HILTON HEAD ISLAND — State Sen. Tom Davis, R-Beaufort, is touting a plan to lower property-tax rates on rental property, second homes and businesses while also generating more state education dollars for Beaufort County and other coastal school districts.
But it comes with a trade-off. The state’s 6-percent sales tax would increase, and dozens of popular sales-tax exemptions would be eliminated, affecting some businesses.
A group of local real estate agents doesn’t support the plan, branding it a Band-Aid for the state’s long-term problem of funding school operations.
At issue is Act 388, a controversial tax change state lawmakers approved in 2006 that exempted owner-occupied homes from property taxes that fund school operations. They also increased the statewide sales tax by 1 cent on the dollar to make up the difference.
Owners of businesses, second homes and rental property were left out of the tax-relief plan, meaning they now pay for school operations with their property taxes. Some question whether Act 388 is fair because full-time residents who own their home don’t pay taxes for school operations. Some argue the tax change is crippling capital investment and discouraging people from buying property.
Davis’ plan is to modify Act 388, extending the tax break to owners of businesses, second homes and rental property. He will work during the legislative session that begins next month to persuade fellow state legislators to:
• Follow some of the recommendations from a 2010 panel of tax and finance experts by eliminating or modifying about 60 sales-tax exemptions on a hodgepodge of items ranging from wrapping paper to materials used to build chicken coops. The elimination would generate about $600 million for the state, Davis said, that could flow to local governments to partially offset the loss of property-tax revenue. Other committee recommendations to tax medication, groceries and more would not be part of the plan, Davis said.
Incrementally raise the state sales tax to 6.25 percent or a little more, Davis said, to also help with the property-tax revenue loss. The current rate is 6 percent.
• Cap state spending each year to the rate of inflation – an idea Davis has repeatedly advocated as a way to reduce government spending and size.
“I wouldn’t support a tax shift. I want there to be an overall tax cut,” Davis said. “So it’s not just raising the sales tax and eliminating exemptions but capping our state spending and applying those revenues to provide tax relief.”
The plan hinges on a highly anticipated state Supreme Court decision that, Davis predicts, will deem the hodgepodge of sales tax exemptions unconstitutional and require lawmakers to handpick products and services that should be exempt.
Hilton Head Realtor Charlie Reed and the other organizers of a group called Property Tax Equalization Initiative say Davis’ proposal does not go far enough.
Instead, they say owner-occupied home owners should pay their fair share of school operating expenses, since they are the ones who have students in the state’s schools.
“The thought that people who live here, who send their children to school here, don’t put any money toward (school operations). That’s immoral,” Reed said. “Many of these other people (who own second homes and rental property) don’t even have children going to school here.”
Long term, Reed said, Act 388 will limit school districts’ ability to raise operating money and improve schools.
“You can only tax people so much,” he said.
Davis said it’s politically impossible to persuade lawmakers to return to the days of homeowners who live in their homes paying property taxes for school operations, because voters will view it as a tax increase.
Reed and his group disagree and say they will take their anti-Act 388 message to people statewide and encourage residents to apply pressure to their local lawmakers to amend it.
“We’re trying to get the people to understand what’s going on that’s wrong and be willing to push their legislators to do something about it,” said Rick Murray, a group organizer.
Other groups, including the S.C. Association of Realtors, are more open to Davis’ proposal.
“Sen. Davis has long been a champion of property owners,” said Nick Kremydas, the association’s CEO. “His idea has a lot of merit, and we’re open to discussing it and any proposals that provide some tax equity while protecting our schools.”