Vanessa Sumo

English

Research Papers in Economics

S
oaring real estate prices have ratcheted up property tax
assessments across the country. In South Carolina, the
Legislature responded to constituent uproar by 
passing a new property tax plan in June that exempts owner-
occupied homes from paying taxes which fund public school
operations. In order to cover the ensuing revenue gap, the
statewide sales tax rate will rise from 5 percent to 6 percent,
except on groceries, which fell to 3 percent from 5 percent in
October. Homeowners will see the exemption in their tax
bills by the end of 2007, and sales taxes will increase 
beginning June of that year.
If every South Carolinian were alike, then this new 
tax plan would affect everyone in the same way. They
would simply pay for school funding out of one pocket
instead of the other. Naturally, this
is not the case. One taxpayer may
own a sprawling mansion and the
other a modest bungalow, while a
third may rent. One may take
home $300,000 a year and the
other $30,000. These differences
matter in how people will be
affected by the changing tax 
environment.
Ellen Saltzman, an economist at
Clemson University, has looked
into how reducing property taxes
while increasing sales taxes will change residents’ tax 
burdens. She finds that under the new tax plan, homeown-
ers will stand to gain more from the tax swap the higher
their income and the more valuable their home. For
instance, since incomes tend to be proportional to home
values, then a resident of, say, the Beaufort school district
who belongs to the top 1 percent of the income distribution
will see his tax burden fall by 0.66 percent of his income,
more than double the savings that poorer residents in the
lowest 20 percent bracket will get. This is because wealthi-
er people with expensive homes will get the largest
property tax cuts in total dollar terms, and at the same time
will likely spend a smaller share of their income on taxed
goods than on nontaxed services. 
Moreover, those who rent their home will be doubly
squeezed. Renters, who indirectly pay property taxes through
their rent, will see their tax burden increase since rental 
property is not eligible for tax relief — but they will have to
pay more in sales taxes anyway. Saltzman finds that a renter at
the lower end of the income spectrum will have a higher tax
burden than one at the top end since this group will end up
paying more in sales taxes as a share of their income. Overall,
the new tax plan thus tends to be regressive since it skews the
income distribution in favor of the bigger earners. 
Besides equity considerations, there is also the concern
that the swap would distort taxpayers’ spending behavior. 
A higher sales tax would hurt local businesses if it 
encourages residents either to shop less or buy items out of
state, something that has been made increasingly easy
because of the Internet. Local revenues could be hit hard as
well. In a recent speech, Holley Ulbrich, a retired professor
and Saltzman’s colleague at Clemson University, noted,
“Anything that hurts retailers hurts local governments, 
especially cities, where the commercial property of stores
and restaurants is the economic lifeblood that donates 
regularly in the form of business licenses, local sales tax, 
hospitality tax, and property tax.”
In addition, firms may choose 
to locate elsewhere if a 
significant part of their business
operations is subject to the sales tax. 
House prices could also be
affected. Buying a home is more
attractive because the property tax
relief reduces the cost of housing.
But home buyers will always weigh
their stream of future costs against
their future benefits, the quality 
of schools being one of them. 
Thus, property tax relief will likely exert an upward 
pressure on house prices provided that schools maintain
the same relative quality between school districts in the
state under the new tax plan.
There’s a question, though, of whether adequate
school funding can be raised under the new tax plan.
Revenue proceeds from the sales tax increase will be 
distributed to schools in fiscal year 2007-2008, and will
be based on the amount of funds each school received in
the previous year. This amount will be adjusted each year
by inflation and the state’s population growth. Some
school representatives are concerned that this 
adjustment may not be enough to fund the schools’ 
growing needs because the cost of education could rise
faster than inflation and population growth.
In all, Ulbrich thinks that the new tax plan doesn’t pass
“the reasonable test of what is a good change in tax policy.”
The property tax relief was mostly intended for those whose
homes have rapidly increased in value but whose incomes
are fixed, particularly South Carolina’s older folks. Targeted
relief that is based on need and income arguably would have
provided a more equitable and less costly solution.   RF
8 Region Focus • Fall 2006
POLICYUPDATE
South Carolina’s Shifting Tax Burden
BY VANESSA SUMO
Homeowners will see the
exemption in their tax bills
by the end of 2007, and
sales taxes will increase
beginning June of that year.
RF Fall v23  10/30/06  2:17 PM  Page 8

Policy update: South Carolina's shifting tax burden

http://www.richmondfed.org/publications/research/region_focus/2006/fall/pdf/policy_update.pdf

Policy update: South Carolina's shifting tax burden

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