IF THE IDEA behind the tax reform movement gaining steam in the
General Assembly is to calm down the people who simply don’t think
they should have to pay any property taxes on their homes,
particularly since a lot of that money goes to educate poor kids,
then the House plan to swap homeowner property taxes for a higher
sales tax fits the bill.
But if the idea is to relieve an undue burden (indulge me while I
pretend it is), eliminating all homeowner property taxes simply does
not make sense: It gives a tax break to people such as me who aren’t
under any undue burden, and in so doing it gives less relief than
could otherwise be given to those who really need it.
Even though they might not like it, most homeowners are able to
pay their property taxes without any great strain. That’s because
they bought a house they could afford, and their income goes up each
year to compensate roughly for the increase in taxes as their home
becomes more valuable.
The main problem is with people whose income doesn’t go up enough
to keep pace. There are some middle-income, working-age people who
get caught in this trap, because they live in extremely popular
neighborhoods where home values are skyrocketing. But it’s mostly
poor people in low-wage jobs and older people who get in this bind,
because their income stays flat.
South Carolina has responded to this problem in the past by
granting a property tax exemption to senior citizens. But that gives
a tax break to people who can well afford to pay their property
taxes as well as those who can’t; and since there’s a limit to how
much the state can reduce taxes and still provide needed services,
that means older homeowners who can’t afford their taxes get less of
a break than they might otherwise. This approach also does nothing
to help poor homeowners who aren’t old but can’t afford their
taxes.
Thirty-eight states have found a way around this problem. As a
report from Clemson’s Jim Self Center on the Future explains, “In
three out of four states, the response to a request for property tax
relief for residences (including family farms) has been to address
the root of the problem — homeowners with low incomes who are unable
to afford their property taxes.”
The solution is to create “circuit breakers,” which target
property tax relief to people who need it most. The recipients range
from only elderly homeowners to homeowners and renters of any age.
But whatever the group, only those in it who meet income criteria
get the break. (You can find the report, “Property Tax Relief
Programs in the United States,” at http://www.scstatehouse.org/citizensinterestpage/PropertyTaxReform/2004PropertyTaxReliefStudySTI.pdf.)
The most straightforward circuit-breakers give tax breaks to
everyone whose income is below a certain level. In North Carolina,
for instance, senior citizens whose disposable income is less than
$18,500 get a property tax break of up to 50 percent.
A few states give a break to homeowners whose taxes exceed a
certain percentage of their income. In Vermont, for example,
homeowners who make less than $47,000 a year don’t have to pay more
than 5 percent of their household income in property taxes.
The third type of circuit breaker combines the need-based formula
with the no-reassessment idea that is so popular among S.C.
politicians, freezing the taxable value of houses until they’re
sold. But in this case, the freeze applies only to certain
homeowners — usually senior citizens and sometimes only poor
seniors.
The problem with any income-based property tax break is that you
have to use the income tax system to establish income, and perhaps
even to deliver the relief. That has the disadvantage of
complicating things and of mingling the local property tax system
with the state income tax system. And, depending on how it’s done,
it could also create a lag time, in which people have to pay their
property tax and wait a year or more before they get the money
refunded or credited against their income taxes. If that happened,
it would make the tax break practically useless for the people who
really need it — much as the Put Parents in Charge scheme would be
useless for the poor parents it purports to help.
But the fact is that we already mingle the two tax systems, by
letting homeowners exempt their property taxes from their income
taxes. And there’s no way the circuit breakers could be more
complicated than all the boutique business property tax breaks the
state already has on the books.
Anyone who actually wants to can find a way to avoid the trap of
making people who can’t afford to pay the bill in the first place
wait a year to get their money back. After all, most states find a
way to make income-based circuit breakers work: Half the states
offer only restricted tax breaks. South Carolina is one of just 13
states that do not have any sort of income restriction on their
property tax breaks.
The idea of circuit breakers is mentioned briefly in the
influential Palmetto Institute’s new study of the state’s tax
system, released earlier this month. But it’s unclear how important
the concept is to the group of business leaders; the report mentions
just about every smart tax policy idea out there.
It needs to become an important idea to that group, and to the
public, and to lawmakers. Our state should target its property tax
relief to those who really need relief, even if that’s in addition
to some sort of limited tax shift for everyone.
Ms. Scoppe can be reached at cscoppe@thestate.com or at
(803)
771-8571.
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