The property tax might be the most despised of all taxes, and it's easy to understand why.

Tax bills can rise sharply and unexpectedly from one year to the next because of tax increases or reassessments. The bills can represent a tax on unrealized wealth and don't necessarily relate to a person's ability to pay.

Property tax bills arrive as a lump sum that combines annual school, county and local taxes, and the full amount can be startling. Imagine getting a single annual bill for sales tax, which goes largely unnoticed when paid a few pennies at a time.

And the property tax can be baffling, with its myriad tax rates and assessment ratios and tax credit factors and exemptions -- not to mention the process of reassessment, when property values and tax rates are adjusted.

Several Lowcountry counties went through reassessment this year, and that, along with a property tax increase by the Charleston County School District, ushered in a flood of higher tax bills and lots of angry taxpayers. (Reassessments also lowered bills for some property owners; they haven't been complaining.)

Members of the General Assembly have responded to distraught constituents by pledging property tax reform, setting the stage for a debate that could affect the wallets of all state residents, regardless of whether they own property.

Tax reform has been a struggle for states across the nation because, without large cuts in spending, any reduction in one form of taxation leads to increases in other taxes, and the tax burden shifts from one group of people to another.

For example, when South Carolina voters approved steep reductions in the property tax on cars and boats five years ago, one result was higher property taxes on homes, stores and other real estate.State lawmakers already have begun discussing what should be done, a debate that will continue when a Senate subcommittee meets Thursday. Property tax reform is shaping up to be the dominant issue of next year's legislative session.

The ideas so far include: eliminating all property taxes and finding ways to raise the $4.2 billion for cities, counties and schools; passing more targeted relief for those who have lower incomes; and raising the sales tax by a few percentage points to pay for school operations, a move that could slice tax bills in half.

The only constant among these ideas might be this: If someone gets a break, someone else must make up the difference.

'SCHOOL FUNDING PROBLEM'

Jeanne Baird, 75, of West Ashley said something must be done. She lives with her husband, Alvin, in a house valued right at the median price for Charleston County homes, about $178,000, and she said she thinks property taxes are too high.

"It's entirely too much, and we think it's going down the proverbial snake hole of the school board," she said. "I frankly think they should curtail spending in the schools. I went to school in the 1930s in a building with no air conditioning, and we didn't have computers, we had pencils."

Baird said cutting her property tax by raising the sales tax would be a fine idea. She also suggested lifting the $300 cap on sales tax for car sales.

The state doesn't collect the property tax, but it regulates how local governments collect it. School districts account for about 60 percent of the typical property tax bill in South Carolina, and property taxes are the main source of local school funding.

"School funding is a state responsibility, yet it's coming from local property taxes," said Municipal Association of South Carolina Executive Director Howard Duvall. "We don't have a property tax problem in South Carolina, we have a school funding problem."

Counties see the issue in a similar light. The South Carolina Association of Counties, which lobbies on behalf of the state's 46 counties, favors doing away with property taxes to operate schools, and it also would like to see lawmakers eliminate some exemptions on sales tax, Deputy Executive Director Robert Lyon said.

Duvall said municipalities rely less on property taxes these days because they can look to other taxes and fees for revenue. It's a similar story with counties.

But school districts, whose tax rates make up the bulk of what property owners pay, don't have other choices.

Paul Krohne, executive director of the South Carolina School Boards Association, which represents 636 board members across the state, said property taxes are the only way local communities have to provide extra support to their public schools.

"Obviously, we recognize that you can't talk about property tax relief without talking about the funding of education," he said. "Eliminating property taxes completely, in our opinion, is very bad policy and would really eliminate what small amount of local control we have over our schools now."

Another wildcard is a pending lawsuit against the state alleging that it has failed to provide the minimum basic funding for its public schools. A ruling in that case is expected soon, and while it likely will be appealed, it could increase pressure on lawmakers to change school funding formulas.

"Nobody knows what it's going to say, so we don't know the implications," he said. "Everybody is just holding their breath."

HERE WE GO AGAIN

For many, the current property tax debate is familiar.

Lawmakers frequently have grappled with tax relief, especially during those years after many counties have undergone a reassessment. They have tweaked the system, but the complaints haven't gone away.

South Carolina already uses state revenue, mostly from income and sales taxes, to provide several forms of property tax relief.

In 29 of 46 counties, voters agreed to raise their sales tax by 1 percentage point to reduce property tax bills. In coastal counties particularly, tourists help pay for this property tax relief, although it also disproportionately affects people with low incomes, because they spend most, if not all, of what they earn.

Statewide, owner-occupied homes and agricultural land are taxed on only 4 percent of their value, while rental properties, stores and offices are taxed on 6 percent of their value. That means the owners of businesses and rental units pay at least 50 percent more in real estate taxes than homeowners would on similarly valued property.

Owner-occupied homes also get a property tax relief credit financed by state revenues that other property owners don't benefit from. People who don't own their property can wind up paying higher property taxes than a homeowner, albeit indirectly, as landlords pass along the cost of the taxes through the rent.

The state also offers tax relief for the elderly and disabled, who may apply for a homestead exemption that exempts $50,000 of their home's value. The size of this exemption hasn't changed in five years, when it was raised from $20,000.

While property values have been rising fast, the homestead exemption still can mean a big tax cut for those with less expensive homes. A $100,000 home, for example, would be taxed on half its value.

Holley Hewett Ulbrich, senior scholar at The Strom Thurmond Institute of Government and Public Affairs, said the state could provide property tax relief more effectively and less expensively by tailoring it toward those who need it most.

"We give relief because you are old, or you own a house, neither of which is an indication of income," said Ulbrich, a Clemson University economics professor emeritus who has won awards for her writings on South Carolina government.

"Among states that provide property tax relief, about 75 percent have some kind of income test, while we do not," she said. "A number of (states) include renters, because property taxes get passed through to the renter, and at a 50 percent higher rate."

In a 1998 study, she notes that exemptions and exclusions from property taxes shrink the tax base and tend to raise tax rates for others. In other words, if lots of property is tax-exempt and you give a tax break to every homeowner and every elderly person, someone else pays. Ulbrich understands how property tax bills can rise. She lives in Pickens County, where her tax bill nearly doubled this year after a reassessment, but she said she believes tax reform should focus on what she calls "hardship cases."

Andy Felts, director of the Riley Institute at the College of Charleston, agrees.

Most states limit real estate tax increases for property owners who meet age or income requirements, or both. These provisions, known as "circuit breakers," either forgive part of the tax bill or defer it by placing a lien on a home that is settled when the owner sells, or when his estate is settled.
"I don't know why circuit breakers aren't being put out there in the front as an alternative," Felts said. "They have been tried and demonstrated to work. Why would we want to reinvent the wheel?"

IF HOMEOWNERS PAY LESS, WHO PAYS MORE?

Lyon, who has worked with the Association of Counties for decades, has watched previous stabs at property tax relief and thinks next year's will be different.

"We're very hopeful that the leadership of the Senate and House will put together something that is reasoned and well thought out and not something that is a stopgap thing," he said. But he also knows that there's no free lunch.

"Every little thing that you tweak and twiddle with affects something when it comes to those property taxes," he said. "If you exempt all residential owner-occupied properties, and you pull that great chunk out of the property tax base, then what does that do? It shifts the burden to other classes of property: small business owners, people who own automobiles, industries. I don't know how fair it is to take one of the blocks and just completely knock it out of the base. This is a very complex issue, and a lot of it deals with equity issues."

Any move to ease property taxes on homeowners could shift the burden more to business, and that will get the attention of people such as Otis Rawl, vice president of public policy for the South Carolina Chamber of Commerce.

"If they're only looking to relieve residential property taxes, then who's really paying the property tax? It's left up to the retail businesses, the farm community and the business manufacturing community to pay," he said. And that can hurt the state's ability to attract new industries or to encourage its existing industries to expand.

"This is hard to get people to understand, but without jobs, you've got a heck of a bigger problem," he said. "You've got bigger strains on our revenue systems from unemployment, health care, poverty, all sorts of things."

Rawl also noted that although increasing sales tax might seem popular, that also could have a backlash on the state's No. 1 employer: tourism. "If you do sales taxes and get too high, then you kill our tourism. It's more complicated," he said.

As they continue to meet this week, lawmakers will continue to wrestle with the trade-offs, and many sets of eyes will be on the legislators. "I think the only thing that's clear is that the Legislature wants to do something on property taxes this year, which is an election year," Duvall said.

LEARN MORE

The Strom Thurmond Institute has the study by Holley Hewett Ulbrich online at www.strom.clemson.edu/opinion/ulbrich/proptax.html.

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