We retired Tax Justice Blog in April 2017. For new content on issues related to tax justice, go to www.justtaxesblog.org
Guest Post by John Ruoff of the Ruoff Group, Click here for orignal post
Who will pay to fix our roads? The burden, as a percentage of income, will fall hardest on those making less than $19,000 a year. Facing massive shortfalls in repairs and maintenance on our state roads and highways, the General Assembly is looking at ways to fund those needs. Everyone understands that, in the end, new revenues to fund the roads are needed. The Governor, seeing an opportunity to pull off a massive income tax cut, proposed that massive cut tied to a much more modest increase in the gas tax. Three proposals have been placed on the table: the Governor’s, a House-passed Plan that combines some tax increases with a much more modest income tax cut and a Senate Finance plan which increases revenues without an income tax cut.
In order to figure out who will pay for these changes, we asked the Institute on Taxation and Economic Policy (ITEP), a Washington, DC, based think tank that produces widely-respected tax incidence studies to model these changes. Their Who Pays? provides detailed analyses of which income groups pay what shares of their income towards various taxes. You can see the most recent analysis of South Carolina here. The ITEP modeling allows us to look at gross income, unlike the estimates from the Office of Revenue and Fiscal Affairs which are based on taxable income.
They modeled three plans:
- Governor Haley proposes trading a 10 cent per gallon gas tax increase for an eventual reduction in marginal tax rates of 2 %. That translated, according to the SC Office of Revenue and Fiscal Affairs, to $1.7 billion reduction in General Fund Revenue by 2025.
- The House version combines an effective 10 cent per gallon increase in the gas tax and raises the cap on sales tax for cars from $300 to $500 with a broadening of income tax brackets that produces a maximum $48 per year tax cut. Other provisions were not modeled.
- The Senate Finance Plan contains no tax cut but increases the gas tax by 12 cents per gallon and the sales tax cap on cars to $600. Other provisions were not modeled.
The Governor’s plan creates a very large tax cut for those with higher incomes. In the Top 1 % of incomes, the tax cut,on average, is $6,893. Meanwhile, those in the lowest 20 % of incomes would face, on average, a tax increase of $34.
The House and Senate Finance plans raise taxes and revenues across the board. The House Plan, netted for a modest income tax cut, raises on average the annual taxes for the lowest income group, which averages $12,000 a year, by $39. The Top 1 %, which averages $987,000 in income, would pay on average an additional $414.
As a share of income, the various plans hit harder on the most vulnerable. The Senate Finance Plan would cost our lowest income quintile, on average, .4 % of their income, compared to .1 %, on average, of the income of the Top 1 %. The House Plan calls on the poorest in our state to pay, on average, an additional .3 % of income while costing our wealthiest 1 % only, on average, .04 %. As percent of income, the Governor would raise taxes on taxpayers in the Lowest 20 % by .3 %, on average, while cutting them for the Top 1 % by, on average, .7 %.
Legislative debates frequently resound with arguments that the rich pay the most taxes and lower income people “don’t pay taxes”. They, of course, mean that most lower income taxpayers don’t pay income taxes. We all pay taxes and we have increasingly in South Carolina relied on regressive sales taxes that take a larger cut of poor people’s income than rich people’s. ITEP’s most recent statewide analysis of actual tax burden (Who Pays?, 5th Ed., Jan. 14, 2015) shows that in South Carolina the lowest income group pays, on average, about 7.5 % of income for all state and local taxes. The Top 1 % pay only, on average, 4.5 % of their income in state and local taxes.
Advocates of cutting taxes repeatedly argue, often to the accompaniment of anecdotes, that cutting income taxes drives in-migration of rich people who bring or start companies. The actual evidence suggests, at best, a very modest relationship between income taxes and economic development. That relationship is far outweighed by the effects of spending on things like infrastructure and education.
Recognizing both that road funding is a critical need for all of us and that gas and sales taxes hit harder on lower than upper income South Carolinians, there are additional approaches which could meliorate these effects on our most vulnerable taxpayers.
A refundable State Earned Income Tax Credit (EITC) has many desirable policy effects. Ronald Reagan and many conservative policy leaders recognize the EITC as the most effective anti-poverty measure we have. The EITC encourages personal responsibility by rewarding work, since only working people get the EITC. In addition, a state EITC keeps money in the hands of folks who will spend it in local communities with local businesses. It’s good for the economy. An EITC pegged at 10 % of the federal EITC, would cut taxes for the Lowest 20 % receiving the credit by, on average, $262 and $331 and $190 to the next two quintiles according to another analysis by ITEP.
Rather than raising the cap on sales taxes on cars (not to mention yachts and airplanes), flipping the cap so that it was a floor would provide relief to folks who can only buy cheap cars while shifting more tax burden to those better able to afford it. That way, instead of stopping the tax when a car’s price reaches $6,000, $10,000 or $12,000, it would start at one of those points. Either of these approaches would reduce revenues for roads overall, but would make the tax system fairer.
The Governor’s Plan appears to be a nonstarter in the General Assembly. The House and Senate Finance plans are not that far apart. A critical flaw in our gas tax has been its failure to adjust for inflation and both legislative plans make provisions for indexing the gas tax (within limits) to inflation. That is a good thing.
What is absolutely clear is that something needs to be done to raise funds to ensure future economic development and safer roads. Clearly, income tax cuts are not the answer, although the House’s approach is far preferable to the Governor’s massive tax cut masquerading as a road funding plan. Equity for our poorest taxpayers needs more legislative attention, since all of these plans ask them to contribute a larger share of income to fixing the roads than their better-off fellow taxpayers.