November 14, 2010
Haley’s tax-cut proposal at issue
She says corporate cut will lure new jobs; few businesses pay tax
The Greenville News
By Tim Smith
Gov.-elect Nikki Haley’s plan to push through the General Assembly the elimination of South Carolina’s corporate income tax may do too little to create jobs and miss larger targets of tax reform that could make a difference, at least in the minds of some business organizations and tax experts.
The proposal would have no impact on the vast majority of corporations already in the state. An analysis by The Greenville News shows that about 89 percent of the more than 80,000 corporations doing business in the state pay no corporate income tax. Of those that do, 68 percent of them are international firms. Rob Godfrey, Haley’s spokesman, said removing the tax, though, will be a draw for new companies to move into the state and create jobs.
“We are a right-to-work state. We keep the unions out And if we become a nocorporate- income-tax state as well, we will become a magnet for businesses to come to South Carolina. And that means more jobs for our citizens, more contracts for our small businesses, and more growth for our economy.”
Revenue from the corporate income tax accounts for about 2.1 percent of the $5 billion state general fund budget. Corporations also may pay a franchise fee, which generated about $73 million in revenue last year. Sales tax revenues make up about 42 percent of the budget, and individual income tax contributes about 41 percent. An assortment of other taxes combined make up the remainder, including taxes on beer and wine, alcohol, insurance, tobacco, banks, admissions, coin-operated devices and retail licenses.
Many businesses organize as something other than corporations, such as partnerships or limited liability companies, and do not pay corporate taxes.
They do pay income taxes and other taxes as well, such as sales taxes on materials used for their business and property taxes. An estimated 50 percent of sales tax revenues is paid by businesses for materials and supplies.
Otis Rawl, president and chief executive officer of the South Carolina Chamber of Commerce, said he believes the state’s corporate income tax is “fairly reasonable.”
“Our biggest concern is property taxes,” he said.
The Chamber didn’t endorse Haley in the Republican primary, choosing to back U.S. Rep. Gresham Barrett. It endorsed Sen. Vincent Sheheen in the Democratic primary and chose not to revisit the endorsements in the general election and let its Sheheen decision stand.
Rawl said the state ranks first or second in property taxes on industrial property and sixth or seventh for commercial property.
And he said that problem has only worsened with the tax swap law known as Act 388, which relieved homeowners of the school operating portion of property tax in return for a 1 cent increase in the sales tax.
Business leaders have argued the swap has shifted the tax burden to the business community.
Throughout her campaign, Haley has argued that she wants legislators to repeal the 5 percent corporate income tax as a way to help small businesses.
She told The News that while the tax accounts for less than 5 percent of general fund revenue, its removal would be a magnet for new jobs, and it would help small businesses.
She referred to it throughout her campaign as the “small business income tax” because of what she said would be the trickle- down effect on small businesses.
Comprehensive tax reform calls for eliminating income levies on businesses and fitting that in with property and other taxes, she said.
“We’ve got to find a balance there,” she said. “I know that the elimination of the corporate income tax will bring jobs now.”
Frank Knapp, president and chief executive officer of the South Carolina Small Business Chamber of Commerce, said the tax has nothing to do with small business and does not believe the Legislature will repeal it. He said his organization has no position on the tax.
“It does not help small business because we don’t pay our taxes as a corporate income tax,” he said. “We pay them as personal income taxes.”
Godfrey, Haley’s spokesman, said removing the taxes could indirectly help small businesses.
“Look at Boeing — 91 percent of their contracts are with South Carolina small businesses,” he said. Frank Landgraff, president of King Chris Co. Inc., which runs McDonald’s of Greenville, said any tax that can be cut will benefit businesses and the state’s economy.
“Any tax that the state can reduce is not going into someone’s pocket,” he said. “It’s being plowed back into the business. And in doing that, that will very quickly create new jobs.”
For the fiscal year ending in June, the state collected $109.6 million in corporate income tax, according to a Department of Commerce analysis.
One reason for the relatively low collections is that the state grants more than 20 types of tax credits used by corporations.
Those credits have grown from $83 million in 2000 to $708.9 million in fiscal 2008, according to Commerce Department data.
The credits can be carried forward for 15 years, which contributes to the up-and-down nature of collections, economists say. Of the 454 filers with credits in 2008, for instance, 279 of them carried forward credits.
Rebecca Gunnlaugsson, chief economist for the Commerce Department, told a tax-study panel recently that corporate income taxes, like other types of state taxes, are becoming narrowly focused in that a small number of firms claim most of the credits and the majority of filers pay no corporate income taxes.
Newer and larger firms are accruing most of the tax credits over smaller and established firms, she said.
The House of Representatives passed legislation this year to repeal the corporate income tax, but the Senate balked, worried about the state’s shrinking revenues.
Lawmakers have said recently that any re-examination of the corporate income tax would take place in debate about tax reform in general and consideration of the Tax Realignment Commission.
The commission has not recommended lawmakers remove the corporate income tax, which both it and Commerce have noted is among the lowest in the nation.
It instead recommended that the maximum job credits be reduced from $8,000 to $6,000, that the time span for the carrying forward of credits be reduced from15 years to five or three years and that once the economy improves, legislators remove most service and retail jobs from credits.
Sen. Chip Campsen of Charleston said in March that eliminating the corporate income tax would be a “travesty of justice” because it would reward large corporations that hire lobbyists while punishing small businesses.
He said if the Senate were to move ahead with the idea, he would propose an amendment that would treat small and large businesses the same in income tax breaks.
The House proposal would gradually have phased in the removal of corporate tax, starting in three years.
The tax brought in $312 million in 2007 but has dropped since as the nation’s economy suffered in recession.
John Rainey, chairmanof the state Board of Economic Advisors, said corporate tax revenue also may have dwindled in part because a large number of businesses organize differently for tax liability reasons.
Holley Ulbrich, senior scholar at the Strom Thurmond Institute of Government and Public Affairs at Clemson University, questioned Haley’s premise.
“All of the evidence is that a 5 percent corporate income tax is so small that it does not affect location decisions,” Ulbrich, an economist and expert on South Carolina tax policy, told The News earlier this year.
“It doesn’t attract industry. It doesn’t repel industry. One person has been quoted as saying it’s chump change,” she said.
Plus, Ulbrich said, a lot of the companies that would benefit operate in multiple states.
“The fact that they have capital to re-invest doesn’t necessarily mean it’s going to get reinvested in South Carolina,” she said
Knapp said if lawmakers move to repeal the corporate income tax, his organization and its members will want similar treatment. Eliminating the income taxes small business pay would cost about $322 million, he said.
Lawmakers next year face a budget shortfall of about $700 million.