The Brack Report

By Andy Brack

Talk about irony: the very folks who have benefited from South Carolina’s surging real estate market seem to be the ones griping most about property taxes.

Earth to taxpayers: That is how property investment and the market are supposed to work.

If your property increases in value, you have an asset worth more, which means you pay more taxes. And because everybody in a county pays essentially the same rate, the system is inherently fair.

In other words, paying more in property taxes is an indicator that you are worth more. So why all the moaning? As an investor, you are succeeding.

But most people don’t look at things like that. Instead when they open their assessment or tax bill and see a large increase, they react emotionally. They look at the bottom line—the amount due—instead of the bigger, long-term picture that their asset is increasing in value.

“It’s a psychological response,” said William Fox, an economist at the University of Tennessee. “It’s not a rational, thought-out response that I’m better off because my asset is better off.”

While taxpayers across the state are balking at property taxes and trying to get them changed, economists like Fox see property taxes as relatively fair. While somewhat regressive, property taxes are based on the principle that rates are standardized and property is valued realistically. Because everyone is operating from the same baseline, the tax is distributed fairly.

Over the long run, property taxes tend to be less volatile than sales or income taxes because the latter two respond more to economic fluctuations.

If the economy is souring, people buy less stuff, which means they pay less in sales taxes. Similarly in bad times, rises in income drop off, which generates less income tax revenue.

But property, as many in real estate say, is a good investment. It keeps its value.

During the summer, state lawmakers have been holding hearings on property taxes to find out what they should do about higher bills, particularly in coastal and tourism areas where land values have increased more than normal.

Predictably, few people are shouting to keep property taxes. Instead they want an alternative, such as an increase in sales tax by 2% to replace most property tax revenues.

But economists warn that putting more of the burden on sales taxes could destabilize the state budget. Additionally it could have three major effects:

Business disincentive. Higher sales taxes could steer business relocation and development away from South Carolina. If a business buys more goods in the state, for example, it immediately would face higher costs here. A state with lower sales tax rates would be more attractive than South Carolina.

Hurt state merchants. Consumers would start shopping around more. Instead of buying from South Carolina merchants, they would head toward the Internet or go to other states where taxes are lower. In turn, the state would lose sales tax revenues.

Shift burden. If those who are complaining the most about property taxes get relief, somebody else will have to make up for lost revenues. It is generally accepted that such a move would shift the tax burden from higher-income people to those in the middle and bottom end of the income scale.

One way or another, it is highly likely the General Assembly will try to control property taxes on a statewide basis because too many squeaky wheels are clamoring. Instead of creating a higher sales tax rate, two options might cause less volatility for the state:

Tax modernization. The state could do away with some or all of the $1 billion in sales tax exemptions it provides. This could allow the state to generate more revenue, which could offset reductions in property taxes.

Property tax cap. A Charleston County 15% property tax cap got thrown out of the state Supreme Court last year because it treated residential property differently than commercial and agricultural property. But if state lawmakers were to send a constitutional amendment to voters to cap property tax assessments annually at a reasonable percentage increase, there would be some relief for people who have seen huge fluctuations in their bills.

Gov. Mark Sanford has warned that the Legislature should be careful about fiddling with property taxes without considering long-term implications on the majority of what they fund: education.

Sanford is right. Instead of getting caught up in a public frenzy, lawmakers should take a measured approach on property taxes.

Andy Brack is editor and publisher of the S.C. Statehouse Report (www.statehousereport.com), a forecast of business developments in the South Carolina Legislature and state government. E-mail him at brack@statehousereport.com.

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