The New State Property Tax South Carolinians Won’t See Coming

In 1976, voters passed a constitutional amendment amending legislators’ ability to provide for state borrowing. The ballot question was general, vaguely worded and failed to spell out what was arguably the most important part of the amendment: the creation of a new, automatic and limitless state property tax that could kick in with no warning and without debate or vote by the legislature.

The amendment mandates that the tax be imposed if the state is unable to make a payment on the debt. Unknowingly, South Carolinians voted to guarantee state debt with their property.

If the General Assembly fails to properly provide for debt payment, South Carolinians would get a bill for whatever amount was necessary to satisfy the payment.

Not only will this tax be immediate and without warning, but also without limit and accountability. In forcing the automatic tax to be levied and collected without action by the General Assembly, lawmakers guaranteed they would not pay the political price even though the legislature controls state borrowing practices.

There is no state law governing the implementation of the tax. The only authority is contained in the constitution, which says the new tax would be imposed “forthwith” without limit as to rate or amount upon all taxable property by the Comptroller General and collected by the Treasurer until the payment is satisfied. A spot check of other Southeastern states found no other state with such a provision in its constitution.

 

When and how the property tax amendment was passed

The mandated state property tax provision was passed 1976, but voters likely didn’t know what they’d voted for. As required by the constitution, both the SC House and Senate voted to amend the constitution, but the ballot question appears to have been vaguely worded in order to give the legislature more flexibility to control state borrowing. There was no reference in the ballot question itself to an automatic state property tax.

 

How the tax would practically be implemented

The amendment requires that the Comptroller General impose the tax forthwith and that the Treasurer collect it – “sufficient to meet the payment…of such general obligation debt then due.”

The problem lies in the details. There does not appear to have been any enabling legislation passed to outline specifics as to how the tax would be implemented, i.e. who would certify that the revenue was unavailable for debt payment, how the amount would be determined, etc. Presumably those decisions would be left to legislators, or to the Comptroller General and Treasurer in office at the time.

 

The threat of an automatic state property tax

The property tax would be triggered if the state is unable to make a payment on the debt. While politicians in the 1970s may have thought there was no danger of that happening, today there are multiple factors that make such a scenario plausible and even imminent.

There are only two kinds of debt the state constitution authorizes: general obligation debt that is borrowed on the “full faith, credit and taxing authority of the state” and thus repaid by all taxpayers, and revenue debt that is repaid “solely from a revenue-producing project or from a special source,” and does not involve tax dollars. Revenue bond debt is incurred by state entities that have a separate revenue stream, such as tuition paid to universities, or that generate money from a project, such as a toll road.

The general obligation debt stands at around $1.2 billion[1]. The debt service – which includes principal and interest – cost the state around $202.5 million[2] in the last fiscal year, of which $49 million was interest. The debt was borrowed for such purposes as economic development, which includes land purchases and road construction for certain corporations; university projects such as the creation of the “knowledge-based economy” and construction of new buildings; and highways and state capital projects.

The revenue bond debt stands at approximately $12 billion (not including interest), and while the state constitution forbids using tax dollars to repay those bonds, the legislature has ignored that prohibition and funneled tax dollars to pay revenue debt.

The possibility that the state might fall short on a scheduled debt payment isn’t hypothetical. There are several scenarios that are in motion right now that could cause a domino effect to produce a budget shortfall.

 

The state pension is dramatically underfunded, and by far more than the state-produced estimates.

While state government estimates the pension deficit to be $3.8 billion, those numbers are based on an unrealistic assumption of a 7.25 percent return (the state 10-year average is 5.4 percent). The deficit has been estimated as high as $81.9 billion when more realistic assumptions are used in its calculation. For reference, the state’s General Fund is $8.2 billion. The inability of the state to make pension payments will have a catastrophic impact on the state budget, and at this point it is not clear how such a crisis can be prevented.

Universities carry heavy debt loads backed by tuition even as revenue decreases.

State universities are carrying an estimated $1.3 billion in revenue debt that is guaranteed largely by tuition. But as tuition rises – a whopping 93 percent from 2008 to 2017 – and SC’s student loan debt becomes among the nation’s highest, state colleges become less affordable, which could cause tuition revenue to drop.

Unfortunately for taxpayers, legislators guaranteed some general obligation bonds with tuition revenue, which means if a revenue shortfall hits universities taxpayers will have to pick up the cost of those bonds – a cost lawmakers for which lawmakers have not budgeted.

The revenue stream for the State Infrastructure Bank is largely funded with tax dollars, despite constitutional provision to forbid it.

Despite promises to use the gas tax revenue to fix roads, lawmakers – in direct violation of the Constitution – designed the tax as a revenue stream for the State Transportation Infrastructure Bank (STIB), which finances costly new road construction and expansion projects. All those new roads will eventually be added to the growing list of roads to maintain and repair – for which the legislature has failed to budget. If that cycle continues, lawmakers will be faced with costly emergency repairs that require immediate funding, as was the case when Charleston’s Wando Bridge closed earlier this year due to a snapped cable. The crisis of crumbling infrastructure is another imminent threat to fiscal stability and presents yet another danger that could trigger the automatic property tax.

Santee Cooper owes $15.8 billion in outstanding debt and interest which, if lawmakers once again ignore the constitution, could conceivably end up being pushed off on taxpayers.

Much of Santee Cooper’s debt come from the failed V.C. Summer nuclear construction project for which Santee Cooper customers are facing years of steep, sustained rate hikes. That alone is reason for alarm, but it is not far-fetched to predict lawmakers will attempt to spread at least some of that debt to the entire tax base. It would be unconstitutional to shift revenue debt to taxpayers, but lawmakers have done so before. Adding Santee Cooper debt to the state budget could easily trigger a shortfall, and thus the property tax.

In addition, in 2018 the legislature raided the debt service fund for special projects, leaving funding for only the minimum due on debt payments. Not only could that ultimately cost the state more, but there is no longer any room for a shortfall.

 

The economic fallout from an automatic new tax will hurt across the board

Not only would a new and sudden property tax hit homeowners hard – many of whom could be at risk of losing their homes – it would hit renters as well. Rental property is taxed at a higher rate than primary residence, and most landlords would have little choice but to pass at least some of the cost on to tenants. The tax, which would apply to all taxable property, would cover vehicles as well. In addition, such a tax would hit businesses hard.

Any time businesses are hit with a sudden and heavy cost the pain is almost always necessarily spread to employees through salary cuts and layoffs, and to consumers through raised prices. The result could be higher unemployment and added stress to the state’s “safety net” services.

 

How to stop the automatic property tax

The only way to ensure that an automatic, immediate and limitless state property tax doesn’t kick in is to repeal it. In South Carolina that means a two-thirds vote in both the House and Senate to put a constitutional amendment on the ballot, then a majority vote at the next general election to repeal the provision, followed by another ratification vote in the legislature. Repealing the automatic property tax would not only protect taxpayers, it would force more responsible borrowing by removing the limitless – and politically pain-free – revenue source for debt.

 

Summary

  • The state constitution contains a provision for an automatic property tax to be imposed without warning, without debate and without limit should the state be unable to make a payment on bond debt.
  • Most South Carolinians are unaware that they could be hit with a tax on all taxable property – from homes to cars to business equipment – nor do they know that the state debt picture is grim.
  • There are multiple scenarios that are already in motion that could result in a shortage of funds to make debt payments, including overcommitment of funds, unfunded liabilities, growing debt and borrowing money to then lend for such risky ventures as student loans and mortgages.
  • Lawmakers could ignore the constitutional ban on funding revenue bond debt with tax dollars – as they’ve already done with gas tax dollars – and add additional debt that shouldn’t be assumed by taxpayers.
  • The economic fallout would hit all South Carolinians, either through the direct tax on homes and cars or the consequences of the tax on businesses, such as layoffs and higher consumer prices.
  • The constitutional provision is designed to spare all politicians from the political pain of a massive tax increase by making it automatic without legislative action.
  • There is no state law to outline details of implementing the tax, which means the details could be decided by legislators in office at the time.
  • The only way to protect citizens from an automatic tax is to repeal it through a constitutional amendment, which requires a two-thirds vote by the House and Senate to be put on the ballot. Repealing the provision would protect taxpayers and force more responsible borrowing

[1] 2018 Comprehensive Annual Financial Report, Office of the Comptroller General, pages 136 and 167

[2] 2017 Annual State Debt Report, Office of State Treasurer

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