Don't make same errors with tax reform 'fixes'

info@islandpacket.comDecember 16, 2012 

Some initial reactions to state Sen. Tom Davis' plan to make better a very problematic property tax reform law shows that no matter what solution is offered up, somebody will object.

Davis is very realistic about the likelihood that lawmakers would double resident homeowners (read voters) property tax bills by repealing Act 388 and taking away their exemption from paying school operations taxes. He says it won't happen, and he's probably right.

Some local real estate salespeople who want to see the law repealed say it's morally wrong that people who live here, many with children attending our schools, don't pay property taxes for school operations. They do pay in some relatively small ways (the 1 percent state sales tax to make up for lost property tax revenue and taxes paid on personal property, for example). But the discrepancy in property taxes paid by resident and nonresident homeowners is stark and abuses any sense of fairness. Nonresident homeowners already were paying 50 percent more in property taxes on similarly valued homes before tax reform came our way. And even before Act 388 was passed in 2006, resident homeowners had $100,000 of value exempted from school operations taxes.

But repealing Act 388 in its entirety would not simply repeal the school operations exemption. It also would repeal the 15 percent cap on reassessment values available to all properties and the cap on the tax rate local governments can levy.

Davis' plan, while pragmatic in part, also depends on the state Supreme Court coming through with a ruling on sales tax exemptions that would give lawmakers political cover to remove many of them. He would like to follow the Taxation Realignment Commission recommendation of eliminating about 60 exemptions, which could generate as much as $600 million.

A big question mark is whether lawmakers would keep their hands off that money and use it to pay for the property tax relief for second homeowners and commercial properties that Davis envisions. He initially said it might take a slight increase in the state's 6 percent sales tax to make up the rest of the $1.3 billion needed to fund schools without property taxes and move toward per-pupil funding weighted for such factors as poverty.

Now, he says he thinks it can be done without a tax increase given the level of state government spending and the prospect of that $600 million in new sales tax revenue. He suggests imposing a cap on state spending and using money collected in excess of the cap for the remainder.

Among his arguments for his proposal are:

  • Act 388 has undermined the state's "index of taxpaying ability" to determine a local school district's share of state money under the Education Finance Act, a primary funding source for districts. A move away from the index bodes well for Beaufort County and other coastal areas, where property values are high and state EFA funding low as a result. Other parts of the state, he says, are seeing the inevitability of per-pupil spending.

  • The inequity has been exacerbated under Act 388. Even though resident homeowner properties were exempt from school operations taxes, they were still included in the "index of taxpaying ability." It also has failed to take into account the shift in recent years from nonresident to resident homeowner status to take advantage of the tax cut.

  • Without a very specific use targeted for the money that could come from the repeal of dozens of sales tax exemptions, it could be frittered away with no real impact on taxpayers.

  • Simply repealing Act 388 wouldn't take away the inequity we've had for years when it comes to paying property taxes, particularly on residential property. Second-home owners would still be assessed at 6 percent, while resident homeowners would be assessed at 4 percent. That's set in the state constitution.

    If Davis is right about the move toward per-pupil state funding, local taxpayers and school district officials also should get ready to lose a lot of discretion in their school operations spending. Local districts and voters would still make the call on capital projects (i.e. debt) and policy decisions. But many policy decisions, including those about what happens in the classroom, are tied to money. Is that what we want?

    One of Act 388's many lessons is to be wary of unintended (or ignored) consequences. We should fully understand the ramifications of any major changes to the law.

    It also is far easier to pass a law than it is to "fix" it after the fact.

    Let the debate begin.

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