On Record is a regular feature which lets South Carolina’s policy-makers speak their mind about the issues most important to them. If you’re interested in guest-blogging for On Record, email PPR Editor Logan Smith. Today’s column is from John Ruoff of The Ruoff Group.
Low-income and middle class taxpayers in South Carolina pay a larger share of their income to support our public structures and systems than do our wealthiest taxpayers. The quality of life we all enjoy in South Carolina is directly connected to those public systems and structures. Our schools, hospitals, social services, parks and infrastructure are what make our communities good places to live and work. But according to Who Pays? (4th ed., 2013), released Wednesday by the Washington-based Institute on Taxation & Economic Policy (ITEP), the top five percent of taxpayers, and especially the top one percent, are not carrying their share of ensuring that our communities are good places to live and work.
As this chart from the report shows, all of us contribute through our taxes, but while our poorest families pay 7.1 % of their family income in state and local taxes, our wealthiest citizens pay only 5 %. This disparity has grown from 1.6 % in 2007 to 2.1 % today when comparing ITEP’s 3rd edition of Who Pays? to the 4th.
All of us are taxpayers. As Figure 2 shows, all of us, but especially our lowest income families, pay a significantly higher share of family income in sales taxes (5.1 % for the lowest 20 %) compared to the highest 1 % (.7 %). As we have shifted more of our taxation from the relatively neutral property tax and the more progressive income tax, that increases the overall difference between our worst off and best off families—shifting ever more of the responsibility for our community well-being onto lower-income families. The top 1 % pays a smaller share in income taxes even than others in the top 20 %–3.6 % to 3.8 %.
Part of the favorable income tax treatment of the wealthiest 1 % flows from the favorable treatment South Carolina gives capital gains income—a 44 % discount for capital gains as opposed to income from actual work. We are one of only eight states with such notable capital gains preferences.
The wealthiest also benefit more from federal deduction offsets to federal income tax for state and local taxes, cutting 1.4 % from their overall contribution. The more you make, the more the federal tax code subsidizes your state and local taxes—an upside-down subsidy.
An article in last Friday’s The State suggested that the annual legislation conforming South Carolina’s income tax code to changes in the federal tax code might cost the wealthiest income taxpayers an additional $200. The average taxpayer in the 1 %, making $775,700 a year, would see a whopping increase in share of family income going to support our community of .03 %.
South Carolina’s tax structure is, from a fairness perspective, better than average as Figure 3 shows. In all income categories, South Carolina families pay a smaller portion of their income to support state and local public systems and structures than do the average American family. And our overall tax structure is less tilted against lower income taxpayers.
A recent editorial in The State describes South Carolina policymakers’ “tax-by-tax” fixation—looking at one tax at a time. Many in the House declare “flatter is fairer”— but only when they are talking about income tax rates. Making the income tax flatter only makes the system less flat and less fair.
This report from ITEP, the fourth in this widely-used, highly-respected series, shows how important it is to look at taxes as a system and not just at each of its pieces. Most of the proposals being discussed on personal taxes—to raise the very regressive sales tax by eliminating exemptions or to cut income tax rates—make our tax system less fair.
In South Carolina our wealthiest five percent and, especially, the one percent are not contributing their fair share. That’s troubling when our revenues have in recent years not adequately supported the public systems and structures we have built up over decades to ensure that South Carolina is a good place to work and live. Rather than focusing on tax cuts, we should tell the wealthiest to step up to keep our state functioning well, now and into the future.