The Palmetto Insider

The blog of the South Carolina Policy Council

Archive for the ‘Transparency’ Category

Let Us be Thankful for Transparency

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There are a lot of things that we should be thankful for today.  So let’s give thanks for the transparency tools that we do have. More and more resources are being created to hold government accountable on the state and federal levels.

On the state level:

On the national level:

When it comes to holding government accountable, what sites or services are you thankful for this year?

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Written by Chip

November 25, 2010 at 1:00 pm

Posted in Transparency

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BEA Should Think Like Economists, Not Accountants

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We’ve made no secret of the fact that we think the state’s Board of Economic Advisors (BEA) could improve upon its analysis of legislation proposed in the General Assembly. As we recommended in our recent report on economic incentives transparency, Three Steps Toward Transparency:

“In addition to any data provided by the BEA, legislators should also be provided (prior to second reading) with a dynamic cost-benefit report demonstrating the pros and cons of the proposed investment strategy, including the impact on existing taxpayers and businesses. This supplemental analysis should be conducted by an independent economist who is not a publicly paid employee, unless that economist is an employee of a public four-year university.”

Our motive in calling for independent analysis, on top of what the BEA does, is that the BEA’s static revenue impact statements rarely capture the true fiscal consequences of a proposed tax increase, cut, exemption, subsidy, or what have you.

Currently, per S.C. Code of Law sections 2-7-71, 2-7-72, 2-7-76 and 2-7-78, the Board of Economic Advisors, a division of the Budget and Control Board (BCB), is required to submit a statement of estimated revenue impact or estimated expenditure impact on revenue (tax) and expenditure (spending) bills, both at the state and local level.

On the surface, this analysis should provide legislators with accurate and useful information they need to make informed decisions about spending and taxing. But that’s not always the case.

One problem is that the analysts at the BEA seem to approach their responsibilities more like accountants than economists.

The impact statement provided for S 999 provides a good example of this mindset. In essence, S 999 would mandate that an individual’s taxable gross income excludes unemployment benefits. The BEA estimated that the tax cut would have reduced General Fund revenue by about $33.010 million in FY10-2011.

This is how the BEA arrived at its calculations:

The state allocated $917.971 million in unemployment compensation benefits for FY2009.

The current tax rate for unemployment benefits is 5.8 percent.

62 percent of all South Carolina taxpayers have income tax liability.

$917.971 million times 5.8 percent times 62 percent equals …

$33.010 million in reduced tax revenue.

This is a fundamentally flawed analysis because it is:

  • Based on historical, instead of projected, or longitudinal, data. Instead, the BEA should have conducted an analysis based on future economic projections and possible alternatives forgone (opportunity costs).
  • Uses a one-year analysis. Instead, the BEA should have conducted a multi-year analysis. Since this exemption would be in effect indefinitely, analysis should be conducted for 5-year, 10-year, or even 20-year, timeframes.
  • Employs simplified assumptions and risk calculations. The BEA assumes that 62 percent of those receiving unemployment benefits have income tax liability. But this number is based on the number of taxpayers statewide. Wouldn’t unemployed persons, generally, have lower-incomes and so make up a greater percentage of those persons with no tax liability? Thus, wouldn’t the resulting reduction in revenue be less than assumed by the BEA?

If the BEA approached these issues with the mindset of an economist, it would have stated the real economic impact, both explicit and implicit, on every revenue stream, including the General Fund, Other Funds and Federal Funds.

As far as S 999 goes, an economic analysis would consider the following issues:

  1. Short-term employment effects and long-term economic growth: such as whether the unemployment rate is expected to increase or decrease.
  2. Economic efficiency: such as whether this bill is the best option for achieving its desired end, or whether resources could be used more efficiently to accomplish the same end.
  3. Cost/benefit analysis: using various scenarios with assigned probability based on different economic assumptions and factors. For instance, considering whether the exemption would increase earning power among low-income consumers. If so, what would the extent of the increase be and how likely is it to occur? Likewise, what impact might it have on job growth?

If the BEA began to conduct more rigorous economic analysis using real-life, on-the-ground assumptions and statistical models, legislators and the general public would gain a better understanding of the true costs, as well as benefits, of important pieces of legislation. Granted such analysis would take more time and use more resources, but the resulting transparency would be well worth it.

To read more about transparency initiatives in the 2010 General Assembly, see our latest Best/Worst.

Written by Simon Wong

November 16, 2010 at 2:26 pm

Posted in Transparency

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Does South Carolina need a Sunset Review Commission?

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In the midst of all the talk about budget cuts and shortfalls, state spending for FY10-2011 was the largest in state history.

Logically, cutting the budget requires policymakers to determine what should be cut – ideally, inefficient programs.

However, South Carolina does not have a permanent standing agency or commission that continually assesses how well government is working.

The key words here are “continual assessment,” as opposed to a temporary or one-time discrete assessment.

What is needed is an institutionalized and methodical way to assist legislators in making budgeting decisions.

To some extent, the S.C. Legislative Audit Council (LAC) performs this role.

But according to the most recent nationwide survey of legislative program evaluations offices conducted by the National Conference of State Legislatures (NCSL), the LAC dedicates 100 percent of its workload to performance audits, program evaluations and policy analysis.

None of these activities are quite the same as pinpointing what agencies/activities should be eliminated or outsourced – that is governmental sunset reviews.

Already, a fifth of the nation’s state legislative auditor offices regularly conduct sunset reviews that examine state agency effectiveness and efficiency.

During the 2010 legislative session, H 3192 was introduced to create a legislative Sunset Review Commission and a Sunset Review Division of the LAC to evaluate state programs. The measure passed the House (without a recorded vote), but died in committee in the Senate.

But certain questions should be addressed before lawmakers reintroduce such legislation in 2011:

  • Should the LAC be conducting sunset reviews? Is any other agency (the Comptroller General, for instance) better qualified to do them?
  • Should the LAC share co-responsibility for such reviews with another state agency? For instance, the Comptroller General or the Office of the State Auditor?
  • How often should a sunset commission conduct a review of each agency? Every 2 years? Every 4 years?
  • What other safeguards or benchmarks should be implemented to ensure a sunset review commission will achieve its intended mission? This question is especially important since South Carolina previously had a sunset commission (abolished in 1998) that failed to eliminate underperforming agencies.

All in all, lawmakers need to find ways to eliminate waste if they wish to optimize the budget. Sunset reviews may be one of the answers – if we can begin by asking the right questions.

Written by Simon Wong

November 3, 2010 at 3:14 pm

Gross receipts tax hurts small businesses

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Earlier this year, the Policy Council began providing research on local government issues – particularly in Aiken – surrounding the city’s arcane business licenses policies.

In short, business owners in most municipalities are forced to pay governments for the right to conduct business. Take this snippet from the City of Aiken business license ordinance:

Every person engaged or intending to engage in any calling, business, occupation or profession listed in the rate classification index portion of this ordinance, in whole or in part, within the limits of the City of Aiken, South Carolina, is required to pay an annual license fee for the privilege of doing business and obtain a business license as herein provided.

Additionally, the manner in which these licenses are levied – through a gross receipts tax – makes the system even more burdensome to business.

The entire gross receipts system is based on a single sentence in the state code of law. In South Carolina, Section 5-7-30 grants municipalities the right to: “levy a business license tax on gross income”

Take for example, the company that earns $50,000 more in gross receipts than the prior year. That company then uses that $50,000 to hire another employee. Because their license is based on gross receipts – and not profits – their tax burden increases – regardless of whether they actually had higher profits.

Now, two Southeastern economists have explored the issue of gross receipts taxes – an issue Georgia is researching with a tax commission similar to TRAC.

Robert Lawson and Frank Stephenson, writing for the Georgia Public Policy Foundation, offer some number crunching on how destructive this form of taxation is on business.

“…when the tax base is gross receipts rather than net receipts, the tax is effectively larger on low profit margin firms (such as grocers) than on higher profit margin firms. Moreover, the taxation of gross receipts rather than net receipts means that firms incurring losses are still subject to the tax. That could act as an impediment for start-up firms, which often require some time before becoming profitable. Applying the tax to firms incurring losses also means that the gross receipts tax bears no relation to firms’ ability to pay, one of two commonly cited normative criteria for tax equity.”

Georgia has been looking at adopting a gross receipts tax. But South Carolina’s experience with the tax should give lawmaker’s reason to reconsider.

  • To begin with, the tax is not transparent. As Lawson and Stephenson write: “That the tax is embedded rather than appearing as a separate line item on sales receipts is probably part of the renewed appeal of gross receipts taxes among state politicians. Customers who see the price of bread rise by a few cents may not realize that a new gross receipts levy is responsible for the increase.”
  • Second, taxes are supposed to be based on the benefit principle – which states that tax burdens should be relative to the benefits received from government services. As Stephenson and Lawson point out, “Since a gross receipts tax makes no adjustments for the intensity of firms’ use of government funded services (e.g., roads), it is not consistent with the benefit principle of tax equity.”

With all the talk about cutting taxes for business, especially small businesses, lawmakers should look at replacing the gross receipts tax with a flat fee. In Georgia, for example, many municipalities use a national “profitability ratio” to determine the fee. Under this scenario, each type of business pays a similar license fee – which lowers the compliance costs for the business by simplifying the process.

Fixing this tiny section of state law would provide a huge boost to businesses – without having to play special interests or favorites.

Written by Geoff Pallay

October 20, 2010 at 7:46 am

Open government tools for more transparency

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John Moore (@johnfmoore) has an interesting post on Govinthelab.com: Can open government reduce political corruption?

While no one is surprised to read about corruption in government my question is how can we use government 2.0 technologies to add more transparency to government, making the fear of losing power greater than the gains made possible by corrupt behavior…”What about local level government? This is where the push for publishing data in open formats becomes critical. The upfront cost to publish open data may, in some cases, be high. However, cost reduction is generally seen as fewer people need to visit town/city halls to request documents.”

Moore’s ideas of transparency through technology are right. Being able to track campaign contributions, posting check registers online, recording votes, and monitoring lobbyists through open formats all play a vital role in holding government accountable.

Sites like Ballotpedia, Sunshine Review, Influence Explorer, Follow the Unlimited Money, S.C. Ethics, S.C. House Expenses, S.C. Senate Expenses and South Carolina Votes arm citizens with important data about what’s going on in their state and helps them make more informed decisions as voters.

For more information on the #opengov movement and ideas check out: #opengov on twitter.

Written by Chip

October 18, 2010 at 9:58 am

Posted in Transparency

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Putting Lawmakers’ Salaries in Context

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The Nerve is running an interesting piece today on legislative compensation. They found that the average legislator earns $32,000 a year once salary, per diem and in-district compensation is accounted for.

$32,000 may not seem like a lot of money – until we realize that average per capita income in South Carolina was just under $32,000 for 2009.

Or that lawmakers earn $32,000 for working three days a week for five months a year.  That translates into $6,400 a month.

Or that $32,000 is a starting teacher’s salary in South Carolina.

Of course, because lawmakers have failed to index the state’s tax brackets, $32,000 is more than enough to catapult them into the state’s top income tax bracket of 7 percent for income over $13,700/year.

Then, again, the IRS apparently also considers anyone who earns more than $32,000 to be “wealthy.” Such earners rank among the top half of U.S. taxpayers and paid more than 97 percent of all income taxes in 2007, according to an IRS report issued last year.

Putting things into context, $32,000 for five months work is not too shabby.

But putting things into context …

  • And an on-time graduation rate of only 55 percent

… And it’s fair to ask whether the citizens of South Carolina are really getting their money’s worth?

Written by Jameson Taylor

October 6, 2010 at 3:42 pm

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Clearing Up Confusion on Legislative Transparency

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Today’s Nerve story provides a rare glimpse into how things work in the Legislature and what the legislative leadership thinks about transparency.

For some – namely, Rep. Ralph Norman – transparency means opening up all House caucus meetings to the public. Norman’s call for greater transparency in the House Republican Caucus meeting last night was met with little enthusiasm.

According to Rep. Chip Limehouse, opening up all meetings to the public would hinder the ability of caucus members to openly discuss controversial policy issues. And he has a point … if one assumes representatives don’t want their constituents to know what they actually think about these issues.

That said, the caucus meetings are also used to pass House rules and to elect the speaker. And these are matters that should certainly be open to public scrutiny.

Accordingly, S.C. Attorney General Henry McMaster issued a formal opinion in 2006 finding that the House majority caucus is a public body subject to state Freedom of Information Act (FOIA) requirements. Under state law, all meetings of public bodies must be open to the public. As things stand, only some meetings are open, with the decision made on a case-by-case basis.

But McMaster’s opinion does not carry the force of law – and, thus far, no one has sued the caucus in an attempt to clarify whether the state’s FOIA laws actually apply to the meetings.

Norman’s definition of transparency seems fairly straightforward – the House caucus meetings should be open to the public so that voters can know what their representatives think about contentious issues, such as budget cuts to favored programs. Under such circumstances, Norman also supports an open vote for speaker.

Previously, though, Norman had called for a secret ballot vote for speaker. As The Nerve reports, “He did so because he believes there could be retribution from the current speaker.”

To summarize, this seems to be Norman’s position:

If caucus meetings are going to remain private – and the fear of retribution salient – the speaker should be elected by secret ballot.

But, the better – and apparently, more constitutional – choice is to open up all caucus meetings to the public and retain the current open ballot process for electing the speaker. No doubt, retribution will still be forthcoming, but at least everyone – including the public – will know why.

The irony in all of this is that Speaker Harrell apparently agrees that an open vote for speaker is the most transparent option. But if this is the case, why not also consider opening up all House caucus meetings to the public?

It would seem the speaker, as well as the caucus as a whole, is confused about what transparency really means.

… Except there’s no confusion here. An open vote in a closed-door meeting has nothing to do with transparency and everything to do with power.

To learn more about how the S.C. Legislature is frustrating transparency, freedom and good government, see our new special report calling for legislative reform.

Written by Jameson Taylor

September 30, 2010 at 12:48 pm