There’s something to be said for reading the S.C. Constitution.
In one example, the state’s founding charter has been cited many times as a big hurdle to lowering South Carolina’s manufacturing property tax rate – widely reported as the highest in the nation – because property tax rates are set in the constitution.
That’s in Article 10, Section 1of the document.
Therefore, the thinking goes, lowering the manufacturing property tax rate requires the herculean task of amending the constitution.
But as it turns out, that’s not the case.
Indeed, a little-known clause in the constitution empowers the General Assembly to change the tax rate on manufacturing and industrial property – and, for that matter, all forms of taxed property – by simply voting to do so.
It must be a supermajority vote – two-thirds of the members of both the House and Senate.
Nonetheless, that’s a smaller hill to climb than a constitutional amendment, which requires a two-thirds vote by both chambers agreeing to put the matter to South Carolina voters in a statewide referendum.
Then, voters must approve the change and the House and Senate have to ratify the amendment.
In the current scheme of things, state law allows companies locating or expanding in South Carolina to negotiate with counties for a lower property tax rate through a fee-in-lieu-of-taxes, or FILOT, agreement.
It is a widespread practice, and one that has spawned secrecy in local economic development incentives, with county officials typically crafting such agreements behind closed doors.
The alternative route to changing property tax rates statewide is detailed in Article 10, Section 2 (d) of the S.C. Constitution.
At least one state senator, Republican Tom Davis of Beaufort County, has known about that provision for several years. And Davis tried to make use of it during the recently ended, two-year legislative session.
When it began, in January 2011, Davis filed a bill to lower the manufacturing property tax assessment ratio with a two-thirds vote of the Legislature. The bill, S. 347, called for reducing the ratio on industrial assets from 10.5 percent, as designated in the constitution, to 6 percent.
The assessment ratio determines the value at which property is taxed.
The Davis bill was sent to the Senate Finance Committee, chaired by Sen. Hugh Leatherman, R-Florence. The committee never acted on the proposal, and it died at the end of the session.
However, Davis says, “I talked with Sen. Leatherman this past session and told him that I think the tax code is very punitive for start-ups and economic freedom in South Carolina, and he indicated that he would be willing to look at that with me.”
Davis and many other observers, in various fields and of different political leanings, believe that South Carolina’s 10.5 percent ratio for manufacturing property hurts the state’s economic competitiveness.
“What it does is it discourages capital formation in South Carolina,” Davis says.
Lewis Gossett is president and CEO of the South Carolina Manufacturers Alliance. “Well, we would certainly support lowering it to 6 percent,” Gossett says.
But even Gossett was surprised to learn that doing so would not require a constitutional amendment. “I didn’t know that,” he said. “That’s news to me.”
Davis says he found out about it while serving as a chief of staff to former Gov. Mark Sanford. “I knew about that because when I was working for Gov. Sanford, we looked at provisions of the tax code that discouraged investors,” Davis says.
Separate studies – both released in April 2011, but by decidedly different entities – ranked South Carolina’s manufacturing property tax rate at or near the highest in the nation.
The studies considered effective rates, or what the amounts were after things like FILOTs were factored into the equation:
- The Minnesota Taxpayers Association, which describes itself as a “nonprofit, nonpartisan organization dedicated to the advancement of efficient, economical government,” in the group’s “50-State Property Tax Comparison Study”; and
- Ernst & Young, one of the largest professional services firms in the world, in the company’s “Competitiveness of State and Local Business Taxes on New Investment” report.
In the Minnesota Taxpayers Association report, South Carolina’s rate is the steepest across the board, whether in rural or urban areas and regardless of other factors.
In the Ernst & Young review, the property tax rates on industrial structures in five other states, ranging from 3.35 percent to 4.35 percent, exceed South Carolina’s 3.3 percent.
But, at 4.75 percent, the Palmetto State’s rate on industrial machinery and equipment is far and away the highest in the Ernst & Young study.
The S.C. Taxation Realignment Commission, a panel the Legislature created a few years ago to recommend reforms to the state tax code, advised – here comes the refrain – “a constitutional amendment lowering the assessment ratio for manufacturers.”
Known as TRAC, the panel also suggested another option – one that relates to those secretive fee-in-lieu-of-taxes agreements.
The commission said that, aside from a constitutional amendment, legislators should change state law to allow existing companies that do not have a FILOT to seek one.
“From an economic development and competitiveness standpoint, while counties have the ability to lower the tax rates for new manufacturing facilities with fee-in-lieu, so do other competing states,” says TRAC’s final report, released in December 2010.
Continuing, it says, “In addition, older facilities which predated the enactment of fee-in-lieu, many smaller manufacturing facilities, and many expansions are not in, or eligible for, a fee-in-lieu.”
To Davis, FILOTs are another problem with South Carolina’s highest-in-the-nation property tax rate on manufacturing.
He contends that the agreements represent a broken system in which politicians dole out incentives as the prescription for economic advancement in South Carolina. “That’s not the source of true wealth and prosperity for our state,” Davis says.
Rather, the road toward those outcomes, the senator says, is evenly paved with reduced taxes on wealth creation and capital formation.
In the case of FILOTs, Davis says they favor big companies with the “political clout” to secure the agreements.
Gossett of the Manufacturers Alliance agrees. “It (the 10.5 percent assessment ratio) makes economic development incentives necessary,” he says. “So that’s the way the game has to be played.”
Might that “political clout” thing explain why the General Assembly has failed to do what it clearly could do – vote – to lower South Carolina’s highest-in-the-nation manufacturing property tax rate?
Reach Ward at (803) 254-4411 or eric@thenerve.org.