South Carolina's property tax swap

http://www.charleston.net/news/2009/jan/14/s_c_paying_piper_act_tax_cuts68293/

The Act 388 property tax reductions for homes were indeed popular, but an analysis by The Post and Courier found that they have made the state's budget crisis worse in several ways.

An $81 million shortfall in the sales tax collections that were supposed to fund property tax relief will account for about 15 percent of the gap anticipated in the next state budget. That means the state will have to cut spending elsewhere to pay for property tax breaks. That was not supposed to happen.

A growing shortfall

When Act 388 exempted owner-occupied homes from the property taxes that fund school operations, the law also increased the statewide sales tax to 6 cents on the dollar.

The Post and Courier

The sales tax increase was supposed to raise the roughly half-billion dollars schools used to collect from homes, and state economists predicted that the sales tax would raise enough to fund extra property tax relief.

Instead, there's been a growing shortfall every year, totalling $143 million since Act 388 was approved in 2006.

"If it hadn't been for the economy, there would have been more than enough," Read said. "They need to increase the sales tax if they need more money."

The Office of State Budget projects that sales taxes will rise enough to cover the tax shift in 2010, before falling short again in 2011. Unlike property taxes, sales tax collections tend to rise and fall with the economy, which nose-dived last year.

"We traded the most unpopular but most stable tax, the property tax, for the least unpopular but most unstable tax, the sales tax," state Board of Economic Advisors Chairman John Rainey said. "It's all snowballing."

House Majority Leader Kenny Bingham, R-Cayce, said it's appropriate to reduce taxes on basic needs such as homes, and the sales tax is preferred by voters.
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"It's how people prefer to be taxed," he said. "They don't like their home being taxed."

The property tax law requires the state to give school districts at least the amount of money they would have collected in property tax from exempted homes, with annual adjustments for population and inflation. However, the state can, and has, reduced other sources of funding to schools.

The Department of Education budget was cut by $253 million in the current state budget.