A panel of S.C. House members is aiming to change the state’s controversial property tax law and tax some sales now exempt from the state’s sales tax, exemptions that cost the state $3 billion a year in revenue.
Reducing the state’s 7 percent top income tax rate also is on the table.
Most on the 14-member panel agreed changes need to be made to the tax laws as they began discussions to pass changes during the legislative session that starts in January.
S.C. residents "want something comprehensive and something they can trust" in terms of changes to the state’s tax laws, said state Rep. Todd Atwater, R-Lexington.
Winners and losers in property tax law
The state’s property tax law — Act 388, passed in 2006 — exempted owner-occupied homes from paying operating taxes for local schools. That shifted the tax burden for K-12 operations to commercial and other properties, including rental homes.
S.C. landlords and small business owners say that shift has been disastrously unfair.
The law, shifting the burden of paying for schools to second homeowners and small businesses, has “created winners and losers,” said state Rep. Chandra Dillard, D-Greenville.
S.C. children are losers because the quality of their education depends on the affluence of the school district where they live, Dillard said.
Landlords who rent homes and small business owners also are losers because they have to pay higher taxes.
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. However, that revenue has not made up the gap in lost property taxes for schools.
Lawmakers on the panel are considering whether to reduce the 6 percent assessment rate for commercial and rental property and the 10.5 percent rate on other business and manufacturing property.
Remove sales tax exemptions
The panel also is considering taxing some sales that now are exempt from the state’s 6 percent sales tax.
The state currently loses more than $3 billion in revenues a year because some sales — including manufacturing items, services, most food and prescription drugs — are exempt from the sales tax.
Members on the panel said the tax base will broaden if those exemptions are repealed. However, lobbyists for some of the affected industries oppose say repeal would hurt manufacturers.
State Rep. Anne Thayer, R-Anderson, suggested phasing out the sales tax exemptions. Lawmakers should not impose sales taxes on companies currently receiving exemptions all at once, she said.
Reduce top income tax bracket
Lawmakers also said the state’s top 7 percent income tax bracket needs to be reduced.
South Carolina’s effective individual income tax rate is 2.99 percent, based on 2012 figures, far lower than the state’s 7 percent top rate.
But the 7 percent top rate is a turnoff for businesses and individuals who are considering moving to South Carolina, said state Rep. Shannon Erickson, R-Beaufort.
Lawmakers want the top rate to be below Georgia’s 6 percent top rate and North Carolina’s flat 5.75 percent rate, said state Rep. Tommy Pope, R-York, who is chairing the panel. That would help with marketing the state, Pope said.
Getting rid of some of South Carolina’s income tax deductions could offset money lost by reducing the rate, Pope said. However, state deductions for mortgage interest and charitable donations likely would be kept, he said. “Our theory is to bring all the taxes down for everybody.”
In addition, the state has to ensure low-income taxpayers in the lower tax brackets are not beat up by the changes, Erickson said.
Changing S.C. tax laws
Lawmakers are deciding how to:
▪ Reduce the 7% income tax top bracket
▪ Eliminate some sales tax exemptions that reduce the state’s revenue by $3 billion a year
▪ Reduce the assessment rate for commercial and rental property from 6 percent and the rate for manufacturing and other businesses from 10.5 percent
Lawmakers on the S.C. House panel plan to meet later this month to discuss the way the state pays for K-12 schools.