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Introduction
Property taxes are an issue in which South Carolina REALTORS® leadership and membership are keenly interested. Property taxes have a significant effect on the overall health of the real estate market. The real estate industry has been the backbone of the South Carolina economy, and we certainly want to keep that backbone healthy and strong. While South Carolinians are only the beginning to feel the effects of property tax reform, REALTOR® members from across the state have contacted the association reporting that the 2006 changes to the property tax structure have had a negative effect on the real estate market and on economic development. The focus of this webinar is to educate you on the changes that were made and have you educate your association on the strengths and shortcomings of the new property tax laws so that we can continue to move South Carolina on a path of economic prosperity.
How Property Taxes Work
Every owner of real property in South Carolina pays a tax associated with property ownership every year, commonly referred to as property tax. Counties, municipalities, and school districts across the state collect property taxes as their major revenue source to fund government infrastructure, services and schools. South Carolina real property taxes are calculated using the tax rate (millage), the type of property, and the value of that property. Real property in South Carolina is divided into several classes, and these classes are each taxed differently. Owneroccupied property is assessed at a four-percent ratio. Non-owner occupied and business properties are assessed at six-percent, while manufacturing properties are assessed at ten and a half percent. The county tax assessor determines the assessed (taxable) value of all properties in the county. Local government entities and school boards use the total assessed value of real property in their jurisdiction to set the tax rate (millage) to meet their annual budgetary needs. A reassessment of all property in the county occurs every five years.
In 2006, the South Carolina General Assembly enacted significant changes to the property tax laws in our state as well as to the State Constitution as it relates to property tax assessment. South Carolina voters approved the Constitutional changes on the November 2006 General Election ballot by an overwhelming margin.
The new property tax law does the following:
1. Eliminates school operating taxes on owner-occupied property and replaces that revenue stream with a 1-cent statewide sales tax. 2. Changes the method of reassessment so that property is reassessed each time an assessable transfer of interest takes place (sale, renovation, transfer to a family member, etc.); when a property is purchased the assessed value of that property becomes the sale price. 3. Caps increases in assessed value to 15% over a 5-year period on all classes of property; this is the Constitutional provision that was approved by voters in November 2006. 4. Enacts spending and millage caps on local government. 5. Allows voters of any county to further reduce property taxes on all classes of property through passage of an additional sales tax referendum. 2007 Clarification of 2006 Property Tax Reform In 2007, some aspects of the new property tax laws were clarified in legislation that was pursued by the South Carolina Department of Revenue. The legislation included a SCAR-supported provision that protects Tax Increment Financing (TIF) Districts to ensure that they continue to receive funding under the new property tax laws. The legislation also clarified another provision of the property tax reforms and allows counties to put new homes on the tax roll upon occupancy and subsequently start collecting property taxes more quickly. This provision is particularly important to high growth areas of South Carolina. Further, the legislation also provides that time-shares are not reassessed each time a share in the property is transferred.
Positive Consequences of 2006 Reform Package
One of the most positive outcomes of the 2006 property tax reform package is that homeowners received an annual property tax reduction anywhere from 40% to 60%, through the elimination of the school operating portion of their property tax bill. Another positive consequence of property tax reform is that increases in the assessed value of all classes of real property are capped at fifteen percent over every five-year assessment cycle. Capping the property tax obligation in this way provides property owners with predictability in their future tax obligations (preventing the 300 percent assessment increases some parts of the state experienced). Negative Consequences of 2006 Reform Package Certain of the property tax law changes have had a significant negative effect on the real estate market and economic development in South Carolina. Property tax issues are driving real estate investors out of our state, while businesses considering locating in South Carolina are choosing our neighboring states. From industrial properties in the Upstate, to commercial facilities in the Midlands and investment residential property along the coast, every market has suffered. Prior to 2006, South Carolina counties re-assessed the value of real property every five years. Each of the forty-six counties had a different assessment method. Some counties assessed very close to market value, while others were closer to fifty percent of market value. Millage rates were set to meet the budgetary needs of the county, given the total assessed property value in that county. In 2006, the General Assembly enacted property tax reform that provided for point-of-sales assessments. Now, property is reassessed each time it is transferred, based on the sales price. Regrettably, this has created serious inequities in the real estate market.
Residential Inequities
In the residential market, neighboring properties now have gross differences in property tax obligations, based only on the date of sale. This inequity will worsen over time. Longtime residents are wary of moving, for fear of taking on an increased property tax burden. Investors looking for property in South Carolina have reconsidered, based on tax complications in our state.
Commercial Inequities
Our commercial market sees a problem when property changes hands. Additional property taxes created by point-of-sale assessments are transferred to the property¿s owner. If the lease agreement on the property does not allow for the increase, the value of the property can decrease as the owner¿s net operating income decreases. Commercial facilities that have not changed hands recently have an unfair and inequitable market advantage ¿ the ability to offer lower lease costs with wider income margins. This produces another disincentive to transfer. Businesses looking to locate to South Carolina have chosen to take their business elsewhere, once they learn of the property tax burden (point-of-sale assessment issues combined with the six percent assessment ratio).
How SCR Can Help
South Carolina REALTORS® leadership and staff have been working with members of the South Carolina General Assembly to educate them on what¿s happening in the real estate market as a result of property tax reform. The Speaker of the House, Chairman of the Ways and Means Committee, and Chairman of the Property Tax Subcommittee, have been very responsive to our concerns and have committed to assisting South Carolina REALTORS® remedy the negative externalities of property tax reform. This is a keynote item on 2008 REALTOR® Quality of Life agenda at the State House.
In February, South Carolina REALTOR® Legislative Group voted to pursue a bill in the Legislature that would eliminate point-of-sale assessment and also examine the feasibility of a bill that would assess all commercial and investment property at the four percent ratio. Regrettably, the political reality we face is that a bill aimed at changing the assessment ratios as currently defined would gain very little traction in the Legislature this year and changing the point-of-sale assessment provisions is the only opportunity the business community has to address property taxes in the immediate future. That is why the Association is pursuing a bill initially addressing point-of-sale. We look at this as a starting point for a more comprehensive examination of property taxes in South Carolina that is to come in future years. Working with Property Tax Subcommittee Chairman Bill Cotty, SCR is focusing on a bill draft that would delay implementation of point-of-sale assessment until the next county-wide reassessment period. This is the most politically viable and expedient way of addressing this issue. During the next reassessment cycle, all property that changed hands would be reassessed at its recent purchase price.
The legislation would still allow a property owner to challenge their assessed value, should market conditions be such that the market value of the property is depressed below the price that was paid for the property. SCR lobbyists are working with Chairman Cotty to schedule a subcommittee meeting on the legislation.
South Carolina REALTORS® also support H.3591, a bill sponsored by Representative Chip Huggins. This legislation would allow South Carolina¿s senior citizens to carry the assessed value of their home over and apply it to a new residence should they want to downsize. The theory behind that is that under the 2006 property tax reform, a senior who has lived in a home 20+ years has had the assessed value on their home capped at fifteen percent over every five years that they owned the property, keeping their assessed value well below the market value. When that same senior wants to downsize, the market value of their new home would be the new assessed value, creating a property tax burden greater than what they had previously. This is a disincentive for a senior to relocate or downsize. Because many seniors are on fixed incomes, this proposal will offer seniors the protections they deserve when downsizing or moving into comparable homes by keeping their property tax obligations nearly unchanged.
With only a few months left in the 2008 Legislative Session, South Carolina REALTORS® have a significant amount of work to accomplish on this issue.