is fiscal year 2001-2002. During FY2002, total general
revenue from own sources – this includes all taxes and fees and charges
– for all state and local governments in South Carolina totaled about
$16 billion. This total represented about 15.4 percent of total
personal income, where this measure of personal income includes all
sources of income earned by people in South Carolina, including both
labor and non-labor income. This 15.4 percent figure was just slightly
higher than the national average of 15.1 percent. That is, the state
and local government revenue burden in South Carolina is just marginally
higher than the national average.
If we look just at taxes, including sales, income,
property, corporate income, and other taxes, the South Carolina burden
drops to below the national average. In FY2002, total tax collections
were 9.4 percent of personal income. This compares with 10.3 percent
for the average state. In this regard, South Carolina ranks in the
bottom ten states in terms of total tax burden.
For South Carolina to have a slightly higher than
average total revenue burden with a relatively low tax burden, it must
be the case that our reliance on charges and fees is relatively high.
Indeed, total non-tax government revenues amounted to 6.0 percent of
total personal income in FY2002. The national average figure was 4.8
percent. Overall, South Carolina appears to be a relatively low tax
state and at the same time is a relatively high charge and fee state.
Taken together, the total government revenue burden is very close to the
middle of the pack for all states.
If we take as given the result that South Carolina
has a relatively low tax burden, we can next consider our reliance on
different kinds of taxes. That is, of all revenues collected by state
and local governments, how much do the different revenue sources
contribute?
Relative to the national average, South Carolina
relies less on all major tax sources. For example, in FY2002, the
property tax accounted for 19.5 percent of all state and local revenue
in South Carolina, compared with 21.1 percent for the average state.
The sales tax generated about 21.5 percent of all revenue in South
Carolina compared with 24.5 percent for all states on average. The
individual income tax represented 14.8 percent of all revenue, just less
than the 15.3 percent for the average state. However, about 38.7
percent of all government revenue came from charges and fees – notably
higher than the 31.7 percent for the national average.
These comparisons – and the many more that are
available using this Census Bureau dataset – serve as important
background for any debate on tax policy and tax reform. And, to add
another layer to this, the Census Bureau data also includes information
on the government expenditure side of the equation – we’ll save an
introductory analysis of government spending for another time.
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