Higher county property taxes could be on way

A property tax increase could be on the way as the Beaufort County School District grapples with a $5 million shortfall due to lower-than-anticipated tax revenues.

The culprit could be a new trend of Beaufort County properties being reclassified, allowing owners to pay a lower tax rate, county leaders speculate.

Beaufort County Council will consider Monday raising property taxes in the new fiscal year that begins July 1 to offset the shortfall. The owner of a second home valued at $265,000 — the county’s median — would pay almost $130 more in annual property taxes, according to a school district proposal.

Similar shortfalls could occur in the years to come, leaving district and county leaders scrambling to cover them.

In the long term, “this is a non-sustainable situation,” said County Councilman Jerry Stewart last week.

4 percent vs. 6 percent

The district’s revenue shortfall is due in large part to the way S.C. public schools are funded, say district and county leaders.

A controversial 2006 state law, called Act 388, exempted owner-occupied homes from property taxes that fund school operations. These properties are now assessed at 4 percent of market value.

Meanwhile, owners of businesses, second homes and rental property fund school operations and are assessed at 6 percent of market value.

The result: a tax system in which owners of second homes — often retirees with grown children — pay the lion’s share of school operations even though they don’t have students in the district.

“It’s unfortunate that business owners and 6 percent homeowners are paying for school operations and, more than likely, they don’t have children in our schools,” said Phyllis White, the district’s chief finance and operations officer.

It’s particularly bad for Beaufort County schools as an increasing number of county property owners paying the 6-percent rate are getting their property reclassified and getting dropped down to the 4-percent rate.

The county assessor’s office processed about 3,400 conversion applications in 2011. In 2015, that number nearly doubled, assessor Gary James said last week.

About 850 properties were added to the 4-percent category in 2015, while the number of properties taxed at 6 percent grew only by about 300, he said.

Incentive to game the system

Act 388 has created a financial incentive for property owners paying the 6-percent rate to apply for reclassification that would drop them to the 4-percent rate, according to county leaders.

“The burden of taxation on our 6 percent (property) owners is so very high that it makes it more cost effective for them to try to evade the law,” Beaufort County Councilman Brian Flewelling said last week. “Rather than pay the 6 percent, they try to circumvent the system to pay the 4 percent.”

School district Superintendent Jeff Moss told the Beaufort County School Board last week that about 90 percent of the district’s $5 million revenue shortfall is due to the number of properties once assessed at the 6-percent rate that are now charged the 4-percent rate.

“There were a lot of tears for us,” Moss said.

County leaders say they’re doing all they can to ensure that county residents who claim that they live full-time in their homes and qualify for the 4-percent rate are being truthful. James said there is a stringent review process for conversion applications that involves checking applicants’ driver’s licenses, tax filings and property records “to try to prove that (Beaufort County) is actually their legal residence.”

About 80 to 85 percent of conversion applications are approved each year, he said.

When a property converts to the lower tax rate, the school district is hit the hardest, said Alicia Holland, the county’s chief financial officer.

“Say you have a $100,000 home assessed at 6 percent. So that’s $6,000 that the taxing districts can use,” Holland said. “Let’s say (the home is reclassified and) drops to 4 percent. So it’s now $4,000. Everybody just lost 2 percent of their revenue — except the school district that took a 100 percent hit.”

In attempt to reduce the number of property owners attempting to game the system, “we have a fraud hotline ... where you can actually report your neighbor,” James said.

It’s unclear how effective such efforts are in reducing fraud.

In recent years, the number of property owners paying the 4-percent rate has grown much faster than the number of residents paying the 6-percent rate.

Why exactly this is happening remains a mystery for county and school district officials.

“We haven’t peeled the onion all the way to the middle to see whether it is existing (owners of properties taxed at 6 percent) that are changing over to (4 percent), or if it is new growth that is coming on initially at 6 percent and then converting to 4 percent,” Holland said.

The county automatically classifies new homes at the 6 percent tax rate.

‘A very bleak situation’

Regardless of how the county and district got into this predicament, leaders are left pondering the impact of lower-than-anticipated tax revenues that could rock the school district for years to come.

“We’re looking at a very bleak situation where we are running out of resources,” said Jerry Stewart, a Beaufort County Council member, last week. “We are going to get to the point where basically the only recourse the school district has is to increase class sizes or reduce the number of teachers.”

Moss said a solution must involve local officials and voters “trying to convince our state leaders that there needs to be a restructuring of how public schools are funded in South Carolina.”

Sen. Tom Davis, R-Beaufort, is advocating for the elimination of some of the state’s sales-tax exemptions, freeing up dollars for school operations.

“Let’s look at of the (state) sales-tax exemptions we have and sunset those that have no purpose,” Davis said, adding that the state exempted more in sales tax proceeds than it collected last year. “Then, that money can be used toward relief.”

It would be an uphill battle. A 2010 effort to eliminate some of those sales-tax exemptions failed to garner lawmakers’ support.

“To get it done, it’s going to take someone like a governor saying, ‘This is what I want done,’ ” Davis said. “Unless you have that kind of leadership, nothing will get done, and nothing will change with Act 388.”

This story was originally published May 21, 2016 at 3:12 PM with the headline "Higher county property taxes could be on way."