April 26, 2006

South Carolina: Breaking New Ground on Property Tax Reform

South Carolina senators continued their never-ending debate over how best to achieve property tax reform last week--and finally threw in the towel until early May. While much of the debate was familiar-- anti-tax lawmakers continue to muddy the waters by insisting that the only way to prevent Palmetto State families from being taxed out of their homes is to completely repeal the school property tax-- one interesting development is a plan that would create a big and bold property tax circuit breaker.

South Carolina is one of the few states without a circuit breaker of any kind-- but this proposal would go from zero to 60, rebating all property taxes exceeding five percent of a homeowner's income for anyone earning less than $40,000. The proposal was in an amendment that got rejected, but you can read the text in the Senate's journal here.

There are design issues to complain about here-- no relief at all for renters, and five percent is probably too high a threshold to be really effective for low-income homeowners--but a circuit breaker that has no cap on the allowable credit would be unprecedented. Every circuit breaker in existence has a maximum credit amount-- this one apparently doesn't.

Circuit breakers always give property taxes a little hint of the "ability to pay" principle that income taxes implement so well, so adding a circuit breaker amounts to changing the property tax to more of a hybrid property-income tax-- but an uncapped circuit breaker is a bold attempt to precisely define the limits of a homeowner's ability to pay, basically asserting that no low-income South Carolinian's property tax should EVER exceed five percent of their income. It would make the South Carolina property tax a lot more like a (flat-rate) income tax.

This would be expensive, although certainly less so than the other proptax reform solutions being thrown around the Palmetto State. It would be potentially hard to administer, since you need to know each family's total income as well as their total property tax to decide whether they get it. And it would arguably be better to save a little money by putting a cap on the allowable credit and then lowering the %-of-income threshold for low-income taxpayers to something less than 5%. But this is a promising step.


At 7:24 AM, Blogger John Ruoff said...

A promising step that disappeared in the end.

The bill given second reading on Thursday instead raises the sales tax by half a penny to create a homestead exemption that will, on average, cover homes assessed up to $330,000 on county operations. We currently have one on school operations up to $90-$100,000. For the average South Carolina owner-occupied home, this would effectively eliminate all property taxes except municipal taxes and special purpose districts. The homestead exemption goes to county operations taxes(30-40% of the average property tax bill) so that lower-income homeowners--already exempt from school operations taxes--benefit from the tax swap. Sales tax proceeds are redistributed according to county population.

In addition, the bill creates a local option to raise sales taxes to replace remaining property taxes on owner-occupied homes and such other classes of property as the referendum petition may designate. A county choosing the local option, triggers millage caps tied to CPI.

The bill still faces third reading in the Senate where it should require a 2/3rds vote of the entire Senate membership (31 votes)--despite some crafty drafting--because it creates exemptions for non-owner-occupied residential classes of property. The tabling motion on the final amendment had only 29 votes on the side of this amendment.

Many Democrats and a few Republican allies in the Senate have attempted to use property tax reform as a vehicle to change school funding in South Carolina. Currently, the bulk of school funding is local property taxes. State funding is based on formulas which do not take poverty into account and leave rural school especially in dreadful shape. (See http://www.corridorofshame.com/) The Democratic plan--actually put forward by a low-country Republican--would have transferred all school operations funding to the state through a 2 cent statewide sales tax increase, a 75 mill statewide property tax, an increase in the real estate transfer tax, and by changing or eliminating a number of sales tax exemptions. The school funding formula would have incorporated a poverty weighting for the first time--although one far from what is needed. Many of the Senate's Democrats saw this as the last real opportunity to address education equity funding since an equity funding lawsuit found that schools in the "Corridor of Shame" met the state Constitutional test of "minimal adequacy" except that they failed to address the effects of poverty through early childhood programs. The General assembly is responding with a Chump Change for Children approach.

If passed on Monday, the bill faces a Conference Committee and an attempt to reconcile this with the House version, which raises the sales tax 2 pennies (to 7 cents statewide), exempts all owner-occupied homes from property tax, removes the sales tax on groceries and imposes revenue caps.


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