June 14, 2006 - Property Tax Restructuring Legislation
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June 8, 2006 - Ordinance Required to Implement 2006 Reassessment Program
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June 14, 2006 H.4449, R417 --  Property Tax Restructuring Legislation

The General Assembly passed two major pieces of legislation this session relating to the property tax system. The statutory legislation is H. 4449 (R. 417) and was signed into law on June 10, 2006. This legislation is largely statutory implementation of the constitutional changes made in H. 4450 (R. 418). The constitutional changes will be voted on in the November referendum and the General Assembly must then ratify a positive result before the constitution is amended. Those changes would become effective in 2007. Most of the statutory provisions in H. 4449 become effective either January 1, 2007 or upon ratification of the constitutional provisions in H. 4450. Those provisions which become effective upon the signature of the Governor are generally not the major provisions of the legislation. The portions of the bill which are effective immediately will be clearly indicated as such. This Technical Bulletin is an overview of two complicated pieces of legislation designed to give the reader a basis for an in depth study of the acts. By necessity, there are many details not addressed and there may be more than one interpretation of some provisions or combinations of provisions. Please do consult your county attorney and other appropriate authorities before taking any action on these pieces of legislation. Copies of both pieces of legislation are enclosed for your convenience and further study. Of course, the SCAC staff is available to take questions or do additional research. Please feel free to contact the staff at 1 (800) 922-6081. Constitutional Amendments - H. 4450, R. 418 H. 4450 amends both Article III, Section 29 and Article X, Section 6 of the South Carolina Constitution. The change to Article III, Section 29 was to state that taxes on real property must be ascertained by methods prescribed by the General Assembly. This is a change in the current constitutional language which requires taxes on real property be laid upon the “actual value” of the property. The amendment does not change the existing language regarding the valuation of personal property. The are two significant changes in the amendment to Article X, Section 6. First, is an explicit authorization for the General Assembly to define the “fair market value” of real property, when real property has been improved or losses have occurred to change the value of the real property, and when an “assessable transfer of interest” has occurred. These changes are designed to overcome any legal argument based upon the plain meaning of “fair market value” preventing the changes the General Assembly has proposed to the property tax system. The changes also allow the General Assembly more latitude in creating the mechanics of implementing the proposed property tax system changes. The second change to Article X, Section 6 is the more substantive change. That change states that real property shall be valued by the method prescribed by the General Assembly so that, after adjusting for improvements and losses, its value does not increase by more than fifteen percent every five years, unless the real property is transferred. This is the fifteen percent cap on increases in value resulting from reassessment. The cap is cumulative, meaning that the increase in value is calculated upon the last value and not a base year. The constitutional amendment must be approved by voters in the November, 2006 referendum and it becomes effective when the General Assembly passes an act to ratify the amendment in the next legislative session. Statutory Property Tax Restructuring - H. 4449, R. 417 H. 4449 is a lengthy bill with numerous provisions. The Act is broken into six portions labeled as follows: Part I - Property Tax Exemption and Sales Tax Increase Part II - Distribution of Revenue and Millage Limitations Part III - Local Option Property Tax Credits Part IV - Valuation of Real Property Part V - Miscellaneous Provisions Part VI - Time Effective This summary will follow the order the provisions appear in the legislation. The one exception to this general approach will be to move some provisions in earlier parts of H. 4449 into the discussion of the entitled miscellaneous provisions. Part V of the Act and the portions moved into that discussion are generally the only portions of the legislation which are effective upon signature of the Governor. The remainder of the Act is generally effective January 1, 2007, or upon ratification of the Constitutional amendment proposed in H. 4450. To assist you in finding the appropriate code section in the Act, the code cite will be placed in the summary in [square brackets]. Property Tax Exemption and Sales Tax Changes - Part I Beginning June 1, 2007, the statewide sales tax rate will increase by one percent for a total of six percent. That increased rate will not apply to food (defined as unprepared food which may be purchased with food stamps), accommodations, or any item subject to a sales tax cap. [SC Code §12-36-1110.] Beginning October 1, 2006, the statewide sales tax rate on food will drop to three percent. The Board of Economic Advisors is to estimate the amount of revenue the Education Improvement Act (EIA) Fund does not receive due to the decrease in the tax rate on food. That amount will be transferred from the State general fund to the EIA Fund. [SC Code §12-36-910.] This reduction does not affect any local option sales tax. The General Assembly also grants a complete state sales tax exemption for the two days following Thanksgiving, November24 and 25, 2006. This sales tax holiday does not apply to local option sales taxes or the accommodations tax. [Part I, Section E of H. 4449.] This is a one time sales tax holiday in addition to the existing sales tax holiday for school shopping. The revenue generated by the increased sales tax will then be placed into the Homestead Exemption Fund (HEF), a fund separate and apart from the state general fund. Amounts equal to the reimbursement granted by the state for the school operating tax exemption on homes in SC Code §12-37-251 and the school operating millage reimbursement portion of the homestead exemption for the elderly and disabled in SC Code §12-37-270 are also paid into the HEF. [SC Code §11-11-155.] Beginning with property tax year 2007 (tax bills mailed in 2007 to fund FY 2007-08), homes receiving the legal residence four percent assessment ratio in SC Code §12-37-220(c) will be exempt from school operating property taxes. [SC Code §12-37-220(B).] These homes will still be taxable for school bond millage and the value of the homes will still be counted for purposes of determining the eight percent general obligation debt limit pursuant to Article X, Section 15 of the State Constitution. Reimbursement Exemption and Distribution of Sales Tax Revenue - Part II Beginning in FY 2007-08, school districts will receive a reimbursement on or after January 1 [SC Code §11-11-156(A)(5).] equal to the estimated amount of revenue not collected as a result of the school operating exemption for owner-occupied homes. [SC Code §11-11-156(A)(1)]. Beginning in FY 2008-09, each school district will receive the amount it received in FY 07-08. The total amount to be paid to school districts will be increased by the amount of the increase in the Consumer Price Index (CPI) from the previous year and the percentage growth in the state’s population. The incremental amount to be distributed to the individual school districts is based upon the weighted pupil units from the Education Finance Act (EFA) with a poverty factor of .20 additional weighting for students who qualify for Medicaid or free/reduced lunch. [SC Code §11-11-156(A)(2) & (3).] Each district will receive that portion of the incremental increase that their total weighted pupil units bear to the statewide total weighted pupil units. The school districts within a county are guaranteed a minimum $2.5 million reimbursement. To the extent the school districts within a county collectively receive less than the $2.5 million minimum reimbursement, the county is paid the difference. That payment is divided among the school districts within the county based upon the 135 day pupil count of students in the school district within that county. Each district within the county receives the percentage of the payment which results from their pupil count being divided by the total pupil count for the county. [SC Code §11-11-156(B)(1).] To the extent that the HEF is insufficient to pay the formula reimbursements for school districts, the state general fund is the source of additional funds. [SC Code §11-11-156(A)(6).] Once the formula reimbursement has been paid to the schools districts, if there is any remaining money in the HEF, there is a county property tax credit granted. The HEF surplus must be distributed to the counties in the proportion that each county’s population bears to the state’s population. The county’s distribution is then applied as a credit against the county operating property tax liability for owner-occupied homes receiving the four percent assessment ratio. The amount of the credit is determined by dividing the number of eligible parcels into the amount of the county’s distribution. Any credit amount which exceeds the county operating tax liability of a parcel would then be distributed in a uniform amount to other eligible parcels. [SC Code §11-11-156(C).] The credit amount will increase, or decrease depending upon the amount, if any, of surplus in the HEF and the number of owner-occupied homes. Millage Rate Limitation Revised - Part II The current millage rate limitation found in SC Code §6-1-320 was substantially revised as part of H. 4449. Beginning January 1, 2007, the millage rate increase limitation is the percentage increase in the CPI over the previous year plus the percentage increase in the population of the entity over the previous year. SC Code §6-1-320 applies to counties, municipalities, school districts and special purpose districts. The annual population increase used in this Code section will be determined by the Office of Research and Statistics of the State Budget and Control Board. The exceptions to the current millage rate cap found in §6-1-320(B)(1) - (4) and the override provision currently found in §6-1-320(C) have been repealed. The millage rate cap may be exceeded upon a two-thirds vote of the entire governing body for the following reasons: (1) the deficiency of the preceding year; (2) any catastrophic event outside the control of the governing body; such as a natural disaster, severe weather event, Act of God, or act of terrorism, fire, war, or riot; (3) compliance with a court order or decree; (4) taxpayer closure due to circumstances outside the control of the governing body that decreases by ten percent or more the amount of revenue payable to the taxing jurisdiction in the preceding year; or (5) compliance with a regulation promulgated or statute enacted by the federal or state government after the ratification date of this section for which an appropriation or a method for obtaining an appropriation is not provided by the federal or state government, If items 1 - 5 are used to impose a millage rate increase, it must appear separately on the tax bill as a separate surcharge with an explanation and not included in the millage subject to the CPI plus population inflator. The surcharge may only be continued for the years necessary to pay for the reason imposed. The millage rate limitation does not apply to fees, or revenue which is not the result of property tax millage and does not supercede any local act of the General Assembly which is more restrictive. Local Option Property Tax Credits - Part III Part III of H. 4449 creates an additional local option sales tax authorization to be in addition to all other local option sales taxes, effective January 1, 2007. A referendum for this local option sales tax may be called for by county ordinance or petition signed by seven percent of the county electors at least 120 days prior to the November referendum date. [SC Code §4-10-730.] Upon favorable referendum result, the additional sales tax would be imposed the following July. [SC Code §4-10-750.] This local option sales tax would be imposed in increments of one tenth of one percent necessary to grant the relief proposed, up to a maximum of one percent, taking into account reimbursements received for property tax exemptions. [SC Code §4-10-730.] This local option sales tax would not apply to accommodations, any item subject to a sales tax cap, or unprepared food. [SC Code §4-10-770.] The rate is to be set by the Office of Research and Statistics of the State Budget and Control Board and is to be targeted to generate no more than is necessary to replace the existing property tax liability of the selected political subdivision(s). [SC Code §4-10-730.] The revenue from this local option sales tax would provide credits against the county operating property tax, the school operating property tax, or both. [SC Code §4-10-720(2).] The credits would apply to all classes of property, whether residential, industrial, commercial, or personal. Property subject to a fee in lieu of tax agreement under Chapter 4 of Title 12 is not eligible for credits. [SC Code §4-10-720(1).] The credits to be generated appear to be an “all or nothing” proposition because the definition of “property tax” in §4-10-720(3) “means all property tax millage imposed for operational purposes by a political subdivision.” So the credits would be for all remaining school operating property taxes, all county operating property taxes, or all of the operating property taxes for both schools and the county. The property tax credit for an individual taxpayer is to be calculated in the same manner as is provided in §4-10-40(B) of the original local option sales tax. [SC Code §4-10-740(C).] There is no revenue sharing provision under which a county would donate or receive from a fund as there is in the original local option sales tax. There is also no provision to change the sales tax rate after the initial adoption. Valuation of Real Property - Part IV The provisions of Part IV of H. 4449 implement the constitutional amendments proposed in H. 4450 and are effective upon ratification of the amendments. The one exception is the provision containing the amended version of SC Code §6-1-50, which is discussed in the miscellaneous provisions. The provisions implementing the constitutional amendments are to be in addition to, not in lieu of, other provisions of law, except where those other provisions are inconsistent with H. 4449. [SC Code §12-37-3120.] Under H. 4449 [SC Code §12-37-3140(C)] , the “base year” valuation is the fair market value for the later of: (1) December 31, 2006; (2) when an “assessable transfer of interest” occurs; (3) the value determined on appeal; or (4) the fair market value determined in a reassessment program, capped at a 15% increase. The fair market value of improvements and additions to the property are then added to the base year value. This 15% cap applies to all classes of real property, whether residential, commercial or industrial. The term “assessable transfer of interest” is given a very detailed meaning and will be discussed later. To illustrate the basic mechanism: Assume a house valued at $100,000 on December 31, 2006, was reassessed at fair market value to be worth $150,000. Under the cap, the value could increase, due to reassessment alone, to no more than $115,000. If the homeowner added on to the house and the fair market value of the addition was $15,000, the new value would be $130,000. Assuming a successful taxpayer appeal determined an error was made and the outcome was a value of $125,000, then the new value would be $125,000. At the next reassessment, the increase in value would be calculated on the $125,000 valuation. If the house were sold at this point, the sale to a new owner would be an assessable transfer of interest and the new owner would be taxed at the $150,000. At the next reassessment, assuming the fair market value of the home were determined to be $200,000, the new owner’s value would be capped at $172,500 ($150,000 + 15%). If the house had not been sold, the second reassessment would have yielded a new capped valuation of $143,750 ($125,000 + 15%) An “assessable transfer of interest,” which triggers a recognition of the full fair market value of a property, is defined in SC Code §12-37-3130(4) and §12-37-3150. The major categories of transfers which trigger full recognition of fair market value include: conveyance by deed, inheritance through will or intestate estate (except inheritance by a surviving spouse), change in the agricultural use of property, and change in the use when the classification changes as a result of a local zoning ordinance changes. [SC Code §12-37-3150(A).] There are several other transfers which also trigger full recognition in the Act not covered here. The major categories of transfers which will not trigger full recognition of fair market value include: transfers not subject to federal income tax (such as rebuilding a destroyed structure with insurance proceeds, transfer between spouses as a result of divorce, and others), transfer through foreclosure until the redemption period expires, transfer where the grantor retains a life estate until the life estate expires. [SC Code §12-37-3150(B).] There are other transfers which are also excluded not discussed here. Every real property tax notice must also contain a certificate to be completed by the taxpayer certifying the details of the property ownership. Knowing falsification of the certificate subjects the owner to a penalty. This is to address some of the “gaming” of the system to avoid detection of an assessable transfer of interest. The Department of Revenue is also given authority to implement Part IV and to examine transactions for their substance to deter “gaming” of the system. [SC Code §12-37-3160.] These provisions do not affect the valuation of agricultural use property and do not affect the appropriate methods of appraising real property used by the assessor or the Department of Revenue. One other change made in Part IV was to amend the deadline for valuation appeals in non-reassessment years found in §12-60-2510(A)(4). The March 31 deadline in the current statute was changed to allow appeals within 90 days after the tax notice is mailed. This change is effective upon ratification of the constitutional amendments. Miscellaneous Provisions • Early Recognition of New Structures The existing provision to allow recognition of newly built structures found in §12-37-680 was repealed and replaced with an addition to §12-37-670. The new provision allows a county to adopt an ordinance to add to the tax rolls and send a partial year tax bill to owners of buildings issued a certificate of occupancy prior to July 1 for one half of the year. Buildings for which a certificate of occupancy is issued after July 1, would continue to be added to the tax rolls in December. This became effective June 10, 2006. • Installment Payment of Property Taxes The existing installment payment of property tax provisions found in §12-45-75 were amended and the details of the authorization were developed more fully. The program still requires the county to adopt an ordinance to make that feature available to taxpayers. The program still requires advance payment of property taxes for the coming year based upon the previous year’s tax bill. This revised authorization becomes effective for property tax year beginning after 2006. • Alternative Financing / Installment Purchase Financing for School Buildings Section 11-27-110(A) of the Code was amended to include school building financing through third parties as general obligation debt for debt limitation purposes. This includes financing plans such as have been used in Greenville and Berkeley. Agreements signed before August 31, 2006, will be grandfathered. The language is drawn to address school building financing only, regardless of what governmental entity enters the agreement. This provision was effective June 10, 2006. • Repeal of Existing Local Option Sales Taxes Part II, Section 3 of H. 4449 adds a provision which is only effective for this year. By county ordinance or a petition of five percent of the electors may trigger a referendum to rescind any existing local option sales tax. Any petition would have to be submitted at least sixty days prior to the November general election date. A referendum result to rescind the existing local option sales tax would be effective January 1, 2007. • Local Option Sales Tax for School Operating Tax Relief Part IV of H. 4449 adds another provision relating to existing local option sales taxes. Revenue from any existing local option sales tax for school operating property tax relief on owner-occupied homes would be redirected to provide pro-rata relief for other purposes as the county governing body may determine. It is not clear that there is an existing local option sales tax for school operating property tax relief. This provision is effective beginning June 1, 2007. • Financial Reporting Existing §6-1-50 of the Code was amended in Part IV of H. 4449. The financial report (annual audit plus other data) counties and municipalities are required to submit to the Comptroller General has been redirected to the Budget and Control, Office of Research and Statistics, Economic Research Section. The annual county financial report’s contents and form are to be determined by that office and it is due by November 15 of each year. Failure to submit the report by that date may result in withholding of ten percent of a county’s Aid to Subdivisions money otherwise due from the state. An extension may be granted for good cause shown. The chief administrative officer must receive written notice of a failure to timely file at least thirty days before any funds are withheld. This amendment became effective June 10, 2006.

June 8, 2006 S. 1245, R. 389 --  Ordinance Required to Implement 2006 Reassessment Program

If your county is scheduled to implement a reassessment and equalization program in 2006, Sections 59 and 60 of S. 1245 (R. 389) require the county to affirmatively adopt an ordinance to implement that program in 2006. Absent adoption of an ordinance, implementation is delayed until 2007. Ordinarily, an ordinance is required to delay implementation and this reversal of the requirement is effective only for this year. S. 1245 has not been signed by the Governor, but if you are in a county scheduled to implement a reassessment and equalization plan in 2006, close examination of this potential change would be advisable. Section 59 is broader than Section 60. As a result, this memo will discuss Section 59 only. S. 1245 also repeals a similar law (R. 227 of 2006) which only applied to Greenville County. However, both provisions are enclosed for your convenience. The key difference between a 2006 implementation year and a 2007 implementation year is the effective date of the proposed constitutional amendment to impose a 15% cap on increases in valuation in a five year reassessment cycle. H. 4450 (R. 418) is the proposed constitutional amendment to impose a 15% cap which must be approved by voters in November and ratified by the General Assembly in order to become effective. Once effective, the valuation of property for tax purposes may not increase more then 15% over a five year period. The base year valuation would be whatever value a property was listed in the tax rolls in 2006. A copy of this legislation is also enclosed for your convenience. If your county wishes to consider implementing reassessment in 2006 it would be prudent to consult the county assessor for the effect of the 15% cap on the total of property within the county. This is necessary to get a clearer picture of the effect of the cap on the resulting adjusted millage rate, the general obligation debt limitation, and the shift of the tax burden. Should the county decide to proceed with implementation of reassessment in 2006, it will be necessary to adopt it by ordinance. Section 4-9-130 does not require a public hearing, because such an ordinance is not the annual operational or capital budget, nor does it make appropriations or levy taxes. However, if the implementation ordinance is amended into one of the ordinances requiring a public hearing, Section 4-9-130 would still apply to the ordinance. If your county does decide to implement its reassessment program in 2006, this decision should also be communicated to the Department of Revenue as soon as possible so that the Department can proceed with their work for the portions of the tax base they assess. A sample ordinance implementing a reassessment program is enclosed for your convenience. The legislative findings in this sample ordinance are not universal and have been adopted from an ordinance being considered in a county.   Sections 59 and 60 of S. 1245 , R. 389 read as follows: SECTION 59. Notwithstanding any other provision of law, implementation of values in a countywide assessment and equalization plan scheduled for the current tax year may not be implemented until property tax year 2007, provided, however, that a county council may adopt an ordinance affirmatively implementing the values during the current property tax year. The provisions of this section do not alter the index of taxpaying ability as defined in Section 59-20-20(3). SECTION 60. A. Notwithstanding any other provision of law, a county that postponed the implementation of values determined in a countywide assessment and equalization program, conducted in 2004, may not implement the values until property tax year 2007, unless the county's county council adopts an ordinance affirmatively implementing the values. B. R. 227 of 2006 is hereby repealed. STATE OF SOUTH CAROLINA ) ) Ordinance No. _______ COUNTY OF ____________ ) ) AN ORDINANCE TO ADOPT AND IMPLEMENT VALUES FOR PROPERTY TAXATION PURPOSES ESTABLISHED BY THE COUNTY ASSESSOR AND THE SOUTH CAROLINA DEPARTMENT OF REVENUE BASED UPON DECEMBER 31, 2005 VALUATION DATE FOR PROPERTY TAX YEAR 2006. WHEREAS, Section 12-43-217 of the Code of laws of South Carolina (2000), as amended, requires each county in the state of South Carolina to implement a countywide reassessment program every 5 years to ensure uniformity and equality in property assessments; and WHEREAS, Section 59 of S. 1245, R. 389 of 2006 was recently enacted requiring the county council to affirmatively enact an ordinance in order to implement reassessment values for tax year 2006; and WHEREAS, all appraisal work performed in the preparation of the tax roll for the mailing of tax bills in October 2006 have been based on reassessment values, and the cost of reversing this process would cost the taxpayers of this county thousands of dollars and delay the mailing of tax bills; and WHEREAS, the delay in the mailing of tax notices might result in cash flow problems for local government entities whose primary source of funding is property tax revenue; and WHEREAS, recent statistical studies indicate that due to changes in the real estate market over the past 5 years our valuations are no longer fair and equitable, meaning some taxpayers are paying more than their fair share of the tax burden; and WHEREAS, it is in the best interest of a majority of the citizens of this county to implement reassessment for tax year 2006 in accordance with Section 12-43-217 of the South Carolina Code of Laws (2000) as amended; and NOW, THEREFORE, BE IT ORDAINED by the County Council of the County of ___, in session, duly assembled with quorum present and voting as follows: That property values established by the County Assessor and South Carolina Department of Revenue based on a December 31, 2005, valuation date are adopted and ordered implemented for tax year 2006. That a copy of this ordinance be forwarded to the South Carolina Department of Revenue.   (R. 418, H. 4450) SECTION 1. A. It is proposed that Section 29 of Article III of the Constitution of this State be amended to read: "Section 29. Taxes on personal property must be laid upon the actual value of the property taxed, as the same shall be ascertained by an assessment made for the purpose of laying such tax. Taxes on real property must be ascertained by the methods provided by the General Assembly by general law as prescribed in Article X of this Constitution." B. It is proposed that Section 6 of Article X of the Constitution of this State be amended to read: "Section 6. Except as otherwise provided in this section, the General Assembly may vest the power of assessing and collecting taxes in all of the political subdivisions of the State, including counties, municipalities, special purpose districts, public service districts, and school districts. Property tax levies shall be uniform in respect to persons and property within the jurisdiction of the body imposing such taxes; provided, that on properties located in an area receiving special benefits from the taxes collected, special levies may be permitted by general law applicable to the same type of political subdivision throughout the State, and the General Assembly shall specify the precise condition under which such special levies shall be assessed. For the tax year beginning 2007, each parcel of real property in this State shall have a maximum value for ad valorem taxes that does not exceed its fair market value. The General Assembly is authorized, by general law, to define 'fair market value' and to define when property has been improved or when losses have occurred to change the value of the real property. The General Assembly shall establish, through the enactment of general law, and not through the enactment of local legislation pertaining to a single county or other political subdivision, the method of assessment of real property within the State that shall apply to each political subdivision within the State. Each political subdivision shall value real property by a method in which the value of each parcel of real property, adjusted for improvements and losses, does not increase more than fifteen percent every five years, unless, as defined by the General Assembly, an assessable transfer of interest occurs. Notwithstanding any other provision of law, for the purposes of calculating the limit on bonded indebtedness of political subdivisions and school districts, pursuant to Sections 14 and 15 of Article X, respectively of the Constitution of this State, the assessed values of all taxable property within a political subdivision or school district shall not be lower than the assessed values of tax year 2006. Whenever there is a merger of governments authorized under Section 12 of Article VIII, tax districts may be created, based upon the services rendered in each district, but tax levies must be uniform in respect to persons and property within each such district." SECTION 2. The proposed amendments in Section 1 must be submitted to the qualified electors at the next general election for representatives. Ballots must be provided at the various voting precincts with the following words printed or written on the ballot: "Must Article III and Article X of the Constitution of this State be amended to authorize the General Assembly to establish the method of valuation for real property based on limits to increases in taxable value, adjusted for improvements and losses, of no more than fifteen percent over a five-year period, unless an assessable transfer of interest occurs; to provide that for purposes of calculating the limit on bonded indebtedness of political subdivisions and school districts, the assessed values of all taxable property within a political subdivision or school district shall not be lower than the assessed values for 2006; and to provide that the General Assembly, by general law and not through local legislation pertaining to a single county or other political subdivision, shall provide for the terms, conditions, and procedures to implement the above provisions? Yes [] No [] Those voting in favor of the question shall deposit a ballot with a check or cross mark in the square after 'Yes', and those voting against the question shall deposit a ballot with a check or cross mark in the square after the word 'No'." Ratified the 7th day of June, 2006.