The Palmetto Insider

The blog of the South Carolina Policy Council

Archive for the ‘Taxes’ Category

No, We’re not joking. Senate fails to repeal 1099 Tax. Again.

leave a comment »

In what is consistently becoming a tragic, comedy of errors, the Senate failed once again to repeal the 1099 provision of Obamacare.

In case you missed it, this little snafu in the legislation will require all businesses to file a 1099 form for anyone paid $600 or more. So if you’re a self-employed individual and you purchase a $900 macbook for work, you’ll be filing a 1099 to Apple and the government.

This is despite the fact that small business communities have strongly voiced their opposition to 1099 provision and that Democrats have acknowledged three weeks ago that the provision would curb jobs creation.

But thankfully (sort of), this measure has been widely criticized by members of both sides of the aisle. President Obama has even called for this provision’s removal. But still, rhetoric itself is not enough. Actions should prove louder than words.

Again, did anybody read the legislation? Shouldn’t this have been the kind of thing that was caught before the bill was passed in a measure of pomp-and-circumstance? If legislators had caught it before passing the legislation, it could have been stricken from the bill as easily as a student erases a mistake on his history test.

But now, we’re stuck having to trust the political establishment that is notorious for failing to act – even when there is consensus approval.

Proof in point was Monday’s vote – which actually passed 61-35, but needed 67 votes to become part of an unrelated food bill.

If you listen to senators discuss the matter, they’d have us put all our trust and faith in them to fix it before the measure takes effect in 2012. “We have plenty of time,” said Senate Finance Chair Max Baucus.

The 1099 measure will supposedly raise $17 billion over 10 years to help pay for Obamacare.

The fact that Democrats felt the need to use this measure as a way to drum up revenue for the healthcare bill is proof that they were really scraping at the bottom of the barrel to find funding for their massive, trillion dollar expansion of government control over healthcare. Perhaps, they think tax revenue is more important than jobs.

Written by Geoff Pallay

December 1, 2010 at 12:12 pm

Posted in Taxes

Tagged with

Health Care Law Already Hitting Home for HSA Consumers

leave a comment »

Even as foes of Obamacare celebrate their recent victories at the polls, more and more of the regulations mandated by the federal health care takeover (otherwise known as the Patient Protection and Affordable Care Act) are hitting their start date, and the reality is setting in quickly – we are all going to be affected by this law, and most of us for the worse.

Take HSAs, for example, which we have previously extolled as a tool to bring down health care costs. HSAs provide greater cost-saving incentives to consumers, who may roll over unused health care dollars from year-to-year and even use remaining dollars for retirement. But Health Savings Accounts are being marginalized by the new healthcare law.

The way HSAs work is like this. Imagine if you had insurance with which to buy a new car – much like we have health insurance to cover health-related expenditures. Well, if the new car is covered by insurance – and you pay a hefty premium to have this insurance – you will likely want to maximize the “benefits” you receive. So does everyone else in the insurance program.  Eventually, your choice and the collective choice under this plan will eventually jack up the cost and the price of your “car purchase insurance”. So when the next insurance bill comes in, everyone is complaining that their “car purchase insurance” is ridiculously expensive.

In short, you’ll buy the most expensive new car your plan allows and it is not secret that there is a price hike. But if instead you have a “car HSA” plan, you might think to yourself: “Should I spend all of my allotted car dollars on this one purchase? Or should I save some of that money in case I want to buy a second car later – or if this first car breaks and I need a new one?”

Based on these incentives, consumers with HSAs tend to only use the health care they need. Instead of over-consuming health care (which sometimes happens with regular insurance plans), HSA consumers weigh the costs and benefits of their health care decisions.

Unfortunately, the utility of HSAs is quickly deteriorating. As of January 1, 2011, over-the-counter purchases will no longer be HSA eligible. Consumers who don’t want to pay out-of-pocket for these items (about 15,000 in total, according to Fox News) will need a doctor’s note.

As Max Borders writes in the Washington Examiner, we have lobbyists to thank for this stomach punch to consumers:

First, Big Pharma (drugs) and the AMA (doctors) were both mixed up with writing Obamacare. This was clear from the start, but the progressives looked the other way. So, an army of lobbyists made sure that if a bunch of people were going to be forced by the feds to buy health insurance, they’d want to get some goodies out of all these newly minted HSA holders. How could all those lobbyists find a way to divert all those new customers into more expensive drugs and make them to go to the doctor more? Take them out of the driver’s seat. It has nothing to do with primary care paternalism. This is good old fashioned rent-seeking at its finest.

Additionally, this is another one of the ways the government has proposed paying for Obamacare. Which in essence, makes it a tax increase.

Other mandates are also making HSAs less affordable.

  • Covering children: Several major health insurers have dropped child-only policies because of the intense mandates that have gone into effect.
  • HSAs must cover 60 percent of actuarial benefit: According to the Heritage Foundation, only the Health and Human Services Department Secretary Kathleen Sebelius can know whether HSAs are viable under this plan. Will contributions count? If not, then HSAs will “no longer be viable.” Why is that? Because the HSAs revenue/expense system functions in exactly the opposite manner of traditional health insurance products. In traditional health insurance plans, premiums are the major revenue stream and deductible and co/pay are supplementary to cover the medical expense. In HSAs, contribution from members (function similar as deductible) is the major revenue stream while premium serves as a supplementary to cover the cost.
  • Medical loss ratio (MLR): Obamacare has mandated the health insurance companies spend at least 80 percent (85 for bigger companies) on “your health care.” What this does is limit choice in the market, by forcing some companies out of business who don’t meet this 80 percent level. It will also discourage spending on fraud prevention, because that will not be counted in the 80 percent. So every dollar spent on fraud prevention hurts an insurance company’s ability to hit the 80 percent level. Fewer choices in the market means fewer HSA plans. Fewer HSA plans means more expensive HSA plans. Either way, it’s bad for consumers.

HSAs are still a viable option for state-based reform. The South Carolina General Assembly could create a better tax environment for consumers who choose these health plans.

One example of a bill that was already introduced is S 998 from last session, which never made it out of committee. This bill – sponsored by Sen. Mike Rose and Sen. Shane Martin — would have allowed a 100 percent tax deduction or HSA premiums and created a fast-track approval process for new HSA plans that have already been approved by other states. Both of these items would add up to more choices for consumers.

Another way the state could counteract federal burdens on HSAs would be to create state-level exemptions. For example, the federal government removed tax-exemption from over-the-counter purchases. But there’s nothing stopping the state legislature from enacting a state-level exemption for South Carolinians.

South Carolina has at times been at the forefront of HSA legislation. The damage done to HSA plans by Obamacare opens the door for more state-based reform.

Written by SCPC

November 24, 2010 at 12:47 pm

Budget Crisis Long in Coming

with 2 comments

Despite all the rhetoric about budget cuts and employee furloughs, South Carolina’s FY10-2011 budget was the largest in state history. The total state budget was $21.149 billion. This includes: $8.268 billion in Federal Funds; $7.766 billion in Other Funds; and $5.115 billion in General Funds. That’s an increase of $500 million or 2.19 percent over last year. The increase comes mostly from increased fine and fee revenue and one-time federal stimulus dollars.

But this year’s budget increases are not an isolated phenomenon. Over the past 10 years:

  • The total state budget increased by 44.49 percent (FY2002 to FY2011).
  • The budget increased by 4.14 percent annually.
  • The budget increased every year, except one (FY2010).
  • In the five-year period (FY2003-FY2008) prior to the beginning of the current recession, the total budget increased 34.56 percent, going up by more than $5 billion.

According to the Mercatus Center, South Carolina’s state and local government spending relative to personal income is 26 percent – 5th highest in the country. In other words, local and state government spends 26 cents of every dollar earned by South Carolina’s people. Similarly, government spending accounts for 23 cents of every dollar of Gross State Product (GSP) – 4th highest in the country.

Debt is another serious problem. South Carolina government is carrying $40 billion in debt, including state, local, and school district debt, as well as unfunded liabilities on public employee pensions and post-retirement health benefits. State and local governmental outstanding debt accounts for 22 percent of GSP – again, 4th highest in the nation.

So we have high spending and high debt relative to income and GSP. What does that get us?

An unemployment rate of 11 percent – 6th highest in the nation (as of September 2010) and a median household income of $42,442, which is 42nd lowest in the nation (as of 2009). Our surrounding neighbors have unemployment rates of 9.6 percent (North Carolina), 8.9 percent (Alabama), 10 percent (Georgia), and 9.4 percent (Tennessee). A pretty uncompetitive situation for the Palmetto State.

It goes without saying that South Carolina is suffering from a budget and spending crisis – and it’s good to know governor-elect Haley recognizes this. But the crisis is not new. It comes from years of fiscal mismanagement and poor budgetary practices. None of these problems were addressed during the 2010 session. It’ll be interesting to see how legislators respond in 2011.

Written by SCPC

November 22, 2010 at 10:15 am

Federal Health Care Legislation: We Really Don’t Know What’s In It

leave a comment »

Everyone already knows the Patient Protection and Affordable Care Act, also known as Obamacare, is more than 2,000 pages long. (2,562 pages and 511,520 words when

both the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act are combined, notes Michael Tanner.)

But what isn’t publicized much is that through July 31, 2010, there were already 3,833 new pages of regulations added to the Federal Register directly relating to the new law’s implementation.

That means that a bill that was signed into law on March 30, 2010, generated almost 4,000 pages of new regulations in four months. 1,000 pages a month – and counting.

Here are some examples:

1)      Medicare: Updated rules regarding Medicare payments to hospitals. This 95-page section pertains to the policies and price levels for hospitals seeking reimbursement for Medicare patients. So instead of focusing on providing high quality of care to patients, hospitals must devote significant resources to reading and understanding these new rules.

2)      Hospice care: This rule, among other things, updates payment rates and capitalization requirements for hospice and home health agencies. The rule is 106 pages long.

3)      Electronic medical records (EMR): Most doctors will likely tell you that EMR improves patient care. It cuts down on paperwork, and reduces the likelihood of errors (ever heard of a doctor with good handwriting?). But this rule adopts standards, specifications, and certification criteria for health care facilities to implement EMR in their facilities. In other words, 153 pages of new regulations and rules to facilitate a process that is supposed to reduce compliance costs and paperwork. Huh? On top of that, the rule adds new regulations and requirements for offices that already have EMR. These early adapters now need to obtain government certification in order to receive reimbursements for Medicare/Medicaid. But what if the EMR system they have is already working fine? Why force them to switch? This rule could also stifle market innovation in this area by locking in all health care facilities to the module that the government requires.

No doubt, this is just the start of literally entire libraries of rules that are going to dictate everything from how much health care providers charge to how many x-ray machines are found in each hospital.

And we wonder why lawyers love Obamacare.

Written by Geoff Pallay

November 19, 2010 at 7:47 am

Governor-elect launches website to address budget crisis

with 2 comments

In January, Nikki Haley will be sworn in as the new South Carolina governor. Like nearly every other governor across the nation, she is inheriting a budget crisis.

One of Haley’s first actions was to establish a task force with the goal of addressing budget challenges. (Disclaimer: South Carolina Policy Council president Ashley Landess is one of five appointees to this task force.) The task force will, “assist Haley in identifying the most pressing fiscal challenges facing the state.”

Additionally, Haley’s team launched a website – http://www.scbudgetcrisis.org – that will solicit suggestions from taxpayers about ways to balance the budget. Individuals can submit ideas – anonymously if preferred – the task force can consider in working toward streamlining government.

This evokes images of the movie Dave, where an average Joe becomes president for a short time and in one scene, spends an afternoon with his friend trimming $650 million in fat from the federal budget, in order to save a homeless shelter. As the fake president and his friend (an accountant) look through the budget, the accountant quips:
“I’ve been over and over this stuff. It doesn’t add up. Who does these books? If I ran my office this way, I’d be out of business.”

Sums it up exactly.

Hopefully, the budget task force and website will bring that common sense approach to budgeting next year.

To that end, here are three easy fixes to get the ball rolling:

1) Cut agricultural marketing funding. The General Fund provides $562,000 for Marketing & Promotions to the Department of Agriculture. Yet the Clemson PSA receives $62 million already for these and other purposes. Let alone the fact that government does not need to be marketing farms, there is already substantial funding for these activities. And without profit motives, you get things like Palmettovore.

2) Cut state-funded tourism. Proviso 39.12 of the FY10-2011 budget funnels leftover tax dollars from the Motion Picture Incentive Wage Rebate Fund into tourism marketing. Proviso 39.1 allocates $1.375 million for tourism promotion, including money for private chambers: $105,000 for the Georgetown Chamber of Commerce; $50,000 for the Myrtle Beach Chamber of Commerce; and $20,000 for the Williamsburg Chamber of Commerce. These funds are in addition to $10.05 million for tourism advertising already allocated in the total state budget. Tourism marketers and private chambers should have to pay their own way, instead of forcing other taxpayers to subsidize their marketing and advertising.

3) Close the Statehouse Gift Shop. For some reason, each year legislators protect the Statehouse Gift Shop from budget cuts. This is absurd. Why continue to subsidize a business that keeps losing money? Stop this ongoing bailout for the gift shop and let private sector vendors fill the void. That’s how you create a stable job base. Moreover, anyone ever heard of priorities?

These ideas are just a start. And you can find plenty more on our website – for instance, here and here. But we encourage you to submit your own ideas to www.scbudgetcrisis.org.

Written by Geoff Pallay

November 18, 2010 at 1:26 pm

State Tax Working Group Looks at Election Results

with one comment

The State Tax Working Group had its first meeting since Election Day this Wednesday, November 10th. The majority of the group’s discussion, both in D.C. and via teleconference, centered on the election results. The first speaker was Geoff Pallay, editor for Ballotpedia, a collaborative political encyclopedia. (Geoff is also an associate analyst with SCPC.) Pallay gave a brief breakdown of the election results and anticipated that Republican wins could translate into real progress for tax reform efforts.

John Stevenson of the National Taxpayer’s Union (NTU) continued the discussion by looking at the impact of midterm election results. As Stevenson explained, voters nationwide considered state and local ballot measures with profound impacts on tax and fiscal policy. Overall, there were 93 statewide measures on the ballot with the potential to limit taxes or the size of government. Of those, 71 percent passed – including two in South Carolina (cf. H 3396).

Next, Joe Moser, a policy analyst with the NTU, broke down what the election results mean for American taxpayers in different states. Here are some highlights:

  • A Missouri ballot measure targeting the state earnings tax was repealed;
  • In Colorado, voters turned down, by a two-to-one margin, three sweeping measures that would have had positive impacts on taxpayers;
  • Georgia voters rejected a measure that would have imposed a registration fee on vehicles.

A representative of an Ohio-based tax organization next spoke on what the election results meant for Ohio. As Republicans flipped the 99-member House (and retained control of the Senate), Ohioans can expect a new Speaker of the House, William Batchelder. The speaker explained that Batchelder is a tax pledge signer and has called for major Medicaid cuts. Additionally, the speaker mentioned a study released this year by the Buckeye Institute that predicts a $2.3 billion savings for Ohio if public-sector and private-sector salaries are brought into alignment.

Finally, Joseph Henchman of the Tax Foundation concluded the meeting by calling attention to tax reform efforts in both Georgia and South Carolina (i.e., the Taxation Realignment Commission: see here and here). The next State Tax Working Group meeting will be held December 8th, along with their annual D.C. conference held December 1st through 3rd.

Written by SCPC

November 12, 2010 at 2:43 pm

Opposition to Act 388 Still Simmering, Not Yet a Full Boil

with one comment

Local property taxes brought in $4.375 billion in revenue for FY08-2009. This is one reason property tax legislation is a controversial subject across South Carolina. Another reason is the overhaul of the property tax system (Act 388) in 2006. Act 388 has largely been deemed a failure. Most important, the act’s envisioned “tax swap” has arguably increased the overall tax burden.

Thus, discontent over Act 388 continues to simmer, especially as the weak economy has put pressure on realtors and others looking to jumpstart the commercial real estate market. Until calls for the repeal of Act 388 reach a full boil, though, legislators are unlikely to do anything more than tweak the current code.

Below is a sampling of property tax legislation introduced in 2010 – most of which died in committee. As will become clear, lawmakers shied away from fundamental reform. Likewise, the Senate chose not to pass legislation (H 4585) that would have permitted TRAC to look specifically at Act 388. (That said, the tax reform commission did publish an extensive review of property taxes and recommended reforms for those who want to study up on other property tax issues.)

Here’s a review of property tax legislation for 2010:

H 4839 (signed into law): Another example of a law written for the benefit of a very small number of taxpayers. This law clarifies that Medal of Honor winners or prisoners of war (and their spouses) are eligible for a property tax exemption, regardless of when the honor was received.

S 405 (governor’s veto overridden): This law allows watercraft to be taxed as real property, akin to homes and land.

S 976 (read twice in Senate): This bill would have allowed counties to tax property owners to pay for the cleanup of unhealthy or unsightly material.

S 983 (died in committee): This bill would have provided a property tax break for elderly persons who move to a new residence.

S 1006 (died in committee): This bill would have increased the homestead property tax exemption from $50,000 to $100,000 for persons aged 65 and over.

S 1119 (died in committee): This bill would have required property be valued at the most recent assessment, rather than the original purchase price, as regards eminent domain/takings lawsuits.

H 3480 (died in committee): Currently, fair market value is based on the appraised value of a home for tax year 2007. This bill would have changed that to 70 percent of the appraised value from 2007 – likely owing to the steep decline in home values since the beginning of the recession.

H 4179 (died in committee): This bill would have exempted improvements, that would otherwise be taxable, made to property by its owner. The exemption is aimed at unsold and unoccupied commercial structures, individual units in commercial structures, and individual units in residential structures.

H 4268 (died in committee): This bill would have capped the fair market value increase on property at 15 percent.

H 4830 (died in committee): This bill would have created another exemption for retirees. In this case, the bill exempts one vehicle from property tax for persons aged 65 and older.

H 4934 (died in committee): This resolution proposed amending the state constitution to: provide for a definition of “fair market value”; eliminate the 15 percent limit on increases in property value over 5 years; and delete an “assessable transfer of interest” as an event that changes the value of property for the purpose of levying taxes. If passed, the resolution would have been submitted to voters for approval.

H 4935 (died in committee): This bill would have made significant changes to current property tax law. Among the proposed changes would be a return to the former policy of allowing local governing bodies to increase mileage rates via a positive majority instead of a supermajority.

See the Best/Worst 2010 Property Rights Chapter for additional analysis of legislation related to private property rights.

Written by Jameson Taylor

November 9, 2010 at 12:03 pm

Posted in Taxes

Tagged with