South Carolina voters might regret not being more careful when they wished for property tax relief and then overwhelmingly approved a new assessment (valuation) limit system that will take effect in fiscal year 2008.
That's when the state's municipal leaders say billions of dollars in tax burden will be shifted from the wealthiest areas and richest property owners to businesses and low- and medium-income families.
"In plain language, the burden will shift from the higher income taxpayer to the lower income taxpayer. This means two out of every three taxpayers could actually end up with higher taxes if this (constitutional) amendment passes," Howard Duvall, executive director of the Municipal Association of South Carolina (MASC), cautioned in published commentaries before the November 7 vote.
But despite the warnings, and an aggressive campaign to defeat the measure, the so-called Amendment 4 passed with 63 percent of the vote.
The amendment will limit increases in property assessments to 15 percent over five years. However, the problem for two-thirds of homeowners, as well as most small businesses, is that their property will not appreciate enough over the period to qualify for the assessment cap, Duvall said.
During normal real estate cycles, only property values in the most desired areas, particularly along the coast, on lakefronts and in resort areas, would increase rapidly enough to qualify for this 5 year/15 percent assessment cap. To make up for this loss of taxable valuation, local and county governments will be forced to raise mill rates to pay for services, according to Duvall.
Duvall was not alone in his sharp criticism of the measure. Several studies, including one by the Strom Thurmond Institute of Government and Public Affairs at Clemson University, concluded that assessment caps benefit higher-income taxpayers the most, shift the tax burden to those with less ability to pay, and depress real estate sales and therefore real estate taxes.
The Institute and other groups describe assessment caps as a "blunt instrument" while recommending income-based property tax breaks, especially a "circuit breaker" or homestead exemption program, as the best ways to provide relief to those who need it most.
As South Carolina goes…
In Maine, Gov. John Baldacci has announced he will resurrect his proposed "LD 2" legislation that was soundly rejected by lawmakers during his first term in office (see sidebar).
Baldacci said he came away from his re-election campaign convinced that a key solution to Maine's property tax problem would be to cap property values. The municipal leaders of South Carolina would have advised him otherwise.
No different than Maine, South Carolina property values have increased the most along the coast, around lakes and in resort areas. The rising assessed value of waterfront property, however, has had little impact on people's willingness or financial ability to purchase it.
In South Carolina, during the next five years 70 percent of residential homes are not expected to qualify for a tax break under the 15 percent valuation limit. Those homeowners will actually see an increase in their property taxes to make up for the lost tax base, according to MASC's Duvall.
Moreover, Duvall says, only homes valued at $200,000 and up will even be in the running for assessment limits, leaving out a large portion of property owners in the state.
Also, while the assessment limits apply to South Carolina businesses, most will likely join the vast majority of homeowners whose property does not appreciate enough over the next five years to qualify under the cap. Business owners too can look forward to higher, not lower, property taxes in the years ahead.
Trying to find a complete list of the states with some form of assessment limits is difficult, since many are so different from each other and because some states use a combination of factors in creating the limits.
• California caps assessments on all properties;
• Florida limits assessments only on homestead properties;
• Montana phases in assessments over six years;
• Some states, such as Maryland, provide a local option to cap assessments;
• Washington, D.C., caps assessment increases to 10 percent a year, although many properties don't approach that kind of value increase year-to-year and therefore many property owners don't get any benefit from the limits.
And then there's the approach used in a number of states to actually freeze the value of property, but only for elderly homeowners.
Meanwhile, in Maine, Baldacci's idea four years ago was to cap the value of homestead land only, which apparently is not done in any of the other states with assessment caps. The governor apparently still favors that approach, which will add yet another variation of assessment limits to the national collection.
Arguably, the best known assessment cap is California's Proposition 13, which limits home value increases to the rate of inflation, or two percent, whichever is lower.
Passed in 1978, at a time when home values were skyrocketing and public pressure for a solution was intense, Prop 13 and similar measures have become known as an "acquisition value tax system" because only when a home is sold does its assessment return to fair market value. It has also been labeled "Welcome Stranger" assessing because it shifts the property tax burden onto new homebuyers.
Prop 13 has long been seen as unfair by tax and public policy experts, since two neighbors could live in identical homes but pay far different tax bills. In California, it has a documented history of starving public service and infrastructure budgets in many communities.
But the U.S. Supreme Court upheld the "acquisition value" system as constitutional in a June 1992 ruling and there appears to be no political or public will to change the system despite its serious and acknowledged negative impacts.
Not a Good Idea
Even the conservative Tax Foundation, which ranks Maine highest in property tax burden and number 6 in per-capita property taxation in the country, thinks assessment caps are bad tax policy. "In general, we see bad property tax assessment limits," William Ahern, Tax Foundation communications director, told the TOWNSMAN in mid-December. "That is, they do not apply to all property. They tend to exclude commercial property. They tend to exclude residential property occupied by certain targeted groups … so our overall view is that they are not good."
"All property should be taxed at the same rate, no matter who owns it or its use," Ahern added.
Instead of capping assessments when property values skyrocket, "local officials should be lowering the tax rate," he said.
Most assessment caps also do nothing to control property tax rates, which diminish any benefits an assessment limit might offer.
According to Iris Lav, deputy director of the progressive Center on Budget and Policy Priorities in Washington, D.C., assessment caps are often counter-productive in the overall effort to reduce property taxes.
In a presentation to a property tax conference in Trenton, N.J., in October, Lav noted that under the Washington, D.C., assessment cap of 10 percent, homes valued at $750,000 or more make up 8 percent of the city's housing stock, yet they get 26 percent of the tax relief.
That kind of tax burden shift is often unavoidable when assessments are artificially capped or frozen, experts agree.
As a South Carolina judge said in rejecting the state's first attempt at assessment limits in 2000, "The revenues that otherwise would have been 'lost' due to the cap are not forgone, but rather are recaptured by increasing the taxes paid on those properties not helped by the cap."
Today, South Carolina municipal leaders are already bracing for a new kind of taxpayer revolt once Amendment 4 takes effect.
According to the MASC study, in four South Carolina counties alone, an estimated $11 billion in taxable residential property will be sheltered from property taxation beginning in 2008. The corresponding loss of property tax dollars will have to be paid through higher tax rates.
In a recent interview with the TOWNSMAN, Duvall said the most ardent supporters of Amendment 4 were residents and lawmakers from the richest areas of the state, particularly along the coast. And even though the vast majority of citizens would pay more in taxes, not less, the MASC could not convince voters to reject Amendment 4.
"It sounds like a good deal, but it's not the deal they think it is," Duvall said. "Trying to explain to the man on the street (that taxes would increase for most homeowners) was an impossible task."
Duvall said the MASC Board of Directors asked its staff to fight the assessment cap "as vigorously as possible" not only out of concern over shifting the tax burden to low- and medium-income families, as well as business and industry, but also to be able to say to voters when the time comes "that we tried to tell you this would happen."