South Carolina Tax-Relief Law Drawing Fire

Major school funding shift seen as harmful by educators, business.

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Some three months after South Carolina legislators changed how the state’s public schools are financed, educators and businesses are decrying a new property-tax-reform law for granting tax breaks to homeowners at the expense, they contend, of economic growth and K-12 education.

Even a national bond-rating agency is frowning on the new system.

Approved in May, the law is essentially a tax swap. Under the change, which could cut South Carolinians’ yearly property-tax bills by as much as two-thirds, homeowners will no longer help pay to run the state’s 85 public school districts through those taxes, though such revenue can still go for debt service. In exchange, the statewide sales-tax rate is going up, from 5 percent to 6 percent. The additional sales-tax money, which will replace revenue from homeowners’ property taxes, will be doled out to schools based on a complicated formula.

The new law, one of the most significant for South Carolina public schools in decades, was cobbled together in the final days of the 2006 legislative session. It was written in part on the flap of a take-out chicken box, according to lawmakers, with little time for public scrutiny. Many legislators are up for re-election this year and were facing pressure from homeowners to lower their taxes. Only recently have schools, businesses, and others been able to decipher the bill, and many are calling on legislators to come back next year and rework it.

“This thing needs to be euthanized,” James O. Ray, the superintendent of Spartanburg County School District 3, said of the law. His 3,100-student district gets nearly half its $20 million annual budget from property taxes.

“We doubt that future [legislatures] will honor the decision of this current legislature to set aside the sales tax for our schools,” Mr. Ray said recently.

District leaders around the state are fuming because the law marks a significant shift in control of school finances from local officials to the state.

Local Control an Issue

Although the state already contributes, on average, nearly 37 percent of the per-pupil funding used to run schools, local property-tax payers have picked up the rest of the tab. With the new law, the state will pick up nearly 60 percent of school funding, according to early estimates by the South Carolina Budget and Control Board.

“What we did is we took away their right to raise their property taxes to whatever they want. School boards generally have not forced their administrators to look for cuts as much as they should,” said Rep. William F. Cotty, a former school board member and an architect of the law. Mr. Cotty, a Republican, said he’s willing to fix any kinks in the law during the next legislative session.

Tax Swap for Schools

South Carolina legislators approved a sweeping property-tax-reform law that will shift control of school funding from local officials to the state.

• Homeowners' property taxes will no longer help fund the operating budgets of the state's 85 public school districts, under the law passed in May. Instead, revenue from a 1-percentage-point increase in the sales tax, which will go from 5 percent to 6 percent in June 2007, will help run schools.

• Operating budgets from the 2006-07 school year will serve as a district's base funding. When the state takes over as the primary source for financing schools in 2008, a district is guaranteed to receive at least as much as that base, with increases depending on inflation, enrollment growth, and a district's poverty level.

School administrators argue that they are now at the mercy of the state for funding, and must rely on what they say is an inflexible school aid formula that doesn’t allow enough money for growth and high poverty.

What’s more, superintendents and school boards say, sales-tax revenue is often less stable and less reliable than property taxes. If the economy declines, and residents slow their buying, the funding stream to schools could be slowed, too. “There’s no safety net,” said Paul W. Krohne, the executive director of the South Carolina School Boards Association.

Operating budgets for the 2006-07 school year, the last that homeowners will help pay for, will serve as the base for a district’s future funding from the state.

Starting Jan. 1, 2008, according to the new law, the state will take over the lion’s share of funding, and districts will be guaranteed to get at least the same level of funding as the year before. In an attempt to give the poorest counties a financial boost, each county is guaranteed at least $2.5 million in sales-tax revenue even if the county didn’t lose that much in property taxes.

State officials estimate the 1-percentage-point sales-tax increase, which takes affect in June 2007, will raise at least $580 million a year for schools and more than cover the lost property-tax revenue.

Districts will get increases in their funding every year based on the rate of inflation using the U.S. Consumer Price Index and a district’s enrollment growth. In addition, districts will get more money based on their poverty rates.

But the extra money for poverty isn’t going to cover the cost of educating low-income students, said William M. Gummerson, the superintendent of the Lexington 3 district in Batesburg-Leesville.

About half his district’s 2,200 students are poor enough to qualify for free or reduced-priced lunches, but that statistic will only translate into an additional $81,000 a year from the state under the new formula. That’s less than 1 percent of his $16 million annual budget.

“This is one of the most negative things I’ve seen in my 28 years [as an educator],” Mr. Gummerson said. “The thing that’s most frightening is we’ve just destabilized everything.”

The new law, which pertains to the day-to-day operating budgets of schools, doesn’t affect how schools pay for debt service for construction projects. Property taxes, including from homeowners and businesses, will still help pay off bonds.

Business Concerns

Businesses don’t like the new law because they will still have to pay their share of schools’ operating budgets, although legislators did include a new cap on how much tax rates can go up. With businesses getting little, if any, tax relief, the state’s ability to increase the number of jobs will be hurt, the South Carolina Chamber of Commerce maintains.

“This bill could destroy the competitiveness of the state and make it difficult to grow the wealth of this state,” said Marcia Purday, the chamber’s spokeswoman.

Businesses are also complaining that schools are driving up taxes this year so that their base funding will be higher when it’s time for the state to take over a bigger share in 2008. That concern has prompted at least one state legislator to propose rolling back the base so it’s not the coming school year, but the just-finished 2005-06 year.

Mr. Gummerson’s district is one of those that increased taxes, in part, because of the new law. The district’s general-fund budget is increasing by nearly 6 percent. For a business valued at $100,000, that translates into a property-tax increase of $210 next budget year, although a credit from a separate, locally imposed sales tax will lower that tax increase.

The Lexington 3 district will use that money to make its teachers’ and administrators’ salaries more competitive with those of neighboring districts.

“We’ve also cut expenses, too, so that’s how we’ve helped sell this to our business community,” Mr. Gummerson said.

Moody’s Investors Service, a New York City-based bond-rating agency, isn’t happy about the new law, either.

The agency, whose commentaries and ratings can increase or decrease the cost of borrowing, last month gave South Carolina’s schools a “negative outlook.” The law “could result in structurally imbalanced” operations and the “erosion of financial reserves” for schools, according to Moody’s special comment issued in July in response to the South Carolina property-tax changes.

But any fundamental retooling of the law appears unlikely. Under the new law, a two-thirds vote by the legislature would be needed to revoke the property-tax break.

PHOTO: S. Hunter Howard Jr., the South Carolina Chamber of Commerce president, speaks Aug. 1 at a news conference as state legislators and the head of a taxpayers' group, at right, look on.
—Mary Ann Chastain/AP

Vol. 26, Issue 01, Pages 28, 32

Published in Print: August 30, 2006, as South Carolina Tax-Relief Law Drawing Fire
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