Hilton Head Island's Town Council on Tuesday took the first of two votes needed to reduce its tax rate by 28 percent, but town officials warned that complications involving property taxes could seriously complicate matters and cost the town $3 million.

The tax rate decision came at a meeting in which the council gave initial approval to a contract with Palmetto Electric that will cost island power users an extra 3 percent per month for about 15 years. The contract won't be official until a second vote is cast.

The island's tax rate also won't be finalized without a second vote, but the rate reduction is a function of South Carolina law.

The state limits the amount of extra tax dollars local governments can collect in a reassessment year. Unless a government holds a special meeting and votes to raise the amount of taxes received, collections can grow only by the amount of taxes attributable to new construction and inflation.

The reduction the council passed Tuesday was made necessary because Beaufort County reassessed property this year. With taxable values of island properties going up, the town had to reduce its tax rate to avoid reaping a windfall.

The tax situation is complicated by legislation passed in June that would cap the amount a property's value can increase during a reassessment at 20 percent.

Tax bills are scheduled to go out in October. But, town manager Steve Riley told the council, if the cap goes into effect after the bills are sent, those whose bills are reduced probably are entitled to a refund. Those whose bills are not reduced would not have to pay more.

The result would be a loss of $3 million in town tax dollars, and $40 million countywide, said Shirley Freeman, the town's finance director.

The financial picture is murkier because the county has not finished recalculating the value of commercial properties, from which the town also collects property taxes. The town made its tax rate calculation based on an educated guess about the value of commercial properties, Riley said.

"We may end up short, or we may bring in extra money," he said, in which case the town would have to reduce taxes again.

While the fate of tax bills remains undecided, each island power bill will increase under a contract the council gave initial approval to Tuesday.

The 20-year contract replaces one with Palmetto Electric Cooperative that will expire later this month. It calls for a 3 percent increase in all monthly bills starting in November.

That 3 percent extra will pay for burying 76 miles of overhead power lines on the island, a project expected to take 15 years and cost around $35 million. It has been a pet project of Mayor Tom Peeples, who wants the lines buried in case of a hurricane or other large-scale disaster.

"It's been a belief of mine for some time that if we can get the lines buried, it will be safer, easier and quicker to get our lives together" after a major storm, Peeples said.

Once the project is paid for, Palmetto Electric will drop the 3 percent monthly charge and begin paying the town a flat fee of $100,000 a year to do business in the town.

Island resident Joni Dimond objected to using increased fees to bury the power lines.

"The town wants to bury the power lines on the backs of the poor," she said. "This town and county cannot dream up taxes fast enough."

In other business, the council:

Endorsed two projects that the town staff says will improve road safety. The first calls for closing left-hand turns onto and off of Wild Horse Road from William Hilton Parkway. The second calls for building an acceleration lane from Coggins Point Road onto William Hilton Parkway. With the council's approval, the staff will design the projects.

Gave the first of two approvals needed for a tax rate increase for telecommunications companies, such as those providing regular and cellular phone service and pager service, doing business in the town. A bill Gov. Mark Sanford is considering would raise the rate towns can charge companies from 0.75 percent to 1 percent. The council's approval was made in preparation for the governor's approval.

Delayed a decision on whether to swap land with Adventure Cove Family Fun Center. The deal would allow Adventure Cove to build a housing development, which Adventure Cove owners said would replace a potential time-share complex. Peeples, however, said the proposal needs more thorough evaluation, a decision the rest of the council agreed with.

Approved a land swap with Henry Driessen Jr. Under the agreement, the town receives 5 acres along Marshland Road, while Driessen gets 3.7 acres. The deal consolidates both Driessen's land holdings and the town's, according to the staff recommendation.

The council approved the deal 3-0, with Peeples abstaining because his company might build a house for Driessen.

Councilmen Ken Heitzke, Bill Ferguson and George Williams missed the meeting. All other votes taken Tuesday were 4-0.