Correcting a mistake.
That’s how Republican state Rep. Jim Merrill describes recently enacted legislation he sponsored that significantly offsets a bitterly unpopular tax increase on rental and commercial property known as “point of sale.”
Despite the rollback, however, many observers say South Carolina’s property tax system remains an uncompetitive, unfair mishmash of different rules for different taxpayers.
“It’s one of the single biggest deterrents to creating jobs in the private sector in South Carolina,” Lewis Gossett, president and CEO of the South Carolina Manufacturers Alliance, says of the state’s 10.5 percent assessment ratio on manufacturing property.
That’s the highest in the United States.
The point-of-sale pill was created through major changes to the state tax code in 2006.
One of those is called Act 388. Among other things, it eliminated the property taxes on owner-occupied homes that helped pay for school operating expenses.
In exchange, the state sales tax was increased 1 percent, except on groceries.
Along with Act 388, the way that property – residential, commercial and the like – is taxed after it is sold or otherwise changes hands was altered.
Previously, the taxable value of such property, just like property that does not change hands, was subject to change only under reassessments. State law requires counties to conduct a reassessment every five years, and each county operates on its own five-year reassessment schedule.
Point of sale changed the rules for property that’s transferred in non-reassessment years.
Instead of the taxable value of such property remaining the same until a reassessment, it now goes to the market value when it changes hands – hence the point-of-sale moniker.
For taxpayers hit with point of sale, it’s a poison pill that has led to, for example, wildly varying property tax bills in neighborhoods with similarly valued homes.
“That’s the disturbing part of point of sale,” says Richland County Assessor John Cloyd.
On a broader level, point of sale has exacerbated a depressed real estate industry in South Carolina, according to industry watchers and others.
“South Carolinians shopping for a second home have been chilled by the ‘sticker shock’ of the annual taxes which would be due on a second home,” says the final report of the S.C. Taxation Realignment Commission.
Known as TRAC, the commission was a special panel the General Assembly created to study most of the state tax code and recommend ways to reform it. The commission issued its final report in December.
Says Cloyd, “There have been sales of property that have not gone through because of point of sale.” He describes it as inequitable and bad public policy.
Merrill, a vociferous critic of property taxes, agrees.
The lawmaker, who represents Berkeley and Charleston counties and has served in the S.C. House since 2001, says he was one of the lawmakers involved in crafting Act 388.
“The point of sale should not have been included in the first place,” Merrill says. “It was a mistake.”
Enter his recently enacted legislation, H. 3713.
It rolls back 25 percent of the taxable value of properties subject to point of sale, though the taxable amount cannot fall below the existing assessed value of a property unless it is sold for less than that.
The Merrill measure mitigates a spike in many point-of-sale property tax bills. But it has one huge limitation: It applies only to rental and commercial properties.
Those are assessed at 6 percent of their market value.
This is where the spires in South Carolina’s property tax landscape emerge.
Under Article 10, Section 1 of the state constitution, different classifications of property are taxed at different levels based on various assessed ratios of their fair market values.
In addition to 10.5 percent for manufacturing and 6 percent for rental and commercial property, owner-occupied homes are assessed at 4 percent while transportation-related assets, such as railroads, are assessed at 9.5 percent.
“In short, South Carolina’s property tax system is a product of extremes,” says the TRAC report.
It says the state has the highest property taxes in the nation on manufacturers and “a low tax burden on urban primary residences, very high tax levies on boats and planes, one of the lowest in the country for primary residents over the age of 65 that live in an urban county, and some of the highest national tax rates on commercial and industrial property, and the lowest tax rates on residential property.”
Says Nick Kremydas, CEO of the South Carolina Association of Realtors, which fought vigorously to deep-six point of sale, “We’ve got lots of equity issues here.”
To Kremydas, Cloyd and others, Act 388 and Merrill’s point-of-sale rollback exemplify those issues.
In making this point, they note that the elimination of property taxes for school operating expenses under Act 388 applied only to owner-occupied homes, not rental and commercial property.
Conversely, the Merrill legislation left out primary residences.
“What they were trying to do was find a way to give some break to the 6 percent (ratepayers),” Cloyd says of the rollback.
That’s how the bill ended up. But that’s not how it started out.
Initially, Merrill says, his proposal included all property. “So it was a much more difficult bill to get passed,” he says.
Through the process of legislative compromise it was amended to apply strictly to properties assessed at 6 percent. “It was more a matter of asking for it all and getting half a loaf,” Merrill says.
As for manufacturers, they are able to obtain property tax relief by negotiating fee-in-lieu-of-taxes agreements with county governments. Such agreements usually run for 20 or 30 years.
But, in another example of inequity in the state’s property tax system, only companies establishing new operations can vie for fee-in-lieu-of-taxes relief. Existing manufacturers cannot, putting them at a disadvantage to out-of-state and even in-state competitors.
That’s why the TRAC panel recommended that the Legislature change state law to allow established manufacturers to enter into fee-in-lieu-of-taxes, or FILOT, agreements.
Critics also point out that FILOT negotiations, like all economic development talks, take place behind closed doors.
That not only removes transparency from the process, but it also empowers politicians to cut deals in secret and then emerge in front of cameras and brag to voters and taxpayers about creating jobs.
To some, one solution to the state’s property tax problem is to level the playing field by applying the same assessment ratio to all property classifications.
Says Merrill, who describes the property tax as an “insidious, unfair, unpatriotic, anti-American tax”: “I’m hopeful for that. I agree with that completely.”
But getting to one assessment ratio would be a herculean challenge.
For one thing, it would take a constitutional change.
“That’s one of your significant hurdles to dealing with any property tax issues,” says Gossett of the Manufacturers Alliance.
Secondly, such a change would lead to some taxpayers winning – by having a lower rate – but others losing by having a higher rate.
“It’s kind of hard to get around the fact that it would be a tax increase for some and a decrease for others,” Merrill says.
Reach Ward at (803) 254-4411 or eric@thenerve.org.