Economist Russell Sobel’s recent commentary in this newspaper did an excellent job of framing the tax and regulatory issues that place South Carolina at a competitive disadvantage with other states in recruiting business enterprises. Many of those disadvantages are self-imposed and should be eliminated by way of legislative actions.
Our General Assembly has over the years taken steps to mitigate one of our most crippling, constitutionally imposed taxation impediments to business recruitment and growth. That is the 10.5 percent assessment ratio on properties classified for manufacturing use, together with the business personal property tax.
The 10.5 percent assessment is embedded in our state’s constitution. South Carolina is unique in that regard. During the antebellum era South Carolina had an almost exclusively agrarian-based economy while the economy of the Northern sections of the nation had a thriving manufacturing base. The conflicts between those two very different economies were a root cause of the late unpleasantness.
In 1876 the Reconstruction period ended. Those who were elected to South Carolina’s reconstituted civilian government were, for the most part, Confederate veterans from agricultural backgrounds who were bitter over the lost war and the subsequent Reconstruction.
They were not happy that Northern industrialists had opened manufacturing operations in South Carolina, competing for scarce resources and labor.
When it came time to write the state’s new constitution those unreconstructed lawmakers imposed a 10.5 percent assessment on properties used for manufacturing purposes and by including it in the constitution made it extraordinarily difficult to change. In the long run they “cut off their noses to spite their faces.”
It was not until the latter half of the 20th century when textile jobs began disappearing by the thousands that lawmakers began to appreciate the importance of manufacturing to our economy.
However, they did not do what was most appropriate: amend South Carolina’s constitution, doing away with constitutionally embedded unwieldy tax policy. Instead they created a series of Band-aid fixes commonly known as “fee in lieu of taxes.”
Fee in lieu allows manufacturing businesses to negotiate fee arrangements that help them navigate around the onerous 10.5 percent manufacturer’s property assessment ratio. As a practical matter the qualifying criteria together with associated cost are such that all small business and most mid-sized businesses do not have access to fee in lieu relief. Those businesses are denied a level playing field.
Economists speak of the seen and unseen consequences of public policies.
While it is not possible to determine how many small to midsized manufacturing business have not been established because of the property tax ratio, reasonable people should be able to agree that charging a 75 percent premium on manufacturing properties makes that number very large.
Businesses pay a 10.5 percent business personal property tax, except for those with fee in lieu deals, on their furniture, fixture and equipment.
Businesses are allowed to depreciate those items over time; however, the valuation never depreciates below 20 percent of its original book value. Over the long haul, businesses can end up paying more in tax on those items than the original purchase price.
Members of our General Assembly would all answer yes when asked if they are supporters of the small business community and would say that they all want to help improve our state’s economy.
They could go a long way toward proving their sincerity by properly addressing the above raised issues by way of a much needed constitutional amendment.
Walter D. Carr
Carr Properties, LLC