Two of the bills in the SC House GOP Caucus tax package will both transfer significant tax burden onto homeowners and car owners and gut budgets of schools, counties, municipalities and special purpose districts. The legislation is advertised as reducing assessment ratios on manufacturers and on commercial property. Both are phased in over four years and eight years, respectively.
The manufacturers’ bill artificially reduces the assessment ratio on manufacturing property and on business personal property (“the furniture, fixtures and equipment that are owned and used to operate a business”) to an effective rate of 6 % from the nominal rate of 10.5 %. This bill will reduce revenues to local governments by $228 million when fully implemented.
The second measure applies not just to commercial properties, but to rental property and second homes as well. The assessment ratio is dropped from 6 % to 5 %. This will reduce revenues to local governments (schools, counties, municipalities and special purpose districts) by $827 million when fully implemented.
If you reduce the assessment ratio of manufacturers, business personal property, commercial property, rental property and second homes, you drop the total assessed value of a community. The remaining classes’ share of the total assessed value has increased even though its assessed value has remained the same.
To raise the same amount of funds for the jurisdiction’s budget, the millage—the total assessed value divided by the budget (expressed as $1 per $1,000 assessed value)—will have to go up. If the millage goes up, but my assessed value stays the same, I pay more in property taxes. The only way to keep my homeowners property tax and property tax on my automobile or truck the same is to keep the millage the same. That means that my local government gets less money.
Because Act 388 of 2006 swapped property taxes for school operations for an extra penny in sales tax, the lost assessed value can’t be shifted to homeowners. But that just puts more pressure on vehicle owners, utilities, agricultural property and transportation to fund schools since the amount paid by manufacturers, business personal property, commercial property, rental property and second homes will have gone down.
You might think you can just move this $1.06 billion dollars around, reducing taxes on three class of property owners while hiking it on others. However, Act 388 also included a cap on millage increases. The millage can’t increase each year by more than the increase in the consumer price index plus population growth, with some flexibility built in following years when the cap was not reached. If the local jurisdiction reaches its cap, it’s only option, other than increasing fees, is to cut services.
In FY09-10, South Carolina schools, counties and municipalities had $13.7 billion in total revenues. Of that, $4.6 billion came from property taxes. Thus, nearly one in four property tax dollars has to be either reallocated to other property owners or the public goods those taxes fund—schools, public safety, sanitation and so forth—cut.
It’s easy for the General Assembly. None of this $1.06 billion will come out of state coffers. They are spending someone else’s money. And they have hamstrung the ability of those someone-elses to move those burdens around or to raise funds in other ways.
It’s an ill wind that blows no good and this blows some good. When Act 388 passed, no one took it in the ear more than renters. They had to pay increased sales taxes but go no relief on their rent like homeowners did on their total housing cost. This legislation would lower property taxes on landlords. However, there are no requirements that they pass those savings on. The economics literature suggests that how landlords and tenants share changes in property taxes is largely a function of how tight the rental market it is. Over the long run, it may slow increases in rents.
For those of us who own homes or vehicles, we are going to face increases in our millage rates and our taxes to pay for some of this billion dollars that people able to afford second homes, landlords and businesses will save. What can’t be shifted onto us will be paid for by reducing the public goods that protect our quality of life and our children’s future. This is very short-sighted public policy.