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Tax reform's ripple effects not getting enough notice

Legislators' 'freight train' of reform needs a lot more study

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Ready or not, property tax reform is coming.

State House leaders made that clear in a meeting Wednesday before Gov. Mark Sanford's State of the State address. That "freight train" is rolling down the track, they said, and changes are coming. Why? Because people are asking for it. Are they going about it in the best way? Who knows.

As residents and taxpayers in a high-growth area with little help from the state coming for such critical needs as roads and new schools, we better be ready for what possibly lies ahead -- a big change in how local governments raise money to address local needs and a lot more state control over the amount of money towns, counties and school districts have for operations.

The version of reform from the House Ad-Hoc Property Tax Committee substitutes an additional 2 percent in sales tax for owner-occupied residential property taxes when it comes to operations for local governments and school districts. Such property stays in the mix for long-term debt. In Beaufort County, that type of property represents about 38 percent of the tax base, according to the assessor's office.

Under the House proposal, the additional sales tax, plus the state's existing 5 percent, would not apply to unprepared food sales. The state sales tax on short-term lodging would be exempt from the increase, leaving it at 7 percent.

One troubling aspect is how the new sales tax revenue would be sent back to local communities. For the first year -- 2007 -- the House bill promises a dollar-for-dollar return. But after that, things are less clear. In 2008, taxing entities other than school districts would be reimbursed based on population. No entity would receive less than it did in 2007. For school districts, money would be distributed according to the Education Finance Act "as amended." No district will receive less than they received in 2007.

How the Education Finance Act, the distribution method for a portion of state education money, will be changed hasn't been determined. That's the same distribution method that has had local officials crying foul this past year. And given the demand for services prompted by millions of visitors to this area each year, a "per capita" distribution is extremely worrisome.

Beginning in 2007, property taxing entities could only increase the tax rate on the remaining properties to be taxed by the percentage of population growth, plus the Consumer Price Index, or 6 percent, whichever is less. So much for the concept of Home Rule.

The House committee proposal also would change the way property is assessed. After 2006, the value would be the fair market value when the house is sold or substantial improvements made.

Most troubling of all is the haste to get this done without knowing the full consequences. House lawmakers look to the sales tax to replace property tax revenue at the same time they introduce a bill to create an independent commission to study the state's myriad sales tax exemptions. The 15-member commission would study all exemptions and determine which to keep, revise and eliminate in a package to be voted up or down by lawmakers. The group would report back to the House by January 2007, long after this year's session ends.

The proposal came one day after Gov. Sanford's State of the State address, in which he asked the General Assembly to review sales tax exemptions as part of its property tax reform efforts. The idea of an independent commission is a good one, but its mission should be broadened to look at the state's entire tax structure, as suggested by a Palmetto Institute report. And no action should be taken to upend the state's taxing structure until such a study is done.

In addition to studying the sales tax exemptions, Sanford's address laid out other "markers" for the General Assembly as it considers property tax reform:

• Any swap of sales taxes for property taxes should be either revenue neutral or a net tax cut.

• A swap of real estate taxes for sales taxes should not erode the state's business climate.

• Local governments need the option of impact fees to help pay for growth, which, the governor says, doesn't pay for itself in this state. If local governments are going to hold down property taxes, they need more tools.

• Align cost with benefit. If the state takes over the funding of local schools, then the state should align or cap the growth rate of spending in those schools.

Sanford's speech was short on details on all of these points, but at least it provided a broad outline for discussion. Unfortunately, the devil will be in the details on this subject.