S.C. tax law changes tough on bond rating

State official warns tax revisions expose revenue to economy’s swings

By JIM DuPLESSIS

jduplessis@thestate.com

GREENVILLE — A bond rating agency will warn investors next week that South Carolina’s credit rating is in danger of falling because of concerns about changes in the state’s tax laws, state economist Bill Gillespie said Tuesday.

Moody’s, a bond rating agency, now rates South Carolina AAA. However, it will put the state on a negative watch because of concerns that the state’s revenue will become more vulnerable to swings in the economy, Gillespie told nearly 100 business leaders who attended a meeting here.

A lower bond rating would make borrowing more expensive for state government.

“The problem with sales taxes is when we enter a recession, sales tax revenues decline,” Gillespie said. “They’re very anxious about what’s going to happen.”

Up until this past weekend, the state portion of the sales tax was 5 percent for both groceries and other items.

However, bills passed last spring lowered the sales tax on groceries to 3 percent as of Sunday, but will increase the sales tax on most other items to 6 percent in June next year. That revenue will be used to offset the elimination of local property taxes for school districts. School property taxes generally account for about half of a homeowner’s property tax bill.

Gillespie said sales taxes generally have been eroding nationwide in part because consumers increasingly are making purchases over the Internet and through mail-order catalogues.

The General Assembly assumes that overall sales taxes will rise, but the ratings agencies are worried because “we just knocked out a huge portion of our tax base” with the cut in sales taxes for groceries, Gillespie said. Some observers say that groceries are a substantial portion of overall sales tax revenue and are steadier in economic storms.

Gillespie was a featured speaker at a luncheon sponsored by Clemson University, South Carolina Bank and Trust and Elliott Davis, a Greenville-based accounting company.

His prepared 19-page speech explained how South Carolina’s tax system has shifted more burden to homeowners over the past 20 years. But now, changes both enacted and proposed are likely to make businesses pay more.

One example he cited is a proposed cap on property assessment growth at 15 percent over five years. Gillespie said he expects a referendum on the issue will pass in November.

A cap on reassessment growth would hurt businesses in the long run because school boards and counties would be under pressure to raise tax rates for all property, and businesses have more property at stake.

Counties and school districts have depended on rising property values to increase revenues without increasing tax rates.

Now under the proposed cap, using assessments to raise taxes would be difficult.

Owners of homes with fast-rising values on the coast and along lakes will benefit most from the reassessment limit, but the result will be more pressure on other taxpayers to ante up.

Under the state constitution, any increase in millage must be applied to all types of property, and businesses provide the bulk of the state’s nearly $5 billion in taxable property. Homeowners account for $1 billion, and cars account for $654 million.

Gillespie said he did not know the solution to the problem, but he said the S.C. General Assembly is likely to make changes in the new law when it feels its effects.

“They’re not going to let the process harm the business community. I think there will be a reaction.”

Reach DuPlessis at (803) 771-8305.