Tax reform may be biggest issue of new legislative session

Charleston Business Journal > January 9, 2006 > News

By Holly Fisher
Supplements Editor

Property tax reform could be one of the hottest issues to hit the legislative calendar this year as the S.C. General Assembly convenes this week in Columbia.

Both the House and the Senate have committees dedicated to property tax reform, and it is sure to be a hot topic.

In general, the proposals focus on either changing the system from one of assessment to one of acquisition value or to swap property taxes for an increase in the state sales tax.

Regardless of which option passes—if either—the business community will feel the impact.

“If the business community is not scared to death, it should be,” said Otis Rawl, vice president of public policy and chief operating officer for the S.C. Chamber of Commerce.

Increasing the state sales tax by 2 cents, Rawl said, means a significant shift in the tax burden, a shift that would cost businesses about $490 million, based on the estimate from the state Board of Economic Advisors that increasing the sales tax 2% would generate $1.17 billion in additional revenue. The business community already pays about 42% of the state’s sales tax.

Raising the state sales tax from 5% to 7% brings South Carolina’s sales tax to one of the highest in the nation. Only Mississippi, Tennessee and Rhode Island have a 7% sales tax, according to a report published by Miley, Gallo & Associates, an economic and financial consulting firm, and compiled on behalf of the chamber.

“It sends the wrong message in terms of businesses trying to compete and to those (businesses) looking to locate in South Carolina,” Rawl said.

The Miley, Gallo & Associates report, “Eliminating Homeowner Property Taxes: An Analysis of Impacts on the State’s Competitive Business Climate,” was released Dec. 5 and urges state legislators to exercise caution as they “shift the state’s reliance on a consumption-based revenue source like the sales tax from a more recession-proof tax like the property tax.”

Of the $9.7 billion paid in state and local taxes in fiscal year 2003, the report noted, $4.1 billion—or 43%—was paid by businesses.

In North Carolina, businesses contributed 36% of taxes, while Georgia businesses contributed 39%.

The report noted that by increasing the state sales tax, businesses will face a heavier tax burden.

It also noted that many of the state’s tourist areas also have local sales, accommodations and hospitality taxes that could push the sales tax up to 10% in some areas.

“My biggest concern is this is going to be hard on the state’s retailers,” said Holley Ulbrich, senior fellow at the Strom Thurmond Institute at Clemson University.

“(A higher sales tax) sends people looking for ways to avoid taxes, and it sends them to the Internet. The state will lose a significant portion of its local economy, property tax revenue, and it affects our competitiveness as a tourist destination.”

Shifting to an acquisition value system would require property to only be reassessed when it changes hands, Ulbrich explained.

One of the positive aspects of that system is it doesn’t tax people out of their homes as property values climb, Ulbrich noted. But one of the problems with such a system is that it gives relief to everyone in an effort to reach those who really need it.

People who are dissatisfied with the assessment process and think property values are often incorrectly assessed, in part, drive this concept, Ulbrich said. “I understand what’s driving it, but I don’t think it’s the right solution.”

So what is the solution?

Ulbrich recommends more targeted relief—determining who really needs a tax break and then granting tax relief to those people.

Overall, South Carolina’s taxes are quite low, Ulbrich said, so she isn’t completely sure why there is such a push for reform this legislative session. She describes the situation as “somewhat of a manufactured crisis.”

“The people behind it are people who overextended themselves in terms of property ownership,” she said. “Interest rates have crept up, and they are looking at what they can do to make the cost of occupying their home less onerous. It’s an easy way to fan the flames. There are a lot of factors that kind of converged … it’s an election year—all these things together suggest that the time is ripe (for tax reform).”

Holly Fisher is the supplements editor for the Business Journal. E-mail her at hfisher@charlestonbusiness.com.

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Workers’ compensation could face changes

By Holly Fisher

Supplements Editor

Businesses will be closely watching how state lawmakers address the rising cost of workers’ compensation as the new legislative session begins this week.

Otis Rawl, vice president of public policy and chief operating officer for the S.C. Chamber of Commerce, calls workers’ compensation the “one prevailing issue that concerns small, medium and large businesses.”

This year the Second Injury Fund, in which insurers pay money toward a workers’ compensation pool, increased its rates from 11.1% to 28.8%. The rate hike has caused many insurance companies to discontinue or reduce their workers’ compensation policies in South Carolina.

“What we’ve seen already is an increase in workers’ compensation rates that is going to elevate us to the middle of the pack,” he said. “We used to have one of lowest rates; now we’re up to the middle. Major workers’ comp. providers are pulling out of the state.”

Other carriers will be looking at what kind of response the General Assembly has early in the session.

Some of the changes the state chamber is proposing include:

The orderly dissolution of the Second Injury Fund.

Defining repetitive trauma, determining the difference between a job-inflicted injury and something that is part of the normal aging process.

Changes to the appellate process so appeals, which currently go through a three-person panel, would go through the administrative law court.

The workers’ compensation claims are based on how liberal or conservative the commission happens to be, Rawl said. “We need some predictability in the system.”

In December, Gov. Mark Sanford received recommendations from a Workers’ Compensation Task Force he formed last summer to review the state system and propose ways to control premium increases.

The task force proposed dissolving the Second Injury Fund, putting restrictions on repetitive trauma claims, eliminating the presumption of total back loss with a 50% injury and reversing the Tiller v. National Healthcare case that allows non-expert testimony regarding a medical condition.

Frank Knapp, president of the S.C. Small Business Chamber of Commerce, said his organization has not formed a position on the task force’s recommendations.

Knapp said he does have some concerns about eliminating the Second Injury Fund; a reform to the fund a few years ago resulted in cost increases.

“We can’t afford another good intention gone awry,” he said.

Holly Fisher is the supplements editor for the Business Journal. E-mail her at hfisher@charlestonbusiness.com.

Health insurance remains focus for small businesses

By Holly Fisher

Supplements Editor

The S.C. Small Business Chamber of Commerce will be pushing for affordable health insurance during the 116th session of the General Assembly.

The rising cost of providing health insurance to employees continues to be a major issue for small businesses, said Frank Knapp, chamber president.

The chamber’s four proposals are:

• Provide state funding for S.C. Primary Health Care Association health care centers located around the state. Funded through federal grants, Knapp said the state could contribute $6 million to these nonprofit centers so service can be provided to small businesses that don’t have health insurance.

• Expand Medicaid so small businesses can buy into it and subsidize health care for workers who meet 200% of the poverty level. Small businesses could add Medicaid funds to their contributions, so they could pay for health insurance for workers who qualify.

• Open the door to the state employee health system to all businesses.

• Provide state subsidies to carriers for reinsurance. Insurance companies normally have insurance on themselves, and that reinsurance is expensive, Knapp said. If insurance providers had their costs cut with state subsidies, they could pass that savings on to their policyholders.

Affordable health insurance, Knapp said, is an “extremely big deal. The vitality of a small business often depends on its overhead expenses. Sixty percent of small businesses in South Carolina can’t afford to offer insurance or their employees can’t afford to pay their portion.”

Small businesses, then, can’t compete for workers because the workers are looking for jobs with benefits, Knapp pointed out.

Holly Fisher is the supplements editor for the Business Journal. E-mail her at hfisher@charlestonbusiness.com.

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