Tax Modernization Committee

Regular Meeting

Columbia, SC · May 19, 2022

Minutes

COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 The Columbia Tax Modernization Committee met on Thursday, May 19, 2022 in Council Chambers at City Hall, 1737 Main Street, Columbia, SC. The Honorable Joe E. Taylor, Jr., Chairman called the meeting to order at 2:00 p.m. Attendee Name Title Status Daniel J. Rickenmann Mayor Remote Joe E. Taylor Chairman Present Edward H. McDowell District II Present James Bennett Member Present Billy Cantey Member Present Scottie Hughes Member Present Steve Taylor Member Present INVOCATION The Honorable Edward H. McDowell, Jr. offered the invocation. WELCOME 1. Meeting Overview - The Honorable Joe E. Taylor, Chair The Honorable Joe E. Taylor, Chairman announced that the final draft of the Columbia Competitive Tax Plan will be presented today. Mr. Bennett suggested that our mayor and others gain as much community input as we can during June, July, and August. The committee will come back in September to receive the final plan and recommendations from the mayor for an implementation committee. The legislative process will begin in January 2023. PRESENTATIONS 2. A Vicious or a Victorious Cycle: The Impact of Property Taxes on Communities, Schools, and People - Dr. Stephen Walters, Chief Economist at the Maryland Public Policy Institute Mr. Stephen Walters, Ph.D., Chief Economist at the Maryland Public Policy Institute said when you talk about tax modernization you will invariably run across a sense that you are endangering very important and very valuable public services. I have been working on tax reform in a lot of jurisdictions and the first question is what you are going to cut if you engage in tax modernization, tax competitiveness, or tax reform. There is a false perception about how we get Page 1 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 more. We need to have a healthy local economy in order to have healthy government finances that can provide what we all want from government. We want more. The perception is that high tax rates will get us that and if we talk about tax cuts we are endangering government finances and we will get less services. That is a dangerous misconception at the local level because we have human mobility (people move) and capital mobility (investment flows are directed to where they are treated best). The best evidence we have of that comes from Columbia. The real per capita property tax revenues in Columbia have fallen by 9.1% over the past decade. That bespeaks a shrinking inflation-adjusted property tax base in the City of Columbia. You simply cannot finance more if the tax base is shrinking. The tax base is shrinking because the investment that is the crucial lifeblood of a healthy economy is being directed elsewhere: that is the competitiveness problem that this tax modernization is trying to solve. The danger is that if we don’t do this, then cuts are inevitable. Then a shrinking tax base and a limping economy will not provide more jobs and opportunities or better parks and schools that we all want. A non- competitive tax rate at a local level violates this necessary condition for a healthy local economy. We talked about how non-competitive Richland One and Richland Two are relative to some of the cities that are competing for investment dollars, population, location decisions, and so forth. If you locate elsewhere, you get a steep annual discount on your property tax bill and your return on investment is more attractive. If we do nothing, things get worse but in slow motion. Investment flows don’t happen over years and then slowly we start to perceive that there is flight of population and capital investment. With lower productivity we get lower wages. With lower wages we get relative poverty and then we get all of the ill social consequences of that vicious cycle. Columbia city’s data on its real per capita property tax revenues is an indication that we are starting this vicious cycle and unless something is done, the future is very much in danger. If you get a competitive property tax and a policy in place, things can turn around rapidly and dramatically. San Francisco used to be an economic basket case. The state imposed a property tax rate cap, Proposition 13 kicked in and the playing field was leveled at 1% for every jurisdiction in the state of California. Once San Francisco’s property tax rate was competitive, people started investing there. It was a tidal wave of new investment and the population started growing. These days, San Francisco’s population and municipal finances are incredibly rich in resources. It turned the city around. They didn’t think anybody would be so foolish as to vote for Prop 13 and vote to reduce their property tax rate from 3% to 1%. They campaigned against it and voters imposed it on them. After Prop 13 with a two-thirds reduction in the property tax rate and a roll back in assessments, San Francisco had to tighten their belt for three years. During this time, investments started to flow in and new populations flooded in. People started paying property taxes, wage taxes, hotel taxes and other kinds of ancillary revenue started to accumulate. San Francisco was out of the fiscal woods and was growing rapidly by the fourth year after Prop 13. Their spending was 60% higher than it had been before tax reform. That is the virtuous cycle in action. The dynamic here is very favorable to the production of more. You can Page 2 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 afford to invest more in schools, parks and recreation, libraries, zoos, and so forth. The virtuous cycle contributes to further reductions in tax rates. Boston was rejuvenated by Proposition 2.5 and has since had successive property tax reductions simply because the greater flows of investment brought people to that economy. As the tax base grew, more services could be provided at lower effective tax rates. It happens organically. Here, our job is more complicated because we have Act 388 and we have an odd situation for schools. This is important for school boards because the tax base is much narrower in South Carolina. It is important for rental and commercial property and the investment climate to be healthy or that is going to endanger school finance. The children are in danger if we don’t take care of the cornerstone of municipal school finance. The schools operating budgets are highly dependent on the health of that commercial and rental property sector. You have to pay attention to how competitive you are at the local level. You also have complications having to do with multiple jurisdictions. Lobbying, convincing and educating at multiple levels is going to be a much more complicated job than it was in Massachusetts or California. To get the virtuous cycle going, there has to be an education effort. Everybody has to understand that this is a necessary condition. I have been studying cities for forty years as an urban economist and I have never found a healthy city economy in a place where there was an unhealthy investment climate and a bad tax climate. I am setting the stage for the legislative strategy. The strategy has to involve equity on the assessment rate. Commercial and rental property has a 6% assessment rate and primary residences have a 4% assessment rate. The goal is to go from 6% to 4% assessment rates on commercial and rental properties over a transition period. The major advantage is having the time to do this in an orderly fashion. We can delay the phase-in and have a step wise reduction in the assessment rate so that we can build towards a competitive property tax rate in a way that doesn’t do any violence to any municipal services in the short run and allows those municipal services to grow in the long run. There are people taking a pass on Columbia because of its non-competitive property tax rate. Projects are put on the board immediately during this phase-in period and we start to build an escrow account we can use when the assessment rate reduction starts to come in over the succeeding years, that’s when we draw on the escrow account to make sure the services we are accustomed to can be financed. As the tax base starts to grow, all the evidence points to the fact that the municipal services can be enhanced at a rapid rate. That is the path to virtue. The Honorable Edward H. McDowell, Jr. said you have given us a pathway, but how do we do that? We talked about the escrow account and how long that will take to lock itself into place. Talk to me more about the shrinking tax base. Mr. Stephen Walters, Ph.D., Chief Economist at the Maryland Public Policy Institute said the hard thing about this is the slow pace at which these consequences become clear to people. A shrinking tax base is invisible on a weekly, monthly and annual basis. In Baltimore, we reassess Page 3 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 property every three years. Here, it is done every five years. There is a lot of inertia built into valuations and that can hide some of the bad consequences of a bad investment climate. Property values may be falling due to high property taxes and reduced amenity levels sometimes and in certain areas but you may be stuck with your property tax bill for five years during which we are pretending that property values are where they used to be. That data shows the shrinking amount of investment relative to changes in the ordinary price level and changes in population. Over a decade things become obvious that aren't obvious annually or monthly. When people don't invest in your town, they don't usually tell you why; they just move on. The perception that things aren't changing is an illusion because of the slow motion nature of the problem. There is a wealth effect here. Every dollar you invest in a high tax environment has a lower return than it would in a more favorable environment. This is a great impediment to wealth creation. It is hidden because the reduced rate of property values and the reduced rate of wealth creation happens slowly over years or decades. You are talking about things that happen in a way that is very difficult to perceive but is very tangible and it is very important. How many businesses are starting? How many jobs are those businesses creating? How are your property values improving over time? All of these things are related to the investment climate and the investment climate is crucially influenced by the property tax rate. Mr. James Bennett, First Citizens Bank agreed that the danger is doing nothing. It is important to understand how we got here, the predicament we are in, and how we bring others with us towards action. If we don’t, that could be worse than no action. In 2006, Act 388 took the burden of school operations off owner-occupied homes. That’s a tremendous burden for every entity to bear. In the city of Columbia, we have talked about all of the entities (Fort Jackson, state, city, and county governments, school districts, religious organizations, and non-profits) that are off the tax records. It comes down to non-owner occupied, investors, and things of that nature. Councilman Taylor mentioned that the school boards’ budgets tend to be higher than the growth in the area. Matching that sounds reasonable but it is hard for us to move forward without engaging our stakeholders whether it is the assessors, auditors, treasurers, the three school districts, and the superintendents. Part of the economic progression is the idea that a rising tide lifts all boats. We have to trust that but we also have to create confidence within our community. That's why collaboration is so important. The city of Columbia is a tale of two cities. The confidence for those at the bottom may not be as high as the middle and upper. We must continue to cast the net wider. The pie isn’t but so big and it is an obligation that we all have. People are hesitant when we tell them that we are taking a piece of the pie. It is a whole lot better if they decide to give you a piece of what they have. I trust the process and I hope we achieve dividends from the process. Mr. Stephen Walters, Ph.D., Chief Economist at the Maryland Public Policy Institute said we Page 4 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 tend to think the pie is fixed and it is a question of slicing it up the way we like. We say we want more and we get it now by raising the tax rate. Investors do the math and they say no. We want more so we go back, slice the pie, and it shrinks. The goal is to transform it from a shrinking pie to a growing pie. We have to price ourselves competitively. All of the stakeholders have to understand in the long run that the fate of our children is crucially tied to a healthy economy. At a local level, you can't be healthy unless you are competitive. Mr. Steve Taylor, Wolfe & Taylor Realtors said in the conversations going forward, we need to include examples of people who haven't invested in recent times. We had examples of that at the last meeting. Maybe we can come up with more examples for the conversations with others. The Honorable Edward H. McDowell, Jr. said we have to make it collaborative and the stakeholders have to become a part of the pie. Do we want to section it off or collaboratively allow the stakeholders to decide how to divide the pie? Mr. Stephen Walters, Ph.D., Chief Economist at the Maryland Public Policy Institute said the growth of the pie is in everybody’s interest. We just need to talk about this more broadly. All of their individual interests should be united behind a competitive tax climate. The Honorable Joe E. Taylor, Jr., Chairman said we all need to acknowledge that Act 388 is universal across the state; every county deals with that. When we look at our competitive disadvantage, we have to understand that all of those counties are also dealing with Act 388. That has not necessarily driven us here. I think it took a couple of decades for us to get in this situation. There is governmental inflation like we are seeing in the consumer economy now. Historically, government inflation ran slightly higher than consumer inflation. If you don't attract enough new tax base every year to cover the inflationary cost of government, you either have to cut government or raise taxes. No one gets to point the finger. We have not recruited enough investment annually to overcome that inflation, so we raise the millage rates. We have been fortunate enough to look into the issue. Two weeks ago, I saw hands go up when Mayor Rickenmann asked who is going to do additional deals if we fix this. I feel extraordinarily confident in the San Francisco model of what we will see here in Richland County when we fix this. The message we need to get comfortable with is if we get our soil conditions right and bring the investment in, the pie gets bigger and everybody's slices will get bigger. I am stunned by the amount of annual new taxes we've missed. We talk about new investments and growing our small businesses, but we have to talk about the impact this has on housing affordability, affordable rents, and the least among us. This past week, Ryan Coleman reported that the city center of Charleston has 9,000 residents. We have 3,000 here. We need to get this right where we can build apartments, houses, and new things that are affordable in our city center where people Page 5 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 are coming back and spending more money. We forget that the state gets all of the income tax. We have to survive on local options sales taxes, hospitality taxes, accommodations taxes, and property taxes. The things that we need to do to make those things grow will make the pie bigger and the slices bigger. I want to acknowledge Mr. Bennet’s advice; it was very good. I am proud of Mayor Rickenmann and each of you because somebody had to start the conversation. Mr. Stephen Walters, Ph.D., Chief Economist at the Maryland Public Policy Institute said this is a huge opportunity waiting to happen. The Honorable Joe E. Taylor, Jr., Chairman said your contribution to this discussion has been immeasurable since we began three years ago. I thank you because you had done most of that on a volunteer basis. The Honorable Edward H. McDowell, Jr. said thank you. You have given me a new concept in terms of the pie structure. It is great to fix a pie. What goes into that pie indicates how deep and how wide you are going to cut that pie. Investment opportunities and investment values are critical and part of putting the ingredients into that pie shell has a lot to do with those components. Mr. Stephen Walters, Ph.D., Chief Economist at the Maryland Public Policy Institute said the ingredients are great here. 3. Legislative and Local Action Plan - Mr. Charles Terreni, Esq., Terreni Law Firm, LLC Mr. Charles Terreni, Esq., Terreni Law Firm, LLC said I have lived in the City of Columbia for 47 years. I am a homeowner and a business owner. I have a vested interest in this town's success. This is a roadmap, not a GPS. We don’t have all of the answers, but we have a solid foundation. The 6% assessment rate is enshrined in the South Carolina Constitution. All property other than residential then agricultural and manufacturing is assessed at 6%. This includes commercial property and non-owner occupied housing, which is about 39% of Richland County. Renters are paying three times the taxes. Article 10, Section 3 of the South Carolina Constitution allows the General Assembly to exempt some property from taxation. It takes a two-thirds vote of each house but the General Assembly has been willing to pass exemptions over the years. We want to model our solution after Act 40 of 2017, the Gas Tax Bill that included a tax exemption of 14.2857% of the property tax value for manufactured property. The significance of this percentage is that when you apply it to the 10.5% rate on industrial it reduces the effect of the assessment to 9%. What happens if we do the same thing for non-owner occupied property? The concept is to phase in an exemption. The General Assembly phased this exemption in over six Page 6 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 installments. The tax exemption will be fully phased in by 2023. We can do the same thing. We can include revenue safeguards. North Carolina indexed their income tax cuts to revenue growth. We should develop this concept by setting stakeholder meetings and by vetting this with other lawyers, the city attorney, city fiscal staff, bond counsel, local and state officials, the business community, government relations staff and other members of the community. This is a road map, not GPS. I am confident that we can come up with a plan by the end of the summer. The Honorable Joe E. Taylor, Jr., Chairman said we would spend some time this summer with the Senate Finance Committee and the House Ways & Means Committees. We are fortunate to have two local members of the House Ways & Means Committee: Representative Kirkman Finlay and Representative Micah Caskey. The key today is knowing that it can be done and other places have used triggers to effectively lower taxes in the least risk-adjusted way. We can protect our entities and safeguard against anything negative. Mr. James Bennett, First Citizens Bank said we will approach our local delegation first. The Honorable Joe E. Taylor, Jr., Chairman agreed to meet with every delegation over the course of the summer. We have to decide if this will be local legislation or offered statewide. 4. Additional Information Regarding Implementation and Hedges for the Schools, the County and the City - Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics presented implementation scenarios for the Columbia Competitive Property Tax Plan. Essentially, we have high property tax rates that leads to slow tax growth and poor property valuations. In turn, these result in smaller tax revenues, prompting leaders to raise tax rates, which further deters growth and depresses valuations. We are stuck in this negative continuous loop. We want to flip that so we have low tax rates that lead to high growth and higher valuations that lead to higher tax revenues that prompt leaders to reduce the tax rate even further without sacrificing revenues. We want to phase this out over a ten-year period starting with two years of escrows. We want to use triggers. We can shorten the ten-year period if we start seeing the revenue. I was asked to talk more about the school districts over this ten-year cycle. The schools levy two millages: one to fund school operations and owner-occupied housing does not pay that and the other is to repay bonded debt and all properties pay that. The historic debt millage for Richland School District One was 53 in 2011. On a compounded annual growth rate, it has grown at 1.9%. The revenues into the debt service fund followed the actual property rates and has grown at 3.38%. Increases in tax rates have provided new revenues for schools. The students have had a relatively steady decline. If we Page 7 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 slowly implement this phased in tax plan the millage will stay the same. The revenues grow at a steady rate at 0.63% compounded annually. Under a worst-case scenario, we will see a decline in revenues from commercial and rental properties, but we also see growth in all other properties to make up for the decline. We do not see a decline in revenues. Richland One has been seeing a decline in students. It is difficult to project out the impact per pupil. School districts have other funds, but property taxes flow into the general fund. Historically, the millage rate increased from 2.36 in 2011 and it has gone up 1.25% compounded annually. Property taxes have grown at 2.95% compounded annually and state revenues have grown at 4.02%. If we implement the tax plan, the property tax will grow at 0.6% compounded annually. Under this worst-case scenario, we do see a decline in commercial, but it is made up by growth in other properties. For Richland School District Two, they have a much higher debt service millage rate. The revenues have mostly grown because of increases in the property tax rate. They have seen growth in students. A lot of people are building houses in Richland School District Two, but they are working in Richland School District One. All of the new houses help with debt tax base to build new schools, but not with the operations. The revenues will grow at the historic rate. The student rate has historically grown at 0.68% compounded annually but we might see something different going forward. Mr. James Bennett, First Citizens Bank said the higher the property value, the lower the millage rate. Should we expect the millage to go down? Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics said if we get in more revenues than the school district, county or city needs to spend then that is the opportunity to lower millage rates. During this phase in period, we are trying to get all of the excess revenues to fill in the gap left by lowering the tax rates. We are trying to hold one constant while lowering the other. If we flip the continuous loop, we can hold the assessment rate constant and start lowering the millage rate. You can use one of those two levers. The general fund revenue for Richland School District Two is significantly higher and it has grown significantly faster. In the past year, there was a decline in property tax revenues and the millage rate didn’t change. We start seeing depressed values, slower growth and slower revenue. This is the slowest case implementation scenario over ten years. Projecting is difficult. We assume that state revenues and property growth occurs at the same rate as they have for the past ten years. Total property tax still grows at 1.07% compounded annually. Property taxes overall make up a lesser portion of the general fund for Richland Two than it does for Richland One. The Honorable Joe E. Taylor, Jr., Chairman said in your original tax study you compared the non-property tax paying real estate between our peer cities and us. If I remember correctly, it was not a consequential impact that drove our taxes. Page 8 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics said we had data from Greenville and Rock Hill. We had slightly more exempt acreage and exempt parcels but it wasn't enough to drive the discrepancy in rates. The Honorable Joe E. Taylor, Jr., Chairman said while an entity like the University of South Carolina doesn’t pay taxes, it has driven a huge amount of 6% assessed properties in and around the university. Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics said yes, USC and state government are two of the biggest entities that generate consulting services, business, and other properties. The Honorable Joe E. Taylor, Jr., Chairman inquired about the percentage of people that rent in the Columbia. Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics said 54% rent in the city and there is a greater proportion of homeowners to renters in the county. The Honorable Joe E. Taylor, Jr., Chairman said we are talking about investment, opportunity and job growth. We are talking about affordability and attainability for over half the population in the city and the county. When we talk about tax modernization, the assumption is that it is to benefit the rich. What we are talking about today has a disproportionate positive impact on working people in our community. The Honorable Edward H. McDowell, Jr. asked how the non-owner occupied homes compare in each school district. Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics agreed to look into that. COMMITTEE DISCUSSION 5. Recommendation of a Final Draft Plan - Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics The Honorable Joe E. Taylor, Jr., Chairman said the people of Richland County and the City of Columbia are indebted to you for your service. We see what our final draft is. Are you comfortable with this as the draft to take to the community and begin the discussions? Page 9 of 10 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING MINUTES THURSDAY, MAY 19, 2022 Mr. James Bennett, First Citizens Bank said yes. Mr. Billy Cantey, Cantey & Co. said absolutely. Mr. Steve Taylor, Wolfe & Taylor Realtors said I absolutely agree. The Honorable Edward H. McDowell, Jr. said yes. There is still concern about diving deeper into the substance of most of these issues. It paves the way for continued conversation. 6. Final Meeting Schedule - The Honorable Joe E. Taylor, Chair The Honorable Joe E. Taylor, Jr., Chairman said we will begin discussions in the community over the course of the next two to three months. We will come together during early September to finalize and create an implementation committee that the Mayor will put together. We will invite email feedback, suggestions and thoughts over the summer. ADJOURNMENT The meeting was adjourned at 3:29 p.m. Respectfully submitted: Erika D. Moore Hammond, CMC City Clerk Page 10 of 10

Agenda

Packet

COLUMBIA TAX MODERNIZATION COMMITTEE MEETING AGENDA THURSDAY, MAY 19, 2022 The Columbia Tax Modernization Committee will conduct a City Council Special Committee Meeting on Thursday, May 19, 2022 at 2:00 pm in Council Chambers at City Hall, 1737 Main Street, 3rd Floor, Columbia, SC 29201. Members of the public may view the meeting online at www.columbiasc.gov. For questions regarding the meeting, please contact the City Clerk at (803)545-3045 or cityclerk@columbiasc.gov. The Honorable Daniel J. Rickenmann, Mayor The Honorable Howard E. Duvall, Jr., At-Large  The Honorable Edward H. McDowell, Jr., District II The Honorable William Brennan, District III  The Honorable Aditi Bussells, At-Large The Honorable Tina N. Herbert, District I  The Honorable Joe E. Taylor, Jr., District IV Prior to entering the meeting please turn all electronic communication devices to the silent, vibrate or off position. All presenters are asked to speak directly into the microphone for recording purposes. CALL TO ORDER INVOCATION WELCOME 1. Meeting Overview - The Honorable Joe E. Taylor, Chair PRESENTATIONS 2. A Vicious or a Victorious Cycle: The Impact of Property Taxes on Communities, Schools, and People - Dr. Stephen Walters, Chief Economist at the Maryland Public Policy Institute 3. Legislative and Local Action Plan - Mr. Charles Terreni, Esq., Terreni Law Firm, LLC 4. Additional Information Regarding Implementation and Hedges for the Schools, the County and the City - Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics COMMITTEE DISCUSSION 5. Recommendation of a Final Draft Plan - Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics 6. Final Meeting Schedule - The Honorable Joe E. Taylor, Chair Page 1 of 2 COLUMBIA TAX MODERNIZATION COMMITTEE MEETING AGENDA THURSDAY, MAY 19, 2022 ADJOURNMENT Page 2 of 2 1 MEETING DATE: May 19, 2022 DEPARTMENT: City Clerk FROM: Erika Hammond, City Clerk SUBJECT: Meeting Overview - The Honorable Joe E. Taylor, Chair FUNDING SOURCE & ORIGINAL BUDGET: Updated: 5/17/2022 4:25 PM Page 1 Packet Pg. 3 2 MEETING DATE: May 19, 2022 DEPARTMENT: City Clerk FROM: Erika Hammond, City Clerk SUBJECT: A Vicious or a Victorious Cycle: The Impact of Property Taxes on Communities, Schools, and People - Dr. Stephen Walters, Chief Economist at the Maryland Public Policy Institute FUNDING SOURCE & ORIGINAL BUDGET: ATTACHMENTS:  TMC_Tax_Plan_Part_3_051922 (PDF) Updated: 5/17/2022 2:50 PM Page 1 Packet Pg. 4 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) COLUMBIA COMPETITIVE PROPERTY TAX PLAN FINAL DRAFT City of Columbia Tax Modernization Committee May 19, 2022 Packet Pg. 5 2.a Columbia’s Tax Modernization Committee Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Remarks by Steve Walters Chief Economist, Maryland Public Policy Institute Fellow, The Johns Hopkins University, Institute for Applied Economics Professor Emeritus of Economics, Loyola University Maryland swalters@loyola.edu 5/19/2022 Slide / 2 Packet Pg. 6 2.a We want (and deserve) more Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) More jobs Better schools More affordable apartments More parks More libraries More quality of life Grocery stores, restaurants, shops, galleries Slide / 3 Packet Pg. 7 2.a A vicious or virtuous cycle? Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) How not to get more Columbia’s tax base Columbia’s vicious cycle: Property taxes are supposed to fund key gov’t services like schools, parks, etc. But over 2012-21, Columbia’s property tax base has been shrinking, so that real per capita property tax revenues have fallen 9.1% Slide / 4 Packet Pg. 8 2.a Review: How did this happen? Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Columbia’s (RSD1 & RSD2) Investment in rental & business property tax burden is simply property flows where it is treated not competitive with rivals: more kindly: E.g., put your new apartment $250,000 property in: Tax Discount complex in Greenville and pay Columbia RSD2 $8,886 0.00% 40% less annual property tax; in Columbia RSD1 $7,288 -17.98% Charleston pay 57% less West Columbia $6,186 -30.38% Our competitors are in a Rock Hill $5,859 -34.06% virtuous cycle, we’re in a vicious Greenville $5,339 -39.92% one Charleston $3,810 -57.12% Slide / 5 Packet Pg. 9 2.a Review: Consequences of inaction Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) “Decaying cities, declining economies, Capital flight and mounting social troubles travel Lower productivity/wages together. The combination is not Poverty coincidental.” Population flight Jane Jacobs Social dysfunction Demographic change Failed neighborhood Slide / 6 Packet Pg. 10 Slide / 7 But: A virtuous cycle can start fast Packet Pg. 11 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) 2.a And: A virtuous cycle can get us more Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Real Total Revenue in San Francisco, 1975-87 (less State Surplus Revenue Distributions) $3,250.0 Real Revenue in Millions of 2000 $ $2,750.0 $2,250.0 Recovery by 4th fiscal year $1,750.0 $1,250.0 $750.0 5 6 7 8 9 0 1 2 3 4 5 6 7 197 197 197 197 197 198 198 198 198 198 198 198 198 Slide / 8 Packet Pg. 12 2.a Our complicated situation Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Before Prop 13, SF’s property tax SC has Act 388 rate was ~3% of assessed value -- An added “vicious cycle” of actually a little less than RSD2’s excessive dependence on rental current 3.55%, and about the and commercial property for same as RSD1’s 2.92% school funding But all Cali had to do was cap the Columbia has jurisdictional property tax rate at a competitive issues; multiple school districts level all across the state, and the But, unlike SF, Columbia has the playing field was leveled for all foresight and ability to control its destiny Slide / 9 Packet Pg. 13 2.a The path to virtue Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) 1. Recognize: Tax competitiveness is a necessary condition if a city is to have a sound economy that provides opportunities for all its citizens to flourish, and generates the resources for local gov’t to do more 2. Legislate: At the state level, need legislation to allow localities to opt- in to an exemption for rental & commercial property so that the effective assessment rate on such property falls from 6% to 4%, on par with residential real estate 3. Transition: To “build a bridge before you have to cross the financial river,” delay phase-in of necessary rate cut for 2 years (in order to build an “escrow fund”), and then reduce the effective assessment rate gradually over as many as 8 successive years Slide / 10 Packet Pg. 14 2.a The path to virtue (cont.) Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) After phase-in, the effective tax rate on rental and commercial property in, e.g., RSD1 will fall from 2.92% of value to 1.82%, below Rock Hill’s 2.34% and Greenville’s 2.14%, and competitive with Charleston’s 1.52% Slide / 11 Packet Pg. 15 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Roadmap for Tax Reform CITY OF COLUMBIA TAX MODERNIZATION COMMIT TEE MAY 19, 2022 Slide / 12 Packet Pg. 16 2.a S.C. Const. Art. X, Section 1. Taxation and assessment. Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) (5) All other real property not herein provided for shall be taxed on an assessment equal to six percent of the fair market value of such property. Slide / 13 Packet Pg. 17 13 2.a S.C. Const. Art X, Section 3. Property exempt from ad valorem taxation. Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) In addition to the exemptions listed in this section, the General Assembly may provide for exemptions from the property tax, by general laws applicable uniformly to property throughout the State and in all political subdivisions, but only with the approval of two-thirds of the members of each House. S.C. Const. Ann. Art. X, § 3 Slide / 14 Packet Pg. 18 14 2.a § 12-37-220. General exemption from taxes. Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) (B) In addition to the exemptions provided in subsection (A), the following classes of property are exempt from ad valorem taxation subject to the provisions of Section 12-4- 720: (52) 14.2857 percent of the property tax value of manufacturing property assessed for property tax purposes pursuant to Section 12-43-220(a)(1). For purposes of this item, if the exemption is applied to real property, then it must be applied to the property tax value as it may be adjusted downward to reflect the limit imposed pursuant to Section 6, Article X of the South Carolina Constitution, 1895; The exemption is designed to reduce the default assessment ratio on manufacturing property from 10.5% to 9%. Slide / 15 Packet Pg. 19 15 2.a Phase in of S.C. Code § 12-37-220(b)(52) Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) B. Notwithstanding the exemption amount allowed pursuant to item (52) added pursuant to subsection A of this SECTION, the percentage exemption amount is phased-in in six equal and cumulative percentage installments, applicable for property tax years beginning after 2017. Section 19.B. Act 40 of 2017; 2017 S.C. ALS 40, 2017 S.C. Acts 40, 2017 S.C. H.B. 3516, 2017 S.C. R. 51 The full exemption will be available in 2023. Slide / 16 Packet Pg. 20 16 2.a Next Steps Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) DISCUSSIONS Bond City Attorney Counsel Local and Community State Stakeholders Officials Government Business Relations Community Slide / 17 Packet Pg. 21 17 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) IMPLEMENTATION SCENARIOS REBECCA GUNNLAUGSSON, PH.D. MAY 19, 2022 Slide / 18 Packet Pg. 22 2.a CONTINUOUS LOOP High Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) The City of Columbia finds itself caught in a continuous loop of high property tax Tax Rates rates that lead to slower growth and poor property valuations. In turn, these result in smaller tax revenues, prompting leaders to increase tax rates, which further deters growth and depresses valuations. Lower Slow Tax Growth & Revenues Valuations Packet Pg. 23 2.a COMMERCIAL/RENTAL COMPETITIVE TAX PLAN Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Announce an 8-year Build escrow account Use escrowed funds Enact “triggers” that 1 schedule of 2 from new investment 3 and growth in other 4 adjust the tax rate incremental tax rate (and by slowing revenues to satisfy reductions faster/ reductions to begin in spending) during first spending while new slower, based on two years. two years. investment grows, availability of new and tax reductions revenues each year. are phased in. Slide / 20 www.yourwebsite.com Packet Pg. 24 RSD ONE 2.a DEBT SERVICE FUND Historic Projected Compounded Annual Compounded Annual Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Growth Rate Growth Rate MILLAGE RATE REVENUES STUDENTS Packet Pg. 25 Author's calculations based on (1) SC Department of Revenue’s School District Detailed Index of Taxpaying Ability dataset, Tax Years 2010 – 2020; (2) April 2022 Parcel Dataset, Assessor’s Office of Richland County; (3) Comprehensive Annual Financial Reports, FYs 2011-2021, Richland School Districts 1 and 2.. (1) Owner-Occupied and Commercial/Rental values from Richland County Assessor. All other values from DOR ITA for tax year 2020. RSD ONE 2.a GENERAL FUND Historic Projected Compounded Annual Compounded Annual Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Growth Rate Growth Rate MILLAGE RATE REVENUES } Total Property Tax Author's calculations based on (1) SC Department of Revenue’s School District Detailed Index of Taxpaying Ability dataset, Tax Years 2010 – 2020; (2) April 2022 Parcel Dataset, Assessor’s Office of Richland County; (3) Comprehensive Annual Financial Reports, FYs 2011-2021, Richland School Districts 1 and 2.. (1) Owner-Occupied and Packet Pg. 26 Commercial/Rental values from Richland County Assessor. All other values from DOR ITA for tax year 2020. *Other revenues include Federal, Interest, other local, and intergovernmental. RSD TWO 2.a DEBT SERVICE FUND Historic Projected Compounded Annual Compounded Annual Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Growth Rate Growth Rate MILLAGE RATE REVENUES STUDENTS Packet Pg. 27 Author's calculations based on (1) SC Department of Revenue’s School District Detailed Index of Taxpaying Ability dataset, Tax Years 2010 – 2020; (2) April 2022 Parcel Dataset, Assessor’s Office of Richland County; (3) Comprehensive Annual Financial Reports, FYs 2011-2021, Richland School Districts 1 and 2.. (1) Owner-Occupied and Commercial/Rental values from Richland County Assessor. All other values from DOR ITA for tax year 2020. RSD TWO 2.a GENERAL FUND Historic Projected Compounded Annual Compounded Annual Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Growth Rate Growth Rate MILLAGE RATE REVENUES } Total Property Tax Author's calculations based on (1) SC Department of Revenue’s School District Detailed Index of Taxpaying Ability dataset, Tax Years 2010 – 2020; (2) April 2022 Parcel Dataset, Assessor’s Office of Richland County; (3) Comprehensive Annual Financial Reports, FYs 2011-2021, Richland School Districts 1 and 2.. (1) Owner-Occupied and Packet Pg. 28 Commercial/Rental values from Richland County Assessor. All other values from DOR ITA for tax year 2020. *Other revenues include Federal, Interest, other local, and intergovernmental. 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) SOURCES TEAM “Revenue Per Pupil Report by School District for 2021-22 Excluding Bond Revenue.” South Carolina Revenue and Fiscal Affairs Office (RFA). Revised 11/15/21. “School District Detailed Index of Taxpaying Ability” dataset, Tax Years 2010 - 2020. South Carolina Department of Revenue. Comprehensive Annual Financial Reports, FY 2021 (FY 2020 where 2021 not available). Cities of Greenville, Charleston, Rock Hill, and Columbia; Town of Lexington; Counties of Greenville, Charleston, York, Lexington, and Richland; School Districts of Richland 1 and Richland 2. Richland County Assessor Property Tax Dataset, Tax Year 2021. US Census Population Estimates, 2000 – 2021 (through 2020 for cities and towns). “Membership Report 135 Day, School Year 2020-21.” South Carolina Department of Education - Office of Finance. SC Constitution Article X, §1(5) (https://www.scstatehouse.gov/scconstitution/A10.pdf) SC Act 40 of 2017 (https://www.scstatehouse.gov/sess122_2017-2018/bills/3516.htm). U.S. Census Bureau, 2016-2020 American Community Survey 5-Year Estimates. "Fiscal Year 2020 - 2021 135-day Financial Requirements Report," Office of Finance, SC Department of Education” Slide / 25 Packet Pg. 29 APPENDIX SUPPLEMENTAL MATERIAL Packet Pg. 30 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) SOUTH CAROLINA PROPERTY TAX FORMULA Slide / 27 www.yourwebsite.com Packet Pg. 31 Slide / 28 EXAMPLE PROPERTY TAX CALCULATION Packet Pg. 32 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) 2.a 1 2 Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) KEY Commercial, rental, and second home properties “All other real properties” have an assessment rate POINTS are all classified as “all other real property” under of 6%, 1.5 times higher than owner-occupied South Carolina law. properties. 3 4 Owner-occupied SC has one of the lowest properties are further tax rates for owner- exempted from school occupied properties in the operations millage rates. US, yet one of the highest for commercial and rental Slide / 29 properties. www.yourwebsite.com Packet Pg. 33 2.a COMMERCIAL/RENTAL Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) TOP PICTURE COMPETITIVE TAX PLAN 1 2 3 TARGET DEVELOP CALCULATE COMMERCIAL/RENTAL LEGISLATION PHASE-IN FORMULA Offer a credit to “all other real Draft legislation at: Property tax rate reduction plan property” that would have the State level to enable counties for Columbia/Richland County effect of reducing the the opportunity to implement a would be based on the template assessment rate from 6% to 4%. rate credit for “all other real outlined by Dr. Stephen Walters, Model after Act 40 of 2017, property,” and to be phased in over 10 years. which did the same for County level to opt into the manufacturing property state-legislated rate exemption statewide. opportunity. Slide / 30 Packet Pg. 34 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) PEER CITIES CHARLESTON GREENVILLE LEXINGTON Commercial/rental $3,810 $5,339 $8,125 property tax rates are more severe in Richland County than peer locations, not due to Act 388, but due to high WEST COLUMBIA ROCK HILL COLUMBIA combined city, county and school $6,186 $5,859 $7,288 RSD1 millage rates. $8,886 RSD2 Slide / 31 Packet Pg. 35 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) $9,000 $8,869 $8,869 RENTAL $8,000 PROPERTY $7,000 $7,288 $7,288 TAX $6,000 DISPARITY $5,000 $4,000 Rental properties, pay 3.9  times more property tax than $3,000 owner-occupied properties. $2,273 $2,000 $1,873 $1,818 $1,498 Residents aged 65 or older  do not receive the state’s $1,000 Homestead reduction if they rent. $0 Richland School District 1 Richland School District 2 Owner-Occupied 65+ Owner-Occupied Rental 65+ Rental Slide / 01 Packet Pg. 36 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) RENTER- Rock Hill 48.2% OCCUPIED HOUSING Lexington 33.9% RATE Greenville 56.9% Columbia 53.0% Charleston 44.6% 0% 10% 20% 30% 40% 50% 60% Slide / 33 Source: U.S. Census Bureau, 2016-2020 American Community Survey 5-Year Estimates. Packet Pg. 37 2.a POPULATION GROWTH TRENDS Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 34 US Census Population Estimates, 2000 – 2021 (through 2020 for cities and towns). “Revenue Per Pupil Report by School District for 2021-22 Excluding Bond Revenue.” South Carolina Revenue and Fiscal Affairs Office (RFA). RevisedPacket 11/15/21.Pg. 38 2.a OWNER-OCCUPIED PROPERTY GROWTH Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 35 “School District Detailed Index of Taxpaying Ability” dataset, Tax Years 2010 - 2020. South Carolina Department of Revenue. Packet Pg. 39 2.a COMMERCIAL/RENTAL PROPERTY GROWTH Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 36 “School District Detailed Index of Taxpaying Ability” dataset, Tax Years 2010 - 2020. South Carolina Department of Revenue. Packet Pg. 40 2.a CITY OF COLUMBIA SELECTED REVENUES Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 37 Comprehensive Annual Financial Report, FY 2021, City of Columbia. Packet Pg. 41 2.a CITY OF COLUMBIA GENERAL FUND REVENUES Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 38 Comprehensive Annual Financial Report, FY 2021, City of Columbia. Packet Pg. 42 2.a RICHLAND COUNTY SELECTED REVENUES Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 39 Comprehensive Annual Financial Report, FY 2021, Richland County. *Includes Intergovernmental not restricted to specific program; Sale of capital assets; Investment income; Miscellaneous;Packet TransfersPg. 43 2.a RICHLAND DISTRICT 1 REVENUES Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 40 Comprehensive Annual Financial Report, FY 2021, Richland School District 1. Packet Pg. 44 2.a RICHLAND DISTRICT 2 REVENUES Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 41 Comprehensive Annual Financial Report, FY 2021, Richland School District 2. Packet Pg. 45 SCHOOLD DISTRICT 2.a EXPENDITURES BY SOURCE Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) Slide / 42 Comprehensive Annual Financial Reports, FYs 2011 - 2021, Richland School Districts 1 and 2. Packet Pg. 46 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) EXAMPLE CITY OF COLUMBIA REVENUES DURING TAX REDUCTION PHASE-IN Assuming Continuation of AVERAGE Historical Growth ANNUAL GROWTH Rates Author's calculations based on School District Detailed Index of Taxpaying Ability dataset, Tax Years 2010 – 2020 and April 2022 Parcel Dataset, Assessor’s Office of Richland Slide / 43 County. (1) Owner-Occupied and Commercial/Rental values from Richland County Assessor. All other values from DOR ITA for tax year 2020. (3) City of Columbia values not Packet Pg. 47 available from DOR ITA and uses Richland County’s Annual Historic Property Growth from 2010 to 2020. 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) EXAMPLE RICHLAND COUNTY REVENUES DURING TAX REDUCTION PHASE-IN Assuming Continuation of AVERAGE ANNUAL Historical Growth GROWTH Rates Author's calculations based on School District Detailed Index of Taxpaying Ability dataset, Tax Years 2010 – 2020 and April 2022 Parcel Dataset, Assessor’s Office of Richland Slide / 44 County. (1) Owner-Occupied and Commercial/Rental values from Richland County Assessor. All other values from DOR ITA for tax year 2020. Annual Historic Growth from 2010 to 2020. (3) Includes Richland County General and Nonmajor Governmental Funds receiving property tax. (4) Does not include Transportation Sales Tax Revenues. (5) RichlandPg. 48 Packet County annual compounded growth rate based on 2012-2020 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) EXAMPLE RICHLAND SCHOOL DISTRICT 1 REVENUES DURING TAX REDUCTION PHASE-IN Assuming COMPOUNDED Continuation of AVERAGE ANNUAL Historical Growth GROWTH Rates Slide / 45 Author's calculations based on School District Detailed Index of Taxpaying Ability dataset, Tax Years 2010 – 2020 and April 2022 Parcel Dataset, Assessor’s Office of Richland County. (1) Owner-Occupied and Commercial/Rental values from Richland County Assessor. All other values from DOR ITA for tax year 2020. Annual Historic Growth from 2010 Packet to 2020.Pg. 49 2.a Attachment: TMC_Tax_Plan_Part_3_051922 (7573 : The Impact of Property taxes) EXAMPLE RICHLAND SCHOOL DISTRICT 2 REVENUES DURING TAX REDUCTION PHASE-IN Assuming COMPOUNDED AVERAGE Continuation of ANNUAL Historical Growth GROWTH Rates Slide / 46 Author's calculations based on School District Detailed Index of Taxpaying Ability dataset, Tax Years 2010 – 2020 and April 2022 Parcel Dataset, Assessor’s Office of Richland County. (1) Owner-Occupied and Commercial/Rental values from Richland County Assessor. All other values from DOR ITA for tax year 2020. Annual Historic Growth from 2010 Packet to 2020.Pg. 50 3 MEETING DATE: May 19, 2022 DEPARTMENT: City Clerk FROM: Erika Hammond, City Clerk SUBJECT: Legislative and Local Action Plan - Mr. Charles Terreni, Esq., Terreni Law Firm, LLC FUNDING SOURCE & ORIGINAL BUDGET: Updated: 5/17/2022 2:51 PM Page 1 Packet Pg. 51 4 MEETING DATE: May 19, 2022 DEPARTMENT: City Clerk FROM: Erika Hammond, City Clerk SUBJECT: Additional Information Regarding Implementation and Hedges for the Schools, the County and the City - Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics FUNDING SOURCE & ORIGINAL BUDGET: Updated: 5/17/2022 2:47 PM Page 1 Packet Pg. 52 5 MEETING DATE: May 19, 2022 DEPARTMENT: City Clerk FROM: Erika Hammond, City Clerk SUBJECT: Recommendation of a Final Draft Plan - Ms. Rebecca Gunnlaugsson, Ph.D., President of Acuitas Economics FUNDING SOURCE & ORIGINAL BUDGET: Updated: 5/17/2022 2:48 PM Page 1 Packet Pg. 53 6 MEETING DATE: May 19, 2022 DEPARTMENT: City Clerk FROM: Erika Hammond, City Clerk SUBJECT: Final Meeting Schedule - The Honorable Joe E. Taylor, Chair FUNDING SOURCE & ORIGINAL BUDGET: Updated: 5/17/2022 4:26 PM Page 1 Packet Pg. 54