November 18, 2005

Senate and House Property Tax Study Committee Proposals - UPDATE

On Wednesday, November 16, both the Senate and House Committees on Property Tax Restructuring amended and further delineated their proposals altering the way property taxes are levied in South Carolina. The following is a summary of both plans as they currently are being presented.

The House Plan

The House Ad Hoc Property Tax Study Committee modified their plan they adopted last week, and plans to further alter their plan at their next meeting. Their current proposal does the following:

1. Eliminates all property taxes on owner occupied homes for the operational expenses of schools, municipalities, SPDs, and county governments.
• Taxes levied for current and future bond debt would remain on homes.
• The plan calls for a constitutional amendment to prevent future reinstatement of property taxes on owner-occupied homes.

2. Exempts unprepared food from the sales tax completely.

3. Raises the total sales tax to 7%. Unprepared food and accommodations are exempt from the sales tax increase. Some sales tax exemptions may be eliminated in order to render the plan revenue neutral. At its November 16, 2005 meeting the House Committee voted to sunset all existing sales tax exemptions as of Fiscal Year 2010. In order for the exemption to remain the General Assembly would be required to affirmatively reinstate the exemption. It is likely this issue will be revisited at the next meeting.

4. Eliminates reassessment on all real property, going to a “point of sale” system. Reassessment values to go back to their 2000- 2001 values. If the property has been transferred since 2000, the value of the property will be the properties value at the point of sale.
• Property only reassessed upon transfer or substantial improvement.
• Spouse to spouse transfers are exempt.

5. Counties will be given the option to recognize improvements for property taxation one month after a certificate of occupancy is issued. The county governing body will have the discretion of when new property will be recognized.

6. The committee voted to put in place a millage cap, however the details of the cap were not discussed.

7. All school facility financing plans which circumvent the constitutional debt limit provisions (like the BEST plan) are eliminated. BEST (Building Equity Sooner for Tomorrow) refers to a particular school building financing plan in Greenville. Under these plans a non-profit foundation established by the school board funds the construction projects. Financing works somewhat like a mortgage or an installment purchase. Schools are built and the cost is paid off over time. The buildings are leased by the non-profit to the school district and an ownership interest is conveyed to the district each year of the lease. The non-profit uses its right to payments and its lease to sell bonds to pay for school construction and renovation.

8. The funds from the sales tax increase would be distributed as follows:
• In year one funds are replaced dollar for dollar.
• For units of local government, other than schools, a distribution method based on population is phased in for subsequent years.
• For school districts, an EFA formula is phased in for subsequent years.
• No local government entity will receive less than they received in year 1.
• In order to provide for increase costs of service, an inflation factor shall be applied to the revenues distributed to local units of government. Any difference between the growth of revenues funding the program and the inflation factor utilized will be provided from the General Fund.
• Any additional revenue generated by the additional 2% sales tax above the BEA’s estimate will be put into a trust fund. The trust fund will be used to supplant monies to local government in years that revenue falls short of the estimate.

The Senate Plan

The Senate Committee adopted the following framework and continues to refine in weekly meetings:

1. Eliminates all property taxes levied for school operations on owner-occupied homes, and vehicles. The plan also includes an income tax credit for renters.

2. Raises the total sales tax to 7%. The accommodations tax will be subject to the increase. Although it is not completely clear whether it has been voted upon yet, the Senate is trying to exempt food from the sales tax completely.

3. The default valuation of property would be based upon “point of sale” (essentially property values are frozen at the value of the property at the time it is bought) retroactive to 2004. Improvements made to property after 2004, however, would be included in the value. A county could decide to have a different method of valuation either by county council ordinance or referendum of the voters. The mechanics of the selection process are still unclear. The different methods available may be:
• point of sale (default)
• property values could increase by inflation (CPI) plus population
• property values could increase by CPI
• property would be valued at fair market value (the current method)
If a county chooses to continue to use an assessment method of taxation, then no millage increase would be allowed in a year of reassessment implementation.

4. A millage cap will be placed upon all units of local government by constitutional amendment. The cap will limit millage rate increases to an inflation factor determined by the total personal income growth average increase for the previous three years. Any millage rate increase would require a positive majority vote.
• The cap could only be exceeded in times of an declared emergency (hurricane, terrorist attack, etc.)
• For counties and cities the cap could also be exceeded by a majority vote in a referendum held in November. School districts would not be allowed to exceed the millage cap.

5. The committee chose not to implement a spending cap.

6. Assessors will be required to receive certification and training, likely through the Department of Revenue.

7. The plan includes a $125 million reserve in case estimates from the sales tax are not reached.

August 9, 2005

Property Tax Restructuring