Property Tax System Is A Mess

A recent news report indicated that the Charleston County School District (CCSD) finished the 2015 fiscal year June 30 with an $18 Million deficit. A school board member quipped, “That’s just a rounding error.” There are five school board seats on the ballot in 2016 – I hope we can find five candidates who take our tax money more seriously than that!
A subsequent report revealed the deficit came from an unanticipated $14 Million overage in the personnel budget, which is inexplicable, and a shortfall in anticipated funding from the Upper King Street Tax Incremental Financing District (TIF) and Boeing. Some people in the finance department should be fired for not noticing and reporting the problem in the personnel budget. The property tax revenue issue merits further reflection.
Our property tax system, which funds 61 percent of the CCSD’s $16,200-per-pupil costs, is extremely complex and far from uniform. The passage of Act 388 in a 2006 referendum vote, made the system more complex and shifted much of the property tax burden to businesses, rental properties and vehicles.
Act 388 exempted owner-occupied properties from the school operating component of the property tax bill, which was more than half in most school districts. The revenue was offset by raising state sales tax from 5 percent to 6 percent. For the vast majority of homeowners, that looked like a great deal. But for business and rental property owners and vehicle owners, it meant whenever the CCSD increases the millage rate, they would pick up all of the costs.
In a 2015 press release, S.C. Chamber of Commerce CEO Ted Pitts stated, “When they (school districts) try to generate more revenue, there is really only one place they can go and that’s property tax on businesses, small and large.” Increased property tax on businesses means less expansion and new hiring and fewer pay raises for employees. Increased property taxes on rental properties result in higher rental costs.
Not all businesses have the same property tax liabilities, however. Corporations with an army of lobbyists can negotiate a Fee In Lieu of (property) Taxes (FILOT) agreement with local governments. They pay a flat fee to local governments (including school districts) and aren’t on the hook when millage rates are increased. Boeing is under a FILOT agreement, but the CCSD should have known how much money the corporation sends each year.
State law has minimum standards for FILOT agreements, including at least $20 Million in capital investment and 400 jobs created over a negotiated time frame. Beaufort Sen. Tom Davis has long opposed special property tax incentives. Sen. Davis states, “That’s not the true source of wealth and prosperity for our state.”
Another quirky aspect of our property tax system is the emergence of Tax Incremental Financing Districts (TIFs), starting in 1984. The concept began in California as a way to finance infrastructure improvements in blighted areas. Developers pay the regular property tax rates, but the revenue goes to the infrastructure for their projects. Local governments, including school districts, may opt out of a TIF and receive their share of the developer’s property taxes.
There are an increasing number of TIFs popping up in our area, including the Horizon Project between The Citadel and MUSC and the Magnolia Project in the Neck area. These projects may have a lot of merit and attract great employers to the area, but if the CCSD accepts the terms, it will wind up increasing millage rates and raising taxes on businesses and rental properties outside of the TIFs.
Another flaw in our property tax system is the highest effective tax rate in the country on industrial property and business equipment. South Carolina’s rate is 2.5 times higher than Georgia’s and 4 times higher than North Carolina’s, putting us at a competitive disadvantage in manufacturing. This tax also applies to business equipment, ranging from service vehicles to copy machines. It does not apply to manufacturers with a FILOT agreement like Boeing.
The consequence of having such a high tax on industrial machinery and business equipment is a disincentive for existing businesses to invest in new equipment and a barrier to small manufacturers building here. Lowering the rate would require a two-thirds vote in the House and Senate.
In order to have a property tax system, which works for everyone, we will need our leaders in the General Assembly to work with business leaders and local governments to retool it. Lower rates will mean more business expansion, less vacant retail space and greater prosperity. We can do better..
John Steinberger is the former chairman of the Charleston County Republican Party, a leading Fair Tax advocate, and a West Ashley resident. He can be reached at John.steinberger@scfairtax.org.