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Under any reasonable property tax system, a property’s tax bill should be tied fairly closely to the actual value of that property. Sure, some modest exemptions and credits can (and should) be used to reduce the property tax’s regressivity, but the basis for the tax should remain the property’s actual market value. Oddly, a proposal currently being considered in South Carolina would depart drastically from this fundamental principle.
Back in 2006, South Carolina raised its state sales tax rate in order to pay for a property tax cap that limits growth in a home’s taxable assessed value to no greater than 15% every 5 years — or a little under 3% per year, on average. Under this arrangement, changes in one’s property tax bill have very little to do with changes in the value of one’s property, and are instead driven by the artificially imposed 15% limitation. Over time, the impact of the 15% limit can add up, and South Carolinians often end up paying property taxes at an assessed value far below what their home is actually worth. In other words, for these families the term “property tax” has very little meaning, as their tax bill is only loosely tied to their property as it currently exists.
As strange and shortsighted as this policy may be, the law as currently structured does have one bright spot: whenever a property changes hands, the 15% limitation is reset. This means that — at least for a short time — the property tax is once again applied to the home’s actual value. These “resets” play an important role in ensuring that South Carolina’s property tax retains some of its character as a tax on actual property values.
Unfortunately, some state legislators would like to eliminate this feature of the law, claiming that the “reset” results in unaffordable tax bills for people looking to change residences. In a way, it’s a legitimate complaint. The South Carolina tax cap (like those in California, Florida, and many other states) results in vastly different property tax bills for different taxpayers, based solely on how long they’ve chosen to remain at their current address.
But the “cure” lawmakers are considering in this case is worse than the disease. Ending the reset feature would essentially divorce South Carolina’s residential property tax system from present day reality. Rather than having anything to do with actual property values, a tax cap system without a reset feature would forever base each property’s tax bill on its 2006 value, and then grow it artificially based on the 15% formula. Sure, when the real estate market is weak the 15% formula might not kick in, but given enough time, many residences will accumulate massive tax cap savings and will be subject to tax bills with almost no basis in present reality.
Ultimately, if the goal of state lawmakers is to ensure that property taxes don’t grow faster than South Carolinians’ ability to pay them, the best relief option is an income-tested circuit breaker credit. Property tax caps, circuit breakers, and many other related topics are discussed in the property tax chapter of the newly released ITEP Guide to Fair State and Local Taxes.