Permanent Tax Reduction Beats One-Time Rebate Checks
As you read these words, a Conference Committee of the South Carolina Senate and House has been tasked with hammering out a state budget for the year that begins on July 1, 2024. There are instances where the House and Senate versions differ, and there are 353 pages of “provisos,” the instructions that the legislature attaches for how the funds must be spent, so negotiations over minor points could take time.
But a deep understanding of a major sticking point between the Senate and House is essential for a larger understanding of tax policy in the Palmetto State.
Palmetto Promise Institute has been writing about fiscal policy since our founding. Thanks to the work of our affiliate economist Dr. Rebecca Gunnlauggson, we haven’t pushed political talking points and opinion in this policy area. Instead, we have proposed comprehensive fixes backed by econometric modeling. We have made specific recommendations to solving the problems with all three legs of state taxes—income, property and sales. In each analysis, we have advocated for a balance between the three legs of the tax stool as sound fiscal policy, we were gratified when The Tax Foundation, the foremost free market fiscal policy organization, came out in strong agreement with our approach.
Migration and Mad Money?
South Carolina’s economy has been hot since the pandemic when we refused to completely shut down. With Americans voting with their feet, the Palmetto State has been rated between #1 and #4 for in migration since COVID hit. This has led to higher than projected tax revenues. But state coffers could be bursting at the seams even more due to the discovery of $1.8 billion that has been sitting in a state account since roughly 2017 presumably due to a change in the state accounting system. Sadly, this made national news and even gone somewhat viral in comedic social media content.
With this unexpected windfall, many are calling for some or all of the $1.8 billion to be returned to taxpayers in the form of property tax rebate checks. That’s tempting, but it would be poor fiscal policy and would fly in the face of a dashboard indicator that has been flashing bright red in South Carolina for a generation.
While Palmetto Promise wholeheartedly agrees that these funds belong to the taxpayers, we strongly oppose a rebate check policy and instead favor of a more long-term solution to speed up our state income tax cuts.
Rebate Checks are Poor Fiscal Policy
The idea of rebate checks sounds great—who doesn’t want to receive unexpected money in the mail?
But in this instance, rebate checks are a short-term, feel-good policy that ignores the larger problems with South Carolina’s tax system.
Here’s an example. Back in 2019, the South Carolina treasury received a $61 million tax influx when an Upstate resident won a $1.5 billion Mega Millions lottery jackpot. The General Assembly decided to distribute this revenue to taxpayers in the form of $50 stimulus checks that went out to 6 in 10 South Carolina households.
Want to know how much mailing all those checks cost the state?
$700,000.
Seven hundred thousand dollars spent to mail a one-time rebate that had little long-term impact on the state’s economy.
Economic research also shows us that one-time rebate checks do not work to boost the economy.
Trusted scholars at the Tax Foundation stated it well in a 2022 article:
“Tax rebates, gas tax holidays, and other temporary tax expedients have the potential to add to existing inflationary pressures while doing relatively little to help those in need. Whereas long-term tax relief or structural reform changes incentivize structures to encourage investment, enhance labor participation, and boost productivity, short-term relief pumps additional money into an environment that is already highly inflationary.” (emphasis ours)
The Heritage Foundation agrees: “Consumers see tax rebates as transitory, they do very little to help the economy, and they generate little consumer spending.”
Just last year, our State Policy Network affiliates in Mississippi—the Mississippi Center for Public Policy—made a similar argument and advocated for long-term tax CUTS.
Palmetto Promise Institute Senior Fellow Dr. Oran Smith wrote recently about the tax cuts proposed in this year’s state budget. He noted that South Carolina’s state income tax still sticks out like a sore thumb in the Southeast (click through to see the map). That’s the dashboard indicator blinking bright red. We are out of step.
The South Carolina General Assembly should seize the opportunity for a permanent tax cut now, which would accelerate the existing plan to cut South Carolina’s individual income tax rate to 6%. We surveyed the fiscal policy brain trust in free market think tanks around the country, and they are in unanimous agreement that getting that individual income tax rate down is the way to create lasting economic growth in South Carolina.
A Fiscal Final Note
Note: Comptroller General Gaines made the public and the General Assembly aware of this mystery money back in October 2023, and since then, the General Assembly, the Governor, the Treasurer, and the Comptroller have been desperately trying to locate the intended purpose for funds in this account. The Senate Finance Committee released a lengthy report with the findings of their investigation, and Governor McMaster has convened a task force with a July 1 deadline to track down the money’s purpose.
As a Certified Public Accountant (CPA), I applaud this move by McMaster. I also agree with calls for an independent forensic audit.
Such an audit would allow objective, outside financial professionals to examine our state’s finances to locate the purpose of the $1.8 billion. These funds should not be allocated until we determine their original appropriation. We need a thorough, objective examination of state finances to make sure there are no other discrepancies like this or last year’s $3.5 billion computing error. The results of this audit could lead to a lowering of our highest in the South personal income tax rate even further.
