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Tax Reform Rationale

Elsewhere I have posted the detail of the current tax reform bills that have been filed. In this article I will attempt to explain some of the logic behind the bills.

Across the country, many states speak of tax reform but few find it. The reasons for failure are as unique as the tax codes of the states themselves. However, if we look to Georgia, we can find examples of problems to avoid.

Several years ago, Georgia appointed a commission, similar to our TRAC, to make tax reform recommendations. The Georgia House decided to introduce the recommendations of this report as a single piece legislation. It failed in June 2011.

The Georgia legislation promised immediate comprehensive reform – while ignoring the time factor. Tax legislation, unlike many other types, evolves and builds upon itself over many years. Each successive law represents a particular concensus for a particular time. These laws become intertwined and any attempt to reform one thread tends to unravel the entire tapestry. The Georgia legislation failed to clear the hurdle of prior consensus. This hurdle can only be cleared through reforms designed to be introduced and implemented over several years.

The Georgia legislation promised revenue neutrality – but to the wrong entity. Revenue neutrality applies both to the state and to the individual taxpayer. It can be extremely hard to prove especially when a tax bill raises one type of tax and lowers another type of tax as an offset. For example, raising the sales tax rate with a corresponding decrease in income tax rates sounds appealing, but this approach still raises taxes on some people while lowering them on others. This cross-tax source approach ensures revenue neutrality to the state but not to individual taxpayers. For tax reform to succeed, it must be revenue neutral or revenue negative to the taxpayer. The Georgia legislation failed to provide this protection.

 The bills designed by the SC House GOP Tax Study Committee attempt to avoid these two fundamental pitfalls. Our bills begin the structural reform of two areas – sales tax exemptions and personal income tax brackets. We also begin lowering tax rates that are high in certain areas when compared to other states. These areas include manufacturing/business property taxes and small business active income taxes.

The reforms contained in these initial set of bills lay the foundation for future reforms. For example, once we have collapsed the personal income tax brackets, the next step is to lower the brackets that remain by eliminating deductions and credits. All it takes for tax reform to begin is for the House to pass the bills that are currently pending. Then we have to persuade the Senate.