How tax reform prevailed

S.C. lawmakers’ perseverance, compromise and a late dinner sealed the deal

By JOHN O’CONNOR

johnoconnor@thestate.com

The seeds of statewide property tax change were sown long before a hybrid plan emerged on the back of a chicken box in the General Assembly’s final days.

They included:

• A new speaker of the House and other House members aiming to make their marks

• A Union County land deal that forged a key working relationship between two legislators

• Accelerating demographic trends that created dramatic changes in coastal real estate values.

All played a role and — mixed with the spotlight of an election year — gave life to tax changes that will affect every South Carolinian.

Still, some of the plan’s most ardent supporters doubted a deal could be done.

“In a huge change like this, there’s so many things that can go wrong,” said Rep. Bill Cotty, R-Richland.

Reducing property taxes for homeowners was the issue for many lawmakers this year. Still, proposals to cut those taxes faced an up and down path. After sailing through the House in March, the Senate worked out details in fits and starts. Ideas were scrapped daily.

Business, school and local government lobbyists also took aim at the various proposals, concerned about their impact. More than once the plan appeared to be on life support.

The House and Senate proposals that landed in a conference committee were so different that many observers saw no way to reconcile them.

In the end, it took a dinner detente to work out a compromise, with final approval coming by just two votes.

THE PLAYERS

South Carolina has cut homeowners’ property tax bills before, in the mid-’90s. But a decade later, the state’s annual appropriation to offset property taxes was having less of an impact. The relief provided individual homeowners’ property tax bills was flat and overall bills were growing.

Recent proposals — such as the Quinn-Sheheen plan to make the state responsible for all school funding — had failed to sway a majority of lawmakers.

But spikes in property values in some high-growth areas — as some of the state’s largest counties finished required once-every-five-years reassessments — drove key House and Senate lawmakers to act.

Both houses formed special panels to draft property tax plans last summer. Citizens organized into a statewide network, spending long hours at the State House and blistering reluctant lawmakers with e-mails and radio ads.

In that climate, the personalities of House and Senate members working on a compromise played a role, Cotty said.

• Cotty came in as a public school advocate who also worked to remove the Confederate flag from the State House dome. After nearly a year working on the tax issue, Cotty could recite the numbers and impact on school districts by memory. He was the choice of former Speaker David Wilkins, R-Greenville, to study the issue, but maintained the confidence of Bobby Harrell when the Charleston Republican became speaker last year.

• House Majority Leader Jim Merrill, R-Charleston, and Rep. Annette Young, R-Dorchester, were the pit bulls for the House position. The two worked to keep House members together as time ticked down on the session. Merrill, who owns a public relations firm, says he is not afraid to “call a spade a spade,” a habit Cotty said he had to work to subdue.

• Rep. Michael Anthony, D-Union, was Cotty’s choice for the Democratic member on the final property tax House-Senate negotiating panel. The two formed a trust two years ago when Cotty brokered a land purchase for the Union County school district, where Anthony works. Cotty felt Anthony was the best channel back to House Democrats. Like Anthony, they were concerned about the impact of any change on school funding and how an accompanying sales tax hike would affect the state’s poorest residents.

• On the Senate side, Finance Chairman Hugh Leatherman, R-Florence, and Sen. Larry Martin, R-Pickens, were the key skeptics. They worried about the impact a change would have on businesses and schools. House press releases called Leatherman, the Senate’s raspy-voiced master of the budget, the roadblock. However, he helped marshal the 31 Senate votes needed to approve the plan.

• Sen. Jim Ritchie, R-Spartanburg, was the facilitator, a low-key expert at finding the middle ground. Ritchie is well-respected in the Senate, and House members said they have as good a relationship with him as anyone in the Senate. Every time the tax plan bogged down in the Senate — in the Judiciary Committee, on the floor, in conference — Ritchie was in the middle of trying to work out a compromise. It was his proposal on how to spend the sales tax increase that finally was accepted by the House.

But no one was associated with tax relief more than newly chosen House Speaker Bobby Harrell, R-Charleston.

“He basically said, ‘I’m going to bet my speakership on this single issue,’” Cotty said.

Harrell gave Cotty and the House committee studying property tax reform their marching orders: Keep it simple, fix the problem and keep it fixed. That outline set the House’s direction toward a plan to increase the state’s sales tax by 2 cents on the dollar. In return, the House plan would strip all county and school operating taxes from owner-occupied homes.

Harrell said the impact on families motivated his push for change. Even when Senate leaders called his plan “dead on arrival,” Harrell said he knew a proposal would get through the Legislature.

“Speakers come and go, and issues come and go” Harrell said. “I just think the issue was critically important to the state.”

Senators thought the issue important, too, but could not reach consensus. In early May, after weeks of wrangling, the Senate passed a plan that would allow counties to raise local sales taxes to lower property taxes. There was no statewide component to the plan, and most counties could not practically raise sales taxes enough to eliminate property taxes.

THE DINNER

Leatherman said the gulf between the House and Senate plans worked to foster an agreement. Because the sides were so far apart, Cotty and Leatherman worked from scratch, confident lawmakers would vote to give them the authority to do so.

“Pure negotiation,” Leatherman said. “The two bills were so far apart.”

Talks began the afternoon of May 22, with the House and Senate laying out “deal breakers:

• The Senate could not accept more than a 1 cent sales tax increase. The House wanted school operations — about two-thirds of a typical homeowners’ bill — removed from property taxes.

• The House wanted a guarantee taxes could not go back up on homes. Two-thirds of senators would not vote for a constitutional amendment needed for that guarantee.

• The House wanted residents to get a break on their grocery taxes. The Senate wanted property owners to get a break on their county government taxes.

For two days, property tax negotiators huddled with staff in small rooms at the Gressette and Blatt office buildings. Lobbyists, tax reform advocates and others camped out in the lobby waiting on word that a conference committee meeting was scheduled.

On May 24, the House unveiled a counter-offer, one that conceded a handful of Senate positions, such as a 1 cent-on-the dollar sales tax increase and a 15 percent cap on reassessed home values over five years.

But Wednesday evening, the Senate responded, rejecting nearly every key point in the House plan.

Harrell stepped in, meeting Leatherman for dinner at the Palmetto Club and brokering the final plan’s outline.

Harrell made it clear the House would not flinch: It wanted a sales tax increase to remove school taxes. It wanted a guarantee the school tax cut would be permanent. It wanted a sales tax cut on groceries.

With lines drawn, Harrell and Leatherman worked out a framework over dinner.

The next day, negotiators quickly began working out a final plan, with a couple of Senate suggestions key to drawing support.

In a back room, without any paper, Cotty tore a piece off a Bernie’s Broasted Chicken box and began to balance the plan.

The plan would tap $180 million in expected revenue that had been added, but not spent, to the state’s budget by economic forecasters. That money would pay for a cut in the sales tax on groceries and pay some county property taxes. The cuts cannot be repealed unless two-thirds of the House and Senate vote to do so, a key compromise made to satisfy House members.

Cotty quickly subtracted out all the costs, such as replacing school money lost by cutting the sales tax on groceries, and found $15 million left. Leatherman was pleased, and the two agreed to use that money — and $55 million from another source — to reduce the county operating portion of property tax bills.

The plan was approved Thursday night.

“I think the parties were always closer than press releases indicated,” Ritchie said. “There was an openness to crafting a comprehensive plan.”

The deal was not yet done. House leaders continued to hold up the state budget until the Senate gave its final approval to the property tax plan.

Some Senate Democrats tried a last-minute push to hike the cap on property increases to 20 percent from 15 percent. A larger cap, they said, would be fairer to owners of moderately priced homes.

Twice the Senate voted on the needed constitutional amendment; both times, it failed to get the needed 31 votes. But, when it became clear the House would not budge on increasing the cap, two senators switched their votes. Thirty-two senators had voted in favor of the amendment, clearing the last hurdle to tax relief.

THE FUTURE

It remains to be seen if lawmakers have succeeded in their goal of property tax relief or if that relief will prove fleeting.

Businesses complain bitterly they pay the majority of taxes, and the property tax plan gives them no relief. Businesses also say the increase in sales taxes will make them less competitive with firms in neighboring states that pay lower sales taxes.

School districts are worried about the restrictions on their ability to tax. In addition, if state revenues fall, those districts might be shortchanged.

“The proof’s in the pudding when you look at it 10 years down the road,” Anthony said.

Cotty, Leatherman, Merrill and others feel the legislation is a first step toward finding a fairer way to pay for state schools. The bill targets more state money to the poorest school districts.

Merrill said success on the property tax issue makes it more likely lawmakers will accept the challenge of addressing the fairness of the state’s school funding formula, which has been challenged in court.

“This has the potential of being a seminal piece of legislation,” Merrill said. “The General Assembly does not act unless it was compelled to ... it’s so much easier to just stand still instead of doing something.”

Reach O’Connor at (803) 771-8358.