Lawmakers should repeal all of property tax 'reform'

South Carolina lawmakers did a bad day's work when they passed property tax "reform" in 2006.

Warnings about inequitable tax bills, over-reliance on volatile sales tax revenue, disincentives for real estate sales and incentives for local governments to raise tax rates even when not needed went unheeded.

Unfortunately, the warnings proved correct. Now lawmakers are on the way to making a bad situation worse by dealing with only one of the law's many problems.

The House has passed a bill that would repeal the law's "point of sale" provision, which sets a new taxable value for a property when it is sold. Real estate industry officials say the resulting increase in property tax bills chills sales and is unfair because similar properties in the same communities can have very different tax bills.

The measure, now in the Senate Judiciary Committee, would delay that change in value until the next countywide reassessment for all properties.

When the law was passed in 2006, the point-of-sale provision was touted as an offset to the impact on tax revenue from a 15 percent cap on reassessment increases for all properties and the limits placed on local governments when it comes to raising tax rates.

Property tax reform's main aim was to provide tax relief for resident homeowners. It did do that, but it came at a price lawmakers have only started to acknowledge.

The exemption from school operating taxes has prompted many to switch their homes from nonresident to resident status. That means a reduction in the tax base for school operations. But the method for reimbursing local school districts from the additional 1 percent sales tax has not kept up with those shifts. School districts, such as Beaufort County, aren't getting reimbursed as they should for the operating revenue lost from resident homeowners.

For local governments, the cap on tax rate increases -- the percentage population increase plus the inflation rate -- encourages them to raise the rate when they can. The cap recognizes that an increase in population means an increased demand for services, as well as rising costs to provide services. If they pass on a rate increase, they can't make it up later.

The impact of that can be seen in Hilton Head Island's consideration of a tax rate increase this year. After the 2010 census, the town has a population increase to capitalize on. If the council doesn't move this year to increase the tax rate, it won't get another chance to do it, and the town faces a decline in its tax base with the upcoming reassessment.

State Rep. Andy Patrick of Hilton Head says more changes are needed to the law, but he's probably kidding himself if he thinks changing the point-of-sale provision is a first step toward a comprehensive overhaul of the tax code. Even creating a special commission charged with the job has only resulted in a report gathering dust.

Lawmakers should repeal the property tax reform law and start over on comprehensive tax reform -- something they talk about, but don't act on. They especially should stop a very bad habit of reacting to complaints from a narrow constituency without thinking through the consequences.