SOUTH CAROLINA 2013

In 1995, a battle over residential property taxes resulted in a major policy change in South Carolina. That year, the legislature passed state-funded relief from school taxes on the first $100,000 of market value of an owner-occupied home. It is important to note that median home value in South Carolina was around $80,000 at the time of passage, and therefore the majority of South Carolina primary residences were completely exempt from school property taxes under the 1995 legislation.

Significant changes to the South Carolina tax code continued into the new millennium. In 2000, intense pressure to reduce the property tax on personal vehicles led to a constitutional amendment that significantly reduced assessment rates. The rate on motor vehicles was reduced from 10.5 percent to 6 percent, and new rates were phased in between 2001 and 2006.  Considering that the personal vehicle portion of total property tax revenues was equal to 20 percent in 2000, this resulted in an 8.3 percent reduction in the property tax.

In 2006, Act 388 was passed in South Carolina, which drastically altered the property tax system within the state. The major property-tax-related components of the act are as follows:

·         Tax Swap: Act 388 eliminated the property tax on owner-occupied homes for all school expenditures other than debt service and increased the state sales tax from five percent to six percent. The tax swap substantially reduced many homeowners’ property tax obligations, some in excess of 50 percent.

·         State Tax Reimbursement: For the first year of implementation, the state of South Carolina was required to reimburse local school districts dollar for dollar for the monies lost by the elimination of the school property tax on owner-occupied homes. After the first year, reimbursements were to grow at the rate of population growth plus inflation.

·         Reimbursement Guarantee: Act 388 guarantees that the one percentage point increase in the sales tax will be used to fund reimbursements to local school districts and will be placed in the Homestead Exemption Fund. If the fund has a shortfall (e.g., the increased sales tax revenue is insufficient to cover reimbursements), the reimbursements must be taken from the general revenue fund.

·         Property Assessment Cap: A 15 percent cap was placed on the growth of property tax assessments over a five-year period unless the property is sold during that time. This change to the tax code was passed as a constitutional amendment.

·         Property Tax Rate Cap: Act 388 imposes a cap on the rate at which property tax rates can increase in a jurisdiction. Rate increases are capped at inflation plus population growth.

An important issue with Act 388 is that while the law was marketed as being revenue neutral, experience since its passage does not support that assertion. The law went into effect at the start of the Great Recession, and the sales tax base fell rapidly. Because property tax revenues are more stable than sales tax revenues in an economic downturn, the one percent increase in the sales tax did not fully cover the revenue lost in the tax swap. Since 2008, there has been a yearly shortfall in sales tax revenues that were allocated to replace the lost property tax revenues. For the last five years, the annual shortfall has been greater than $100 million per year, with a projected shortfall of $120.5 million in 2014–2015 (State of South Carolina, Revenue and Fiscal Affairs Office, 2014).