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Columbia Business Monthly

Will the General Assembly tackle tax and pension reform in 2019?

Jan 08, 2019 11:06AM ● By Kathleen Maris
By Jason Zacher

At noon on January 8, the General Assembly returns to session for what promises to be a busy year for business at the Statehouse. The next day, Gov. Henry McMaster will be sworn in for his first elected term as governor. 

So, maybe we’re actually talking January 15 before they get down to work. Either way, 2019 will be a year when the state’s business community needs to take note of some major policy debates that will have a significant impact on your bottom line.

Comprehensive Tax Reform. This is the Holy Grail of public policy. Do public officials have the strength to withstand the special interest pressure and populist grandstanding to truly make a tax code that promotes small business and is fairer to everyone? The South Carolina Chamber, in partnership with the Tax Foundation, released a 129-page report in December that outlined a number of scenarios.

You’ll have to excuse a little sarcasm, but this proposal joins a long and distinguished line of tax reform study committees and plans that have become a distinguished series of door stops in General Assembly offices. This is not because of a lack of intensity or sincerity on the parts of the legislators or the staff working on these proposals. 

As one senator said when the report was released: “This is the Lobbyist Employment Act of 2019.” 

Business leaders across the state need to quickly review the plans and figure out what it may mean to your bottom line—and consider what a comprehensive plan may mean to the entire state’s economy. There is no argument that decades of piecemeal reforms and credits have made a mess of things, resulting in:

Fewer than 50 percent of our residents paying income tax while about 40 percent pay the top rate, and, 

A dizzying array of exemptions and caps that leave nearly two-thirds of all transactions not subject to sales tax.

Add in policies such as Act 388 and business license fees, and the tax burden in South Carolina falls disproportionately on small business and entrepreneurs—the leaders who will build the next great businesses in our state. That makes us significantly less competitive than our neighbors. Any significant fix to the sales tax structure will have to address taxes on services, business raw materials, and the plethora of “necessities” that do not currently have a sales tax levied (electricity, gasoline, groceries, prescription drugs, water, etc.). 

To illustrate the extremely broad nature of the debate: Poorly considered policies such as Act 388 are also exacerbating affordable housing issues, which is negatively impacting the available workforce in many parts of our state.  

Comprehensive tax reform is an issue that has been on the business community’s agenda so many times —with so little action—that we feel like Charlie Brown kicking a football. As sales tax exemptions and income tax credits are debated, how do those figure into your bottom line, and will giving up some of those make our entire economy more globally competitive?

Pension System Reform. Our state’s public pension system directly impacts 10 percent of the state’s population and 100 percent of our state’s businesses. A joint House-Senate committee began work in 2016 in an effort to head off, in the words of the co-chairman, “The biggest challenge we face this decade.” Modest progress was made in 2017, but despite promises to finish the job, nothing was done in 2018.

The state retirement system faces, officially, a $24 billion deficit, but private estimates (critical of the official estimate) range as high as $40 billion. South Carolina is not alone in facing such a deficit. Many states are grappling with the shocks of more retirees, fewer contributors, and investment returns that lag estimates.

The impact on business is significant. There are only so many places the General Assembly can go to find the funds needed, and most agree that any future increase in funding will have to come in the form of higher “employer” (i.e., taxpayer) contributions, catch-up contributions, or diversions of general fund revenues. That will result in cuts to local and state services or higher taxes—barring a major increase in the rates of investment return or state revenues. Because of the aforementioned Act 388, school districts can only tax businesses, manufacturers, and rental properties, leaving them nowhere else to go to react to state mandates.

Tax reform and any pension system fix will have a major impact on your bottom line. Your Chambers of Commerce and other business groups are in Columbia watching these issues closely for you so you don’t have to, but we need you to let us know what is important to you so we can ensure your voice is heard this year.