South Carolina: Lawmakers override veto and pass a gas tax increase

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As promised, the South Carolina legislature overrode Gov. Henry McMaster’s veto and passed H3516, the Infrastructure and Economic Development Reform Act, 32 to 12. Thus, effective on July 1, 2017, and then annually on July 1 until 2022, motorists will be subject to a new gas tax of 2 cents per year, for a total of 12 cents by 2022. All of the revenue is to be separated from the general fund, and deposited into either the State Highway Fund, the State Non-Federal Aid Highway Fund, or the Infrastructure Maintenance Trust Fund. The current rate is 16.75 cents per gallon, which puts the Palmetto state’s gas tax at the second lowest, behind only Alaska, whose state gas tax is 12.25 cents.

Additionally, the bill increases various fees, such as the registration fee for motorists under the age of 65, from $24 to $40, and the maximum sales tax per sale, from $300 to $500. Beyond these provisions, H3516 creates a non-refundable earned income tax credit equal to 125 percent of the federal earned income tax credit.

According to its language, H3516 constitutes “a comprehensive approach to address the effect that the deteriorating transportation infrastructure system has on [the state] and its residents, tourists, and economy.” With the safety and economic problems being of “paramount concern,” it is now “time to focus the resources of [South Carolina] in an efficient, effective manner to stop that deterioration and to set our State on the path toward building a first-class road network that is the envy of the nation.”

A month ago, when we last addressed this topic, we observed that the legislation had been roller-coastering through the law-making process, with its prospects ranging from slim-to-none, to high-priority.

About the deal, the Tax Justice Blog opined that it “could have been worse, could have been better.” While it is true that the legislation is expected to raise $600 million per year for badly needed repairs once it is fully phased in, this is short of the need, calculated to be $1 billion. “[B]ut is an improvement nonetheless” because it “brings in meaningful revenue without robbing funding from other priorities.”

More specifically, on the plus side, the Tax Justice Blog pointed out that lawmakers “resisted efforts to tack on costly, regressive, unrelated tax cuts to ‘offset’ the effect of the gas tax increase.” This stands in contrast to other states’ solutions that have raised infrastructure repair funds at the expense of schools, public safety and health care programs. For instance, Tennessee tied their gas tax increase to a tax cut for the wealthy, and New Jersey held theirs “hostage to assure elimination of the completely unrelated estate tax.”

On the other hand, the Tax Justice Blog pointed out three major flaws:

Flaw # 1: The first is with the structure of the legislation, such that it is not likely to achieve the goals that it sets out to. For example, the creation of the non-refundable earned income tax credit “on the surface looks quite impressive.” But the fact that it is non-refundable, and the way it interacts with other provisions of the tax code, “render it meaningless to the vast majority of the state’s low- and middle-income families, precisely those who will be hardest hit by the gas tax increase.” 

Flaw # 2: The second problem is that although the legislation creates a credit for preventative vehicle maintenance, obtaining that credit is cumbersome, and has a cap of $114 million once fully phased in. For motorists, they must save all their maintenance and gas tax receipts, “and then claim a credit equal to either the total of their maintenance spending or their total increase in gas taxes resulting from the bill, whichever is smaller.”

For the state, it must estimate how many people will use the credit, and then “provide an adjustment factor for people to use when calculating their individual credits.” All of this suggests that when they enacted such a burdensome framework, lawmakers hoped compliance would be low.

Flaw # 3: Finally, the increase is not indexed to inflation. As has been observed by others before, like the Tax Foundation, doing so would help insure a sustainable funding stream by making sure the tax revenue’s purchasing power remains strong over time, especially as motorists spend less on gas due to vehicles’ increasing fuel efficiency. The Tax Justice Blog predicts that without such indexing or other remedial action, “revenues will inevitably fall behind needs once again and this debate will have to be repeated while those needs go unmet.”

Gov. McMaster tweeted a video explaining why he vetoed the gas tax increase, which The State, among other outlets, shared. He argued that over 25% of gas tax dollars are not used for infrastructure improvement because they are “siphoned off for government agency overhead and programs that have nothing to do with roads. Then, “much of what’s left is spent on the wrong roads,” those with “almost no traffic.”

Instead, he would have liked to have seen reform of the Department of Transportation’s tax dollar spending, which would have given the state “plenty of money,” making the tax hike “totally unnecessary.”

Finally, the governor lamented the fact that small businesses, young people and seniors would get hit the hardest, many of whom are “barely making it now…South Carolina is a great place, and you deserve better than this.”

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