Sales tax on cars could balloon under plan to broaden tax base

by Ron Barnett • Greenvilleonline.com staff writer • published: July 22. 2010
The era of sales tax-free groceries in South Carolina would be short-lived, and sales taxes would be levied for the first time on prescription drugs, electricity in homes and purchases made on the Internet, if a set of recommendations given initial approval Wednesday goes into effect.
The state Tax Realignment Commission, an independent group of business leaders and experts in finance and tax law appointed by the Legislature and governor, put forward the proposal as a starting point for discussions, adding that any new taxes would be offset for the first year by a reduction in the overall sales tax rate. "Our goal is to really broaden the base and make it a more equitable tax for everybody," said Kenneth Cosgrove, a member of the Commission and director of operations and marketing for Greenville-based Piedmont Petroleum Corp., which operates convenience stores in the Upstate.
A national study released last year by the University of Tennessee estimated that South Carolina missed out on $336 million in sales tax revenue from Internet purchases made by the state's residents last year.
Among the items now exempted from sales tax that would be taxed under the proposal, and the estimated amount they would generate are:
Long distance phone calls: $45.8 million
Prescription drugs: $153.2 million
Electricity, natural gas and other residential heating sources: $94.1 million
Hearing aids: $2.1 million
Unprepared groceries: $212.6 million
Newspapers: $7 million
Adding the proposed new sales taxes and tax increases would allow reducing the overall sales tax rate by 4.96 percent, according to an analysis by the state Board of Economic Advisors.
The recommendation also calls for doing away with the $300 sales tax cap on automobiles, which would generate $61 million, and on manufactured homes, adding $13.3 million.
An increase in the sales tax on cars would hurt already struggling auto retailers and car buyers, said Scott Wade, general manager of Greer Nissan.
"Raising any taxes in a downturned economy is a negative," he said, adding that he's skeptical that the increases would be offset by overall decreases.
The proposal calls for raising the cap to $600 the first year, $1,000 the second year and $1,200 after that.
A comparison of South Carolina's auto sales tax with that of North Carolina and Georgia done by the Board of Economic Advisors shows that the other the other two states have progressive sales tax rates, ranging from $180 for a $6,000 car to $2,240 for a $56,000 vehicle, while South Carolina's cap is $300 regardless of price.
The proposal also calls for gradually raising the caps on boats and airplanes to $1,200.
It would retain the sales tax exemption on lottery tickets and on the sale of musical instruments to religious organizations. It would eliminate the 1 percent sales tax exemption for people 85 or older and narrow the list of items exempt from tax on the August sales tax holiday to school supplies only.
The proposal calls for taxing prescription drugs at 3 percent.
Suzie Foley, executive director of the Greenville Free Medical Clinic, said charging sales taxes on prescriptions would hurt people who already have a difficult time paying for medications.
"The cost just continues to spiral upward," she said. "So whether it's the increased expense of the medication or sales tax, any additional burden on a person who doesn't have either resources or coverage for that, it's going to impact their ability to get what they need."
Ken Wingate, a TRAC Commission member from Columbia, said the group plans to hear public input on the plan at its next meeting, Aug. 13 and has asked various trade associations for data on the anticipated impact.
A final report, including proposals on property taxes, income taxes and excise taxes, is due in November.
The commission is divided on whether it is authorized to recommend changes to Act 388, the law that added a penny sales tax to offset property taxes for school operations, Wingate said. The group has asked for legal advice on that, he said.
The downturn in the economy of the past two years caused a plunge in sales tax revenues, which hurt public schools and other state agencies. Wingate believes the proposed sales tax changes should result in a system that is fairer and less volatile to market forces.
"To the extent that we can smooth out some of the peaks and valleys in revenue, that would be a very positive outcome that could be achieved," he said.
The recommendations will go to the Legislature in January, with a new governor and an end to federal stimulus money that helped save state jobs this year.
State Sen. Larry Martin, R-Pickens, said he favors the idea of broadening the sales tax base, as long as it's offset by an overall reduction in rates.
"The key is you're going to have certain segments of the economy that are going to be more adversely affected," he said. "That's the real policy question that the Legislature is going to have to address."
Special interest groups, ranging from the Medical Equipment Services Association to the South Carolina Press Association, have appeared at commission meetings to make their case as to why their product shouldn't be subject to the state sales tax, or should remain capped.
The Press Association, for example, said taxing newspapers "would be a tax on free speech" and that newspapers are an information service, not a product.
"No reader buys a newspaper for its weight in newsprint and ink," the association said in a letter filed with the commission.
The South Carolina Medical Association argued that the Palmetto state is one of only three states in the nation that charge sales tax on medications administered in doctors' offices but not on most prescriptions purchased at drug stores.

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