Property tax plan divides Legislature

Some say bill would benefit homeowners, not 'working poor' COLUMBIA - South Carolina homeowners would never again pay property taxes on their residences under a plan expected to emerge from a House committee this week. A majority of the House tax panel is coalescing behind a proposal by Speaker Bobby Harrell, R-Charleston, that would completely eliminate property taxes on owner-occupied homes by raising the state sales tax 2 cents. Dubbed the Homeowners Tax Relief Act of 2006, it also would remove all sales taxes on groceries and reassess all other types of property only when they are substantially improved or transfer owners. A copy of the plan was obtained from House committee members, who were mailed a summary at the end of last week. 'It is real, lasting property tax reform,' said Harrell, who credited other lawmakers for helping develop the plan. 'We are tired of Band-Aids. We want a permanent solution.' The House model diverges sharply from what state senators have recommended, drawing the battle lines for a debate that could affect the wallets of all residents, whether or not they own property. For months, House lawmakers have been dragging their feet on the issue, while senators charged out of the gate with a comprehensive, yet convoluted, plan. But Rep. Bill Cotty, R-Columbia, the chairman of the House committee, said he expects to make some decisions at a meeting Wednesday. 'It's about 3-to-1 odds' Harrell's concept receives approval, he said. 'It appears to me all the votes are there.' Meanwhile, a Senate committee is moving forward on a plan designed to spread tax relief beyond homeowners using an identical 2-cent sales tax increase. The panel meets Monday to resume deliberations on a preliminary proposal that would, on average, cut in half the property taxes on homes, renter-occupied units, second homes, cars and other personal property such as boats. It also would keep the sales tax on food at 5 cents and restrict local governments' authority to increase taxes on other types of property. A separate component would let each county choose from a list of four methods when assessing a property's value. House lawmakers say the Senate's proposal is just too confusing. 'Ours is just a much cleaner bill,' said Rep. Jim Merrill, a Daniel Island Republican on the House committee. 'People can understand it.' Merrill and other House members also worry that the Senate plan does away with only some property taxes. They point to the 1995 property tax reforms that have been eroded by subsequent tax increases. 'I think we are very fearful that if they don't completely handle something, then it will come back,' Cotty said. Taking that extra step costs a lot more money, though. The price tag for eliminating all property taxes on homes is $812 million. Removing the sales tax on groceries costs an additional $309 million. A 2-cent sales tax increase won't be enough to foot the bill, and Harrell's plan calls for repealing $115.5 million of the well-guarded sales tax exemptions. Sanford weighs in Harrell and Senate leaders pitched their competing proposals to Gov. Mark Sanford last week. Lawmakers in the meeting said the governor didn't favor one plan over the other, but he did respond favorably to the complete elimination of property taxes for homeowners. The Republican governor publicly commented on the property tax issue for the first time last week. Sanford said he is willing to work with the Legislature on reforms but refrained from weighing in on specifics, except to say the bill should be revenue neutral and not negatively impact businesses or the tourism industry. 'We are still reserving judgment until we've looked at all the other plans out there,' Sanford said. 'What we can say is that we are categorically behind the idea of tax reform in the larger sense and property tax (reform) in the more limited sense.' Equity issues remain The tide of property tax reform is sweeping through the halls of the Statehouse, pushed in part by the opportunity for lawmakers to score a major victory in an election year. But some lawmakers worry the issue of tax equity will be drowned out. Rep. B.R. Skelton, an Upstate Republican, said the House committee is looking at the problem all wrong. 'Before we start modifying and shifting the tax burden, we need to decide where there are inequities,' he said. 'In effect, owner-occupied residences are already being subsidized by renters, industry, manufacturers and utilities that pay a higher portion of property taxes.' As for raising the sales tax, Skelton and other lawmakers worry about shifting the burden to the sales tax, which is traditionally a regressive tax that negatively affects lower-income people. 'I'm not convinced we need to put all our eggs into the sales tax basket,' said Rep. Gilda-Cobb Hunter, D-Orangeburg. 'What we've heard so far doesn't do much for the working poor.' Homeowners Tax Relief Act of 2006 FIVE PILLARS OF PROPERTY TAX RELIEF: 1. Eliminate all property taxes on owner-occupied homes. Establish exemption for all owner-occupied property taxes. Amend state constitution to prevent future reinstatement. 2. Remove the sales tax on groceries. 3. Impose additional 2% sales tax, bringing total state sales tax to 7%. Exempt accommodations from 2% increase. 4. Eliminate reassessment on all remaining classes of property. Reassess property only upon transfer or substantial improvement. Exempt spouse-to-spouse transfers from reassessment. 5. Eliminate sales tax exemptions as necessary to render revenue neutral. DISTRIBUTION OF FUNDS: In first year, funds are replaced dollar for dollar. For units of local government, a distribution method based on population is phased in for subsequent years. For school districts, an Education Finance Act formula is phased in for subsequent years. No local government entity will ever receive less than they received in the first year. In order to provide for increased costs of service, an inflation factor shall be applied to the revenues distributed to local units of government. Any difference between the growth of revenues funding the program and the inflation factor utilized will be provided from the General Fund. Questions and answers about the tax As state lawmakers tackle the complicated tax structure in their efforts to reduce property taxes, few legislators offer as unique perspective on the debate as Rep. B.R. Skelton, an Upstate Republican. Skelton is the legislative body's only economist. He retired in 1987 after 26 years in the field but remains a professor emeritus of economics at Clemson University. The Post and Courier sat down with Skelton to discuss the property tax debate. Question: How does your background as an economist affect your views on property taxes? Answer: I guess my economics background might make me reach some different conclusions than some other people. As an economist, I like to look at cost-benefit, I like to look at the basic concepts of taxation, ability to pay; and I think that plays a role in my analysis of the problem that we have. Q: What is the fairest method of taxation according to economists? A: The fairest tax would be a tax like your water and sewer fee where you know who is getting the benefit and you charge them accordingly. Once you get beyond those (types of fees) where you can really determine the benefit, then you have some concerns about who ought to be paying the taxes. You can't say that only those people who call the fire truck during the year ought to be paying for fire services. . So in those situations you have to apportion the tax burden generally on people's ability to pay. As a general rule, people who own higher valued property have a greater ability to pay than people who own lower valued property or do not have property. Q: The Senate property tax panel suggested using a 2-cent sales tax increase to make up lost revenue if property taxes are reduced. But sales tax is talked about as a regressive tax. Explain that concept. A: It is a regressive tax based on income, it's a proportional tax based on sales. So the general argument is that people who have $20,000 a year in income are going to be spending a larger percentage on sales-taxable items compared to people who make $100,000 a year, so it's regressive based on income. Q: You don't agree with other lawmakers who shift the tax burden from property tax to the sales tax. Explain your position. A: What I'd like to do is what I think is right based on my principles of equity. If we take as a given that people who own more valuable property ought to be paying a higher percentage of the cost of educating children, police, fire, that sort of thing, then equity considerations would suggest that you don't eliminate the tax burden for those people who are paying and shift to those people who can less afford to pay it. To me, my tax burden is probably fair in property taxes. For me to be relieved of a substantial portion of that and shift that to people who have to decide between prescriptions and food or taxes, I think that's inequitable. My proportional reassessment plan would apply a 15 or 20 percent cap on all classes of property, regardless of how much it went up. That maintains the same relative market value of property and I think that's a kind of reassessment cap that is even within the framework of the constitution right now. Q: Does your background as an economist help you influence other lawmakers? A: It doesn't look like it. It helps me to understand but it doesn't always help me to persuade my colleagues that I'm right.

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