Doughnut holes take bite out of city taxes

Glancing at a city zoning map and the kaleidoscope-like pattern of parcels along the S.C. 170 corridor, scores of small, colorless lots stand out.

Seemingly within the city, the lots are actually part of Beaufort County, a collection of holdouts whose owners don't want to pay city taxes and city business license fees.

For Beaufort, it's a jigsaw puzzle of parcels of land -- with a lot of pieces missing.

And the missing pieces mean missing money.

"By looking at a map, you can see how messy it is. There's no real logical pattern," City Manager John McDonough said of the city's growth along S.C. 170 and gaps of unincorporated land.

Known as "doughnut holes" in municipal planning vernacular, the gaps cost Beaufort thousands of dollars each year in potential property taxes, business license fees and hospitality and accommodations taxes -- dollars that could go toward dropping the city's tax rate and improving services, but instead go to the county.

There exist about 45 parcels of land, many of them commercial properties, in doughnut holes between the Cross Creek Shopping Center and Boundary Street on or near S.C. 170, according to zoning maps.

Property taxes alone for these parcels of land could contribute about $40,000 to the city, and more than 20 businesses avoid paying more expensive city business license fees, including five car dealerships.

But because of historic bit-by-bit expansion along S.C. 170 and the state's restrictive annexation laws, the city is dependent upon property owners to initiate interest in annexation.

State law allows for proposed tracts to be annexed into a city if more than 75 percent of property owners in an area petition to annex or more than 25 percent of residents in an area petition for a special, simple majority referendum for annexation.

Because the doughnut holes are generally commercial properties owned by a small number of property owners and contain no residents, an owner on S.C. 170 unwilling to annex can easily remain in the county.

"It's very difficult to annex a property owner that does not want to be annexed," said Howard Duvall, executive director of the S.C. Municipal Association.

Examples of how the city incrementally grew along S.C. 170 include the annexation of Cross Creek Shopping Center in 1988, Regions Bank in 1993, and Beaufort Boat House property in 1996, according to Libby Anderson, Beaufort's planning director.

"In general, in the past 10 years, the city has been more interested in voluntary annexations," said Libby Anderson, the city planner since 1996.

Anderson said many tracts of city land along S.C. 170 were large clusters of properties owned by families, as opposed to separate owners, that decided to annex the pieces into the city bunches at a time.

Such clusters and other scattered annexations over the past two decades have led to the creation of the isolated bits of county land, with the city powerless to do much about it.

Beyond missing revenues from taxes and business license fees, the spots of county land within the city can make it difficult to provide services.

"It creates a very confusing situation for dispatch, EMS and fire service," McDonough said.

Maj. Matt Clancy of the Beaufort Police Department said that new dispatch computer systems that can code if a location is in the city or county have reduced confusion the last few years, but sometimes a caller cannot accurately state where an incident is taking place.

"If it ever comes up and there is confusion, we'll send an officer and worry about jurisdiction later," Clancy said.

McDonough added that for owners of undeveloped lots, city services may be of little value.

Sen. Scott Richardson, R-Hilton Head Island, said doughnut holes, sprawling and haphazard city growth can be the result of aggressive cities pursuing more tax revenue.

"The biggest issue is the city needs to take the good with the bad," Richardson said, mentioning Beaufort's annexation of commercial properties on Lady's Island. "Cities tend to cherry-pick the high value areas."'

Beaufort has annexed upscale residential developments on the outskirts of the city that include homes in Battery Shores, Islands of Beaufort, and on Cane, Cat, and Distant islands. Meanwhile, places like Polk Village, a neighborhood of small homes tucked away to the north of the S.C. 170 and U.S. 21 intersection and bounded by city property, are in the county.

Richardson said that reluctant landowners unwilling to pay city taxes also play a role.

"In most of these cases, people are getting a lot of city services for not paying city taxes," Richardson said. "I think there's justification that everyone in the area should be putting into the till."

The senator said there is "guarded optimism" for a bill proposed by Sen. Jim Ritchie, R-Spartanburg, which would allow municipalities to annex doughnut holes by ordinance if the property meets three conditions: It has been completely surrounded by the municipality for three years, is less than 50 acres, and contains less than 25 electors.

The bill, now sitting in the Senate Judiciary Committee, would bring changes welcomed by Mayor Bill Rauch, who called state annexation laws "backward."

Rauch said apart from legislative changes, another way to encourage annexation and the filling of doughnut holes is to put the city's tax rate on par with the county's and nearby fire districts.

While Rauch said taxpayers in the Lady's Island Fire District realize tax savings, residents in the Burton Fire District would not see a large hike in tax bills should they join the city.

"On the Burton side, it's almost a wash," Rauch said.

The city of Beaufort has a tax millage rate of 55.8 mills, Burton Fire District has a rate of 54.2 mills and Lady's Island has a rate of 28.5 mills.

This story was originally published May 8, 2005 at 8:53 AM with the headline "Doughnut holes take bite out of city taxes."