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Act 388 – A Gift that Keeps on Taking

The $866 million bailout of Act 388, reported yesterday in The Greenville News, raises serious questions about legislative transparency, oversight and the seeming lack of any coherent tax policy on a state or local level. The article also revealed that Act 388 unfairly burdens two specific classes of taxpayer.

Act 388 has driven small business owners share of local property taxes higher in South Carolina than almost all other states. This increase, though unfair, has been visible to property owners.

What has remained hidden until now is the cost to our state’s workers. We now know that South Carolina workers, those who pay personal income taxes, are funding the $866 million bailout for an ill-conceived piece of legislation.

Act 388 was a tax swap passed in 2006 to fund public school operating costs. It raised sales taxes on the state level while lowering property taxes on the local level. The bill contained a safety net for school districts that committed the General Fund to a bailout if revenue from sales tax growth did not meet expectations.

The bill, touted as tax relief, passed with great fanfare in 2006. Then an economic event happened that apparently no one factored into the sales tax growth projections – a recession hit. Since then, sales tax growth has never met the formula requirements in the original bill – even after the recession ended. The bailout has leveled off at over $100 million per year with no end in sight.

The General Fund has two main sources of tax revenue – the sales tax and the personal income tax. When sales tax revenue fails to meet growth projections and a safety net exists like we see in Act 388, then the revenue used in the required bailout comes from personal income taxes.

In the final analysis, the tax relief offered by Act 388 was really a property tax shift on the local level and a sales tax hike on the state level. It covered the cost of the supposed “tax relief” by shifting revenue shortfalls onto the backs of South Carolina workers. The shortfall resulted from unrealistic growth projections and created a $100 million annual bailout that remains uncorrected.

Worse yet, these facts have seemingly remained hidden from most members of the General Assembly in a complex budget process that only a select few legislators have control over – a pattern typical of the last leadership regime in the House.

As a House Republican, these revelations violate the very core of conservative principles that I hold and they should be remembered by every House conservative as we begin debating the new budget, the $500 million bond proposal and the two road funding bills.