S.C. landlords and school advocates urged lawmakers Tuesday to change a controversial property tax law.
Others, at a S.C. House hearing, spoke out for and against repealing sales-tax exemptions, which cost the state $3 billion in revenue in 2012-13.
The House panel is deciding whether to change the state’s tax laws.
“We’ve got to roll up our sleeves,” said chairman Tommy Pope, R-York, adding legislators will meet two more times before deciding what reform proposals — if any — they will introduce next year.
Are property taxes unfair?
Much of Tuesday’s hearing focused on controversial Act 388.
Passed in 2006, the act exempted owner-occupied homes from paying operating taxes for local schools, shifting that burden to commercial and other properties, including rental homes. The act also increased the state’s sales tax by a penny, sending that money to school districts, a move intended to make up for lost revenue.
As a result, owners of more than one home and businesses have been saddled with an unjust responsibility for school costs, said Fort Mill landlord Paige Howarth.
When she lived in a home valued at $257,000 in 2007, the taxes were $1,300, Howarth told legislators. However, when she rented that house, the tax bill increased to about $5,000.
On average, a landlord needs to collect three months of rent to cover the property taxes of a home, said David Phillips of the S.C. Association of Realtors.
Meanwhile, school officials told legislators that Act 388 has undercut education funding.
The Fort Mill School District, for instance, has doubled to 14,000 students, said school board chairman Patrick White. But growth in the district’s revenues — limited to taxes on rental and business properties — have not kept up with that increased enrollment, he said.
"We do think the property tax system is broken," said Harry Miley, chief finance officer of the Richland 2 school district, which has about 28,000 students.
If a developer builds 1,000 new homes in a school district, that could mean 400 new students, Miley said. But the new homes will not bring any new revenue into the school district, he added.
However, Don Weaver of the S.C. Association of Taxpayers defended Act 388.
The law “spread the burden of operating school millage, not just to homeowners, but to all those who use and benefit from our school system: renters, tourists and those who travel to do business in our state," Weaver said.
He added his organization and others “would view any wholesale abandonment of Act 388 to be a broken promise, a broken covenant made to the taxpayers of our state."
Repealing sales tax exemptions?
Legislators also got feedback on whether to eliminate some of the $3 billion a year in exemptions to the state’s sales taxes, covering items from farm machinery to prescription medicine.
Broadening the sales tax base by eliminating some of the exemptions could help pay for Act 388’s property tax relief, said Holley Ulbrich, an economist representing Clemson University’s Strom Thurmond Institute and the League of Women Voters.
But those who benefit from the sales tax exemptions balked at the idea of losing them.
For example, Lewis Gossett of the S.C. Manufacturing Alliance urged lawmakers not to repeal the exemption covering packaging materials. That exemption cost the state $27.7 million in 2012-13, according to the state’s revenue office.
Repealing the exemptions would not bring in more revenue, Gossett said. Instead, manufacturers would close, eliminating the property, income and other sales tax revenues that they now generate.
A panel of S.C. House members is reviewing the state’s tax codes including:
Personal income tax
The state has a 7 percent top rate, but — after exemptions and deductions — the effective rate is 2.99 percent.
The state charges a 6 percent sales tax on some items. However, local governments can tack on additional sales taxes for special purposes, including building projects or tourism-related activities.
Act 388 exempted owner-occupied homes from paying operating taxes for local schools, shifting that burden to commercial and other properties, including rental homes. In exchange, the state increased its sales tax by a penny on the dollar and agreed to send money back to school districts, intended to make up for lost revenue.
The law also:
▪ Capped how much local governments, including school districts, could raise taxes
▪ Reduced taxes on groceries to 3 percent from 5 percent. (The following year, lawmakers exempted groceries from the sales tax.)
▪ Limited property tax hikes to 15 percent of a property’s increase in fair-market value. The cap only applies to properties reassessed for tax purposes every five years.