By Ashley Fletcher Frampton
aframpton@scbiznews.com
Published Jan. 18, 2010

The S.C. Senate is expected to take up a bill early in the 2010 legislative session that would limit the amount that property taxes could increase when real estate changes hands.

Realtors in South Carolina support the bill, saying the current practice of “point-of-sale” valuation can lead to large tax increases that they say are dragging down an already troubled real estate market, especially for investment properties.

Many local governments are on the other side of the debate, arguing that the bill would hamper their revenue growth and ability to provide important public services.

The legislation that would alter the tax policy in question made it through the S.C. House of Representatives last year but was stalled in the Senate when the session closed.

Result of 2006 reform
Point-of-sale valuation refers to the practice of updating a property’s taxable value to the sale price when it changes hands. Lawmakers put the practice into effect when reforming the state’s property tax system in 2006.

Before that, local governments revised property values on the tax rolls only during countywide reassessments every five years, regardless of sales.

The 2006 reform was meant to help homeowners afford taxes on properties that were quickly gaining value. Lawmakers took away a portion of property taxes that paid for schools, replacing it with a higher sales tax. They also instituted a 15% limit on increases in property value during the five-year reassessments.

But the 15% reassessment cap doesn’t apply to owner-occupied homes when they change ownership, in most cases. And it doesn’t apply to commercial properties or second homes at all.

The S.C. Realtors Association is especially concerned with the problems the new tax system creates for commercial properties and second homes.

Executive director Nick Kremydas said one of two things usually happens when expenses — such as taxes — increase on an income-producing property: Either the sales price goes down to compensate, or the tenant’s rent goes up.

The latter scenario can make properties that have sold recently uncompetitive with surrounding properties.

“If you’re in business and you’ve got an edge on your competition because you have a better service, that’s free enterprise,” Kremydas said. “But if your advantage is because you’ve got a lower tax rate, that doesn’t make for sound business policies. Certainly it doesn’t offer equity in the marketplace.”

Both scenarios — increased tenant rent and reduced sales price — can kill a sale, Kremydas said. He said South Carolina should be particularly concerned about that as it heads into 2010, when commercial real estate foreclosures are expected to mount nationwide.

The current point-of-sale tax system could have the effect of reducing the value of all commercial real estate when it goes to sale, said Jon Chalfie, an office broker with Grubb & Ellis WRS in Charleston.

Right now, getting a commercial property to sell is already a feat, brokers say.
“If and when those sales do pick up, as we expect them to in the next year or two, it puts all the (new owners of) properties at a distinct disadvantage in the marketplace for tenants,” Chalfie said.

Although the real estate market is trending downward these days, Realtors say a new valuation after a sale could still bring a tax increase, depending on when the property was last previously assessed.

Charleston County tax officials said the same thing in 2009 when recommending a one-year delay in the county’s reassessment process. Current assessed values for most properties in the county are tied to December 2003 values, officials said, and even with recent drops, values are higher than in 2003 in many cases, because the real estate market peaked around 2006 and 2007.

Local government revenue
The inclusion of point-of-sale valuation in the state’s 2006 property tax reform was, in some ways, a concession to local governments.

The 15% cap on home value increases during five-year reassessment cycles limits city and county revenue growth and, in turn, limits their ability to ramp up services to meet the needs of growth, they argued.

The assessments of properties at full value when they sell was a way to soften the blow to local government budgets brought by other portions of the reform.

Repealing point-of-sale valuation would be another hit to future revenue growth, according to the Municipal Association of South Carolina and the S.C. Association of Counties.

Without point-of-sale valuation, the city of North Charleston estimates it would have lost about $500,000 in revenue over the past three years. That is the equivalent of 10 police officers on the street, said Warren Newton, city finance director.

North Charleston City Council adopted a resolution in November to oppose the bill that would limit point-of-sale valuation. The city’s resolution says state lawmakers should wait for the recommendations that are coming from a special task force appointed last year to look at more comprehensive reform to state tax policies.

The bill under consideration “only presents another piecemeal approach to change the already fragmented state tax structure,” North Charleston’s resolution says.

Newton said budgets for businesses and government keep going up every year because of health care costs and other expenses not under their control. But local governments face state limits on how much their tax base can expand to cover the costs.

Addressing critics who say governments should cut back during hard times like businesses do, Newton said North Charleston has done exactly that.

The city hasn’t raised its millage rate in several years, and the city cut 9% from its budget last year by freezing positions and reducing services. But additional limits on revenue growth will lead to more challenging decisions about how to keep delivering services, Newton said.

Local government associations also say the elimination or limit of point-of-sale valuation creates further inequities among taxpayers. More of the tax burden will be shifted onto properties that haven’t increased in value to make up for limits on those that have.

Charging taxes based on the price a buyer agreed to pay for a property is fair, the groups say.

Changes and compromise
The bill that would reform point-of-sale valuation has changed since it was originally proposed. Initially, the bill called for elimination of any property value change after a sale. The latest version limits the increase to 15% and has a five-year sunset clause.

Kremydas said the problems created by 2006 property tax reform — many provisions of which the Realtors pushed — were not anticipated at that time.

“We were at the peak of the real estate boom then,” he said. “Nobody, at least in our state, predicted future doom and gloom. On the backdrop of a growing economy with properties growing in value, point-of-sale was not a worrisome issue.”

Reach Ashley Fletcher Frampton at 843-849-3129.