The taxing situation

By Charles Sowell  

FEBRUARY 5, 2010 9:16 a.m. (0)

Fast-growing Greer is poised to become the first local government in Greenville County to significantly raise taxes or fees to make up for revenue shortfalls largely caused by state tax law changes.

Unless there is a wholesale revision in the state tax code, or the Upstate economy suddenly goes into high gear, virtually every resident will eventually face local tax or fee increases, or both, experts say.

The alternative is cuts in services that, in Greer’s case at least, would be unacceptable, said Mayor Rick Danner.

Neither changes in the tax code, or quick recovery, are seen as likely, despite indications the recession is ending.

Holley Ulbrich, Strom Thurmond Institute fellow and economist said recently, “It took until 2007 for the state to get back to where it was before the 2001 recession, which was relatively mild. I see nothing to indicate the comeback from this recession is going to happen any faster.”

Virtually all of the funding problems now facing local governments can be traced to Act 388 and its companion legislation, called point of sale. Act 388 was a straight swap of a penny in sales tax for revenue that schools get from residential ad valorem taxes.

Act 388 was the end result of tax cutting zeal that started in the mid 1990s when the state and local governments had large budget surpluses and the economy was booming.

State figures show $143 million lost since 2006 due to Act 388.

South Carolina at one time had one of the most balanced and fair tax systems in the nation, Ulbrich said.

Today South Carolina has tax holidays for gun purchases. Residents pay the same sales tax on a new Mercedes as a 10-year-old car – five percent to a maximum of $300.

The Taxation Realignment Commission (TRAC) was set up by an act of the legislature last year to look into problems with the tax code.

Greg Foster, communications director for House Speaker Bobby Harrell, said the speaker supported a truly comprehensive tax reform process by letting TRAC take up Act 388.

The Senate’s version of the legislation did not include Act 388 and when the measure came out of conference committee for a House vote Act 388 was not included.

The House voted to accept the compromise plan and Act 388 was precluded from TRAC consideration by act of the legislature.

The recession has gutted any benefits schools might have seen from the penny sales tax, said Jeff Knotts, executive director of finance for the Greenville County Schools.

“State changes in the tax code have made the stream of potential revenue available to us much smaller,” he said.

Act 388 worked well in 2007 and 2008, but state revenues coming into Greenville school coffers fell by about $20 million last year when the recession took hold in earnest.

A companion bill to Act 388 put caps on real taxable property of all kinds.

South Carolina has five year reassessments and the cap was set at 15 percent over the period between reassessments.

As a safety valve in the legislation it is allowed to set the tax value for property at its most recent sales price, or point of sale.

That provision has worked poorly from the perspective of the real estate industry in South Carolina because purchasers could face a big tax bite on sales where there is a sharp increase in price.

Nick Kremydas, executive director of the South Carolina Association of Realtors, said reform on the commercial and residential side of point of sale is crucial to economic development.

Ulbrich said in a position paper prepared for the Jim Self Center on the Future at the Strom Thurmond Institute at Clemson, that “Realtors aren’t too happy with the exception (in current point of sales law), because it discourages real estate transfers (sales of existing properties). But for local governments feeling the effects of state aid cutbacks… the point of sale provision is at least one way to generate additional revenue.”

“Our members have reported things like losing a potential customer to California because the property taxes out there were lower than ours,” Kremydas said.

His organization has run an aggressive ad campaign pushing for point of sale tax relief that cites anecdotal estimates of $500 million in lost business expansion to other states.

Reba Campbell, deputy executive director of the state municipal association disputes those figures said she hasn’t seen evidence for that claim.

“I do know (based on state estimates) that point of sale will cost local governments $88 million the first year and will grow exponentially,” she said.

Local governments would lose $132 million the second year, $176 million in the third year and so on. Without some sort of comprehensive tax reform such a piecemeal approach is bound to become unsustainable, she said.

“This isn’t about Realtors versus local government,” Kremydas said. “It’s about doing what’s right for private citizens and positioning our state to thrive when the recession finally ends.”

Greenville County Councilman Jim Burns said proposed point of sale tax revisions could hurt economic development prospects since the changes would only give a break on sales of existing properties and not new ones.

Danner said Greer city fathers fell into the same sort of thinking that created state tax problems by basing too much of their budgeted income on growth and on aid from state sources that were traditionally stable, but quickly ceased to be in the recession.

Sen. Thomas Alexander said fixing the damaged real estate tax code is important for the state on the other side of the recession.

Comprehensive reform, including Act 388, is something that lawmakers will have to consider at a future date.

That’s a stance that local governments and the business community disagree with strongly.

“We need comprehensive tax reform now,” said James P. Fields, executive director of the Palmetto Institute, one of the state’s premiere business think-tanks. “Everything needs to be on the table. This piecemeal approach is only making a bad situation worse.”

“Point of sale reform as it stands now is designed to please a special interest group,” said Greenville County Council Chairman H.G. “Butch Kirven. “The only way to ensure fair ad valorem tax rates is to let the market rule and base the rates on sales figures.”

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