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2005 Legislative Alerts

Dec. 8, 2005
Senate and House Property Tax Study Committee Proposals — UPDATE

Nov. 18, 2005
Senate and House Property Tax Study Committee Proposals — UPDATE

Aug. 9, 2005
Property Tax Restructuring


Dec. 8, 2005
Senate and House Property Tax Study Committee Proposals — UPDATE

The House met on Dec. 7 and produced a conceptual framework which will be drafted and introduced. The Senate proposal remains as it was adopted on Dec. 1. Please take time to review these plans. Now would be the time to start communicating with members of the House and Senate, if you have not already done so.

In the Senate, the two constitutional amendments will be sent to the Senate Judiciary Committee and the implementing bill, which has yet to be drafted, will be sent to the Senate Finance Committee. The House legislation is expected to be considered in the House Ways and Means Committee.

Please let us know what you think of the features contained in the attachments and the practical implementation issues as well as their effects upon your county. We can be reached at 1-800-922-6081. Please direct your comments to Robert Croom or Kathy Williams.

The House Plan

The House Ad Hoc Property Tax Study Committee adopted the following conceptual plan on Dec. 7. The proposal is not completely drafted, and the implementation legislation will have to address a number of points not addressed in the conceptual framework.
  1. Eliminates all property taxes on owner-occupied homes for the operational expenses of schools, municipalities, SPDs and county governments. Property taxes levied for current and future bond debt would remain on homes.
  2. Exempts unprepared food from the existing sales tax. For existing local option sales taxes, food would remain taxable. Local option sales taxes adopted after the effective date would not tax food.
  3. Increases the statewide sales tax rate by 2 percent to 7 percent. Unprepared food and accommodations would be exempt from the sales tax increase. No existing sales tax exemptions would be affected.
  4. Eliminates reassessment of all real property, going to a "point of sale" system or a freeze of property tax valuations. Reassessment values would be as they exist with no retroactive application. There was no discussion of any exemptions from the recognition of increased value upon sale, but previous discussions generally exempted spouse-to-spouse transfers from triggering a new valuation.
  5. Counties will be given the option to recognize improvements for property taxation as early as one month after the improvement is sold the initial time (roughly at the issuance of a certificate of occupancy). The county governing body will have the discretion of when new property will be recognized.
  6. Local millage rates would be capped. Each year's increase would be limited to the increase in the Consumer Price Increase (CPI) plus population growth. The cap could be exceeded upon a two-thirds vote of the entire governing body. There was also mention of adding other exemptions for items such as natural disasters, but none were adopted at the meeting.
  7. 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 nonprofit 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 nonprofit to the school district, and an ownership interest is conveyed to the district each year of the lease. The nonprofit uses its right to payments and its lease to sell bonds to pay for school construction and renovation.
  8. Funds from the sales tax increase would be distributed as follows:
    • In year one, funds are replaced dollar for dollar—for both schools and other local taxing entities.
    • For schools, the districts would be held harmless on their per pupil funding formulas for years after year one, but no distribution formula was adopted for growth in years after year one.
    • For units of local government (other than schools) in the second year of the reimbursement, there would be an increase equal to the increase in the CPI plus population growth—not to exceed six percent.
    • The House Committee also adopted a revised minimum local effort millage driver formula which defines those school services to be maintained using terminology from the In$ite Financial Analysis Model for Education including Instruction, Instructional Support (excluding extracurricular programs) and Leadership (excluding program management). These terms are defined in the financial model and are also intended to make the millage driver be based upon appropriations instead of revenue.
  9. The counties and cities which currently have local option sales tax would not be penalized for providing property tax relief. It would appear that the plan is to reimburse cities and counties for the property tax amount billed prior to the application of the local option sales tax credit. The local option sales tax revenue which currently goes toward credits on owner-occupied homes would then be redistributed to other property taxes through the existing formula.

The Senate Plan

The Senate Committee adopted two constitutional amendments dealing with valuation for property tax purposes and a millage cap on Dec. 1. The statutory implementing part of these bills—dealing with the details of reassessment, the distribution of school revenue and several miscellaneous items—has yet to be drafted and will be considered later this month.

  1. Valuation Constitutional Amendment — Prefiled as S. 960
    • Point of Sale valuation retroactive to tax year 2004 or the most recent year prior to that, if none was implemented in 2004. Above the base year value, the value may be increased by the lesser of the actual cost of improvements after the base year or the fair market value of the improvements added after the base year. The reduction in value does not apply to values used prior to tax year 2007 for purposes of bonded indebtedness or for calculating the index of tax paying ability.
    • The General Assembly may enact an inflationary annual percentage increase by general law.
    • The General Assembly may enact general laws to define fair market value at the time of an assessable transfer.
    • A county—by ordinance, by voter initiative petition referendum or by referendum called by the county—may adopt annual reassessment at fair market value or any other system provided by the General Assembly.
  2. Millage Cap Constitutional Amendment (Prefiled as S. 969)
    • Schools and taxing jurisdictions (meaning all property taxing jurisdictions other than schools) may raise the millage rate by a positive majority vote of their governing body to the extent of the increase in Personal Income Growth averaged over the latest three years completed and available from the U.S. Department of Commerce. If local legislation limitations are more restrictive, those restrictions apply instead.
    • Schools and taxing jurisdictions may exceed the millage limitation for a prior year deficit, a disaster beyond their control (does not include an economic downturn) or a court order. This surcharge is a millage levied and made as a separate notation on the tax bill, and it does not become part of the base millage of the entity.
    • Millage rate limitations on taxing jurisdictions could further be raised by referendum.
    • The General Assembly may enact by general law a more restrictive limitation.
  3. The tax swap portion of the package is yet to be drafted, but is basically the following:
    • Eliminates all property taxes levied for school operations on owner-occupied homes and vehicles. The plan also includes an income tax credit for renters.
    • Raises the total sales tax to 7 percent. 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.
    • The distribution to school districts will most likely be dollar-for-dollar replacement in the first year and through some sort of weighted pupil average in years going forward.
    • Assessors will be required to receive certification and training, likely through the Department of Revenue.
    • The committee chose not to implement a spending cap.
    • The plan includes a $125 million reserve in case estimates from the sales tax are not reached.

Nov. 18, 2005
Senate and House Property Tax Study Committee Proposals — UPDATE

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

The House Plan

The House Ad Hoc Property Tax Study Committee modified the plan they adopted last week, and plans to further alter the 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.
    2.
    • 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.
  3. Raises the total sales tax to 7 percent. 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 Nov. 16 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 value at the point of sale.
    • Property will only be 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, details of the cap were not discussed.
    7.
  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 nonprofit 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 nonprofit to the school district, and an ownership interest is conveyed to the district each year of the lease. The nonprofit uses its right to payments and its lease to sell bonds to pay for school construction and renovation.
  8. Funds from the sales tax increase would be distributed as follows:
    9.
    • In year one, funds are replaced dollar for dollar.
    • For units of local government (other than schools) a distribution method based upon 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 one.
    • In order to provide for increased 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 percent 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 it 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 percent. 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; or
    • 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.
  7. The plan includes a $125 million reserve in case estimates from the sales tax are not reached.
    8.

Aug. 9, 2005
Property Tax Restructuring

County officials will need to make direct contact with members of the House and Senate—focusing on the members of the property tax committees—during the month of August, regarding property tax restructuring to preserve the ability to meet the service needs of the citizens without causing unintended consequences. It is critical to make your voice heard during the initial formulation stages of this process, both in public hearings and in personal contacts with members of the committees addressing the property tax.

The House and Senate have both formed large committees to produce a property tax restructuring bill, and each has a goal of completing their work before January, possibly before Thanksgiving.

The Senate committee has scheduled five public hearing beginning this Thursday, Aug. 11 from 6-9 p.m. at Trident Technical College Main Campus, 7000 Rivers Avenue, in Rooms 212-216 of the Student Center (Building 410). If you wish to speak at the Charleston public hearing, there may still be time to sign up after the noon Aug. 10 deadline, but everyone will be required to have a speaker registration form from the Senate Judiciary Committee. There will also be a sign up for any time available after the registered speakers. The remaining public hearings the Senate Committee has planned are scheduled as follows:

  • Aug. 23 — Strom Thurmond High School, Edgefield, 6-9 p.m.
  • Aug. 24 — Greenville Technical College, Greenville, 6-9 p.m.
  • Aug. 30 — Joyner Auditorium, Marion, 6-9 p.m.
  • Aug. 31 — USC—Lancaster, Lancaster, 6-9 p.m.

The Senate Committee has asked that comments at the public hearings be directed to the potential changes in the property tax system. The Senate Committee is looking at several approaches to property tax restructuring, including any one or more of the following:

  • Millage rate limits. This approach is to cap the increase in millage rates, which may be tied to some inflation or growth index. We currently operate under this type of approach.
  • Assessment limits. Limiting the amount of increase on the values used for property tax purposes is the key. This is similar to the 20 percent cap on assessed value increases passed in 2004 and vetoed. Another version of this approach is the valuation freeze, similar to Proposition 13 in California.
  • Revenue rollbacks. Under this approach, the millage rate is required to be adjusted when the assessed value increases. South Carolina currently does this after reassessment implementation. There are other versions of this approach as well.
  • Property tax freeze. Property tax increases are prohibited under this approach when certain conditions are met, typically age or income thresholds, although there are other conditions contemplated. This is something like our homestead exemption.
  • Tax caps. Another approach is a total tax revenue cap or limitation, typically tied to some sort of inflation or growth index.
  • Property tax substitution. This approach replaces some or all of the property tax revenue stream with revenue from a different mechanism such as sales tax or another tax. This is the approach adopted in the SCAC policy position.

The House and Senate property tax committee rosters are enclosed and posted on the SCAC website. Other postings to the SCAC website will include additional background information on the school millage driver formulas and other information as it is developed. Another source of information and raw data is the Senate website (visit www.scstatehouse.gov, click on "Citizens' Interests" on the left side, then click on the link under "Property Tax Reform"). The speaker registration form and other details on the public hearings are also posted on the Senate website. If you have questions or need further information, please contact Robert Croom in the SCAC office at 1-800-922-6081 or via e-mail. Please include a reference to Property Tax Restructuring in the subject line.

SCAC Policy Position on Property Tax Restructuring

Support shifting school operating funding from the property tax to state sources of revenue:

  • Eliminate local property tax millage for school operating purposes (for all classes of property).
  • Millage levied to pay school general obligation debt would remain on the property tax bill.
  • Current school operating revenue would then be replaced on a dollar-for-dollar basis by state appropriated revenue.

The most frequently discussed replacement revenue source for property taxes is an increased sales tax. Current proposals range from 1-3 percent additional sales tax and sales tax exemption changes. However, the SCAC position does not exclude other replacement revenue sources.

Why Should the School Operating Tax Be the Focus?

  • School property taxes are 61 cents of every property tax dollar collected in South Carolina. School operating taxes are 49 cents of every dollar collected in South Carolina.
  • The statutory requirements of EIA/EFA require that school operating revenue per pupil be maintained and increased each year, regardless of what happens to the property tax base. Without addressing the millage drivers, any property tax relief granted will soon be consumed by the increases in school property taxes required by this formula.
  • The statutory formula is not based upon service needs, but purely upon the amount of revenue collected for school operations. If the publicly adopted budget is one amount and there is a windfall of revenue collected (because of an unanticipated addition to the tax base...) above the budgeted expenditures, the benchmark becomes the revenue collected figure. That figure is then divided by the number of pupils from the previous year, increased by the inflation factor, and then increased again by the previous year per pupil expenditures multiplied by the number of additional students in the district. There is no needs assessment made in the process, and any savings recognized from more efficient operations cannot be cut from the budget without obtaining a waiver from the State Department of Education.
  • The statutory formula uses estimated pupil attendance supplied by the individual school districts and is never adjusted for the audited numbers.
  • Capital items and one time expenditures in the school operating budget become part of the per pupil funding level, which must be maintained and increased in order to receive state funding the next year.

What do the Numbers Look Like?

Total school operations (FY 05-06 est.):   $2,083,298,558
Statewide additional sales tax (2/05 est.): 1%
2%
3%		 $601,000,000
$1,166,000,000
$1,696,000,000
 
Using a 3% sales and revisiting the sales tax exemptions and caps:
3% sales tax increase   $1,696,000,000
 
Revenue from sales exemption repeals or modifications   $387,298,558
 
There are currently more than 60 sales tax exemptions or capped sales tax items. The total value of those exemptions and caps were estimated to be over $1.2 billion in FY 04-05 at a 5% sales tax rate.
 
Total replacement revenue:   $2,085,000,000
 
Other solutions with a smaller sales tax increase and more sales tax exemption changes may be made but the concept is the same. Sources of revenue other than sales tax could also work under this concept.

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