By Kim Chen Wiseman
Contributing Writer

A heated debate about how the state will address rising property taxes in South Carolina will dominate the upcoming legislative session as lawmakers gear up for a fight in January.

The controversy, however, seems less about whether property taxes should be reduced or eliminated and more about how such a move would affect the state’s schools.

Currently, South Carolina’s 85 school districts, already graded near the bottom in the nation, receive a majority of their funding from property tax revenues. However, increasing public pressure to address rising property taxes, particularly in coastal areas where property values are growing at a faster rate, has state lawmakers hammering at the issue.

This month a House Committee adopted a plan that would eliminate property taxes on owner-occupied homes, replacing the lost revenues to the state with a 2% sales tax increase.

The proposed 7% sales tax would place South Carolina among those few states with the highest sales taxes in the nation, including California where the sales tax is 7.25% and groceries are exempt.

The proposed House Committee plan would also eliminate sales tax on groceries in South Carolina, an exemption that committee members say will take the burden off the poor.

“We know that any reform plan must prevent property taxes from coming back, rather than creating a windfall for local governments,” said Majority Leader Jim Merrill, R-Daniel Island, a member of the committee. “This plan will restrain future spending so relief isn’t an excuse to raise taxes.”

But how stable sales tax-generated funding would be and how the state would distribute the money back to schools remain in heated debate.

Arthur Felts, director of the Joseph P. Riley Jr. Institute for Urban Affairs and Policy Studies at the College of Charleston, warns that replacing property taxes, a stable source of funding for the state’s schools, with a sales tax would be risky at best.

“There is some wisdom to funding schools centrally, but tying the funding to a sales tax would be unwise because it’s not a stable source of income. Just look at the recessionary period we’ve had over the last three years,” Felts said.

Nancy Cook, chairwoman for the Charleston City Schools board, said Charleston has only begun to see what it costs to run schools during the past few years.

“We’ve just begun digging out of 30 years of under funding and neglect on buildings,” Cook said.

She fears that a sales tax would be volatile and cause further inequities across the state, particularly in impoverished districts where a 2% increase in sales tax would hurt spending.

“What happens if we have some bad years … our lawmakers owe it to the local people who elected them to be responsible trustees of public education,” Cook said.

The business community is also monitoring the issue because economists project businesses would suffer from a sales tax increase.

Because business pays for about 40% of the state’s sales taxes and would not have relief under the proposed plan, critics warn that competitive conditions would prevent businesses from passing the increased cost through to customers.

A higher sales tax would also be a disincentive to businesses looking for relocation or development, as they would face higher costs here. Existing businesses may also see loss in business as consumers become more cognizant of the larger sales tax attached to their purchases, perhaps opting to shop online or in another state.

Economists warn the plan would overall make the state non-competitive for new recruitment of businesses and hurt existing businesses.

To lessen the impact on small businesses, the committee has proposed rolling back appraised values to their 2000-2001 levels.

The next steps for the House committee, Merrill said, will be to figure out how much money it would need to make up for the loss of property taxes, how to make it up and determine how to redistribute monies back to schools.

“We are highly cognizant that’s where the argument is going to lie. We are encouraged by the dialogue and hope it will bring about action so homeowners will see relief,” he said.

But these decisions, Cook said, will have grave implications on student achievement and accountability in the future.

Because of this, Cook thinks districts should be involved in the tax reform decision-making process, she said.

“Our district has not been contacted or engaged in this process so far,” she said.

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