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Tinkering with tax policy yields unintended consequences

Lee Walton

What a great idea!– Cap periodic property reassessment at 15%, eliminate school operating taxes on residential property, and fund it with a state-wide1% increase in sales tax. Let the tourist pay while the locals play! It was high time those poor folks South-of Broad got a little recognition for keeping up those beautiful old mansions that draw those nosey tourist “from off” here in the first place.

Two years ago, property values were still skyrocketing, developers couldn’t build fast enough, condos were springing up like summer weeds all over the Peninsula, and high-end properties were being snapped-up by speculators at phenomenal prices. Finally, Lowcountry legislators listened to the plight of their constituents and solved a local tax policy riddle that had frustrated their predecessors for generations. Motivated by pre-election pressure from well-funded Lowcountry supporters, they pushed ahead in an eleventh-hour panic and passed the 2006 Tax Reform bill that promised a win-win for everyone, notwithstanding a last minute add-on that mandated property reassessment triggered by sale.

Property tax has always been the most unpopular tax in America, but it’s still the best way to fund local government. Why? Because it links the voting power of the local constituency and their property wealth directly to those elected to provide local schools, public safety, and public services. It also links local government to what it has the greatest power to control – land use. If property values rise, government revenues increase. If property values and tax revenues increase enough, local government can provide more services of even cut property taxes.

The unfortunate reality is that most homeowners don’t see it that way. Growing tax revolt pressure in locations with skyrocketing property values has led to numerous attempts to curb property tax increases by substituting various forms of regressive sales tax reforms, often coupled with homestead property tax and food sales tax exemption provisions. Invariably, such hybrid taxing policies punish the poor, the young and upwardly mobile, businesses, commercial property owners, new homeowners, and trap retirees who’d like to sell their homes.

Long-term, reassessment limitations can lead to continuous undervaluation of property that doesn’t change ownership, and create a stagnant, no-growth or shrinking tax base for local governments. One of the major strengths of property tax is the automatic increase in revenue as property values rise. Like all goods and services in an inflating economy, the cost of public services rises with inflation. Without artificial limitations on assessed value, increased property tax revenue is capable of funding the rising cost of public services and public education. This key attribute is severely restricted by property tax reassessment limitations and is often manifested in drastic reductions in public services as experienced in Michigan, Florida and recently in California public schools. If not restrained by restrictive legislation, local governments are often forced to raise property tax rates to offset reassessment limitation losses, particularly during periods of slow economic growth as now being experienced.

All sales taxes are regressive – poorer people and those on limited or fixed incomes pay a larger percentage of their income in sales tax than more wealthy residents. As sales taxes are substituted for property taxes, the tax burden shifts further downward to the less affluent. This regressive imbalance is especially evident in localities where some foods, medicines and utilities are subject to increasing state and local sales taxes. A 1999 North Carolina study by Gardner found that an increase in sales taxes burdened the poorest 20% six times more than the wealthiest 1%.

That tired old cliché to increase sales taxes and make the tourist pay is the cruelest hoax of all – everyone who lives here pays the increase too! Even with no tax on unprepared food, the majority of families still pay the increased sales tax on a fast-food working lunch or an infrequent dinner out at a local restaurant with the family. Senior citizens on fixed incomes with older, larger homes are hit by both the increased sales tax and the reassessment on sale provision of the current tax policy. Many want to downsize into smaller, easier-to-maintain homes or urban condos, but they can’t because their property taxes would take a significantly higher percentage of their fixed income if they sold and purchased a new, smaller home.

Never fear, one of our local legislative geniuses has a new “fix” for the realization that his past actions contributed to the over-taxing of commercial and non-owner occupied real-estate, particularly his own. His current bill would eliminate property taxes altogether on “homesteads” for homeowners 65 and older and eliminate 28-30% of the current property tax of all 4% and 6% properties – all for just another 1% increase in state sales tax. The likely result of this ill-conceived action would be the demise of the middle-class, a quantum impact upon the already struggling poor, and old-timers trapped in their homes until the end of their days.

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