Few laws continue to ruffle feathers a decade after they took effect, but that’s the case with South Carolina’s Act 388.
The tax-relief measure was adopted in 2006 and took effect in 2007. It was the General Assembly’s answer to complaints that residential property taxes were too high.
At the time it was adopted, home values were soaring, especially beachfront property along South Carolina’s coast.
The law’s main thrust was to remove the tax burden for public school operations from owner-occupied homes. To make up the revenue lost by that tax break, lawmakers added 1 percent to the state sales tax. Other classes of property – commercial property, industrial property, and rental property – did not get the same tax break.
One result has been a dramatic widening of the tax differential between owner-occupied homes and rental homes.
Even before Act 388, taxes were higher for rental homes than for owner-occupied homes. The assessment ratio for rental homes was 6 percent compared with 4 percent for owner-occupied homes.
That meant the tax bill on a rental home was 50 percent higher than the tax bill on an owner-occupied home of the same value in the same tax district.
A decade into Act 388, the difference can be 300 percent to 400 percent.
In Greenville County, for example, the yearly tax bill for an owner-occupied home valued at $200,000 is $915 (not counting municipal or special district taxes).
By contrast, the yearly tax bill in Greenville County for a $200,000 rental home is $3,022.
Act 388 increased the tax inequity between homeowners and renters “and over 10 years that wedge has gotten bigger and bigger,” said Rebecca Gunnlaugsson, a Columbia-based economist who is advising a special committee of the state House of Representatives studying tax reform.
Critics of Act 388 say the different tax burdens for owner-occupied homes and rental homes hurt the poor.
While some people choose to rent, they say, others rent because they can’t afford to buy.
And while those people’s landlords are responsible for paying the higher taxes, the landlords simply pass the additional cost onto their tenants in the form of higher rents, the critics say.
It’s not clear whether the legislative committee studying tax reform will try to address the inequity. The committee, created last year by House Speaker Jay Lucas, a Hartsville Republican, has met several times but so far has not recommended any legislation.
Members, however, have kicked around ideas for addressing the inequity during public meetings.
Among the questions they have posed: Could smaller rental properties — say those with four units or less — be taxed differently than large apartment complexes with hundreds of units each?
The committee’s chairman, Rep. Tommy Pope, a York Republican, said the overall goal is to create a “lower, flatter, fairer” tax system.
Asked if the committee is expected to recommend changes to Act 388, Pope said he does expect it to address property tax policy, and any true reform of property tax policy would likely have to take Act 388 into account.
“Does that mean we’re going to start taxing your home? I highly doubt that will be the case,” he said.
Pope said he sees the different tax bills for owner-occupied homes and rental homes as a concern.
“Anything that affects the fundamental fairness of our taxing system is a concern for that committee,” he said.
Pope said the state might be able to improve its property tax policy if it begins generating new revenue by ending the patchwork of sales tax exemptions.
Rep. Chandra Dillard, a Greenville Democrat on the committee, said she believes the higher tax burden on rental homes is decreasing the supply of affordable housing by discouraging investors from renovating and renting out older homes.
Still, Dillard said, revising tax policy can be tricky.
“You start pulling a string, and other things start unraveling,” she said.