Property tax reformers never expected falling values How can property lose value, but end up with a higher tax assessment?

Provided Assessment caps have exempted more than 15 percent of Berkeley County's tax base, including many houses on Daniel Island. The caps result in higher property tax rates, because some property value is excluded from taxation.

When South Carolina dramatically changed the way properties are taxed in 2006, a hallmark of the legislation was a cap limiting how much a property's taxable value can rise during county-wide reassessments.

No one at the time could have predicted the Great Recession and the plunge in real estate values that took hold in 2008 - an event that's leading to some unexpected outcomes.

In at least one county, Beaufort, real estate values dropped so much between reassessment years that property tax rates had to be raised to maintain local revenues. The reassessment cap, designed to protect taxpayers from the tax impact of rising real estate prices, had a different effect when values fell.

"We're going to see a lot of things we've never seen before," said Frank Hefner, economics professor at the College of Charleston and director of the Office of Economic Analysis.

"All the rules that are put into place to protect yourself during an inflationary time ... don't work when an asset class drops across the board," he said.

Property values were soaring along the South Carolina coast and elsewhere before the recession. In some areas, that meant soaring tax bills, and there was a backlash.

The state responded with Act 388 in 2006, which exempted owner-occupied properties from taxes to fund school operations, raised the sales tax to make up the revenue, and put a 15 percent cap on the amount a property's taxable value could rise during reassessment.

The cap was meant to approximate the rate of expected inflation. Counties reassess every five years, so the 15 percent cap represented 3 percent annual gains in real estate values.

In the first round of reassessments that followed Act 388, the cap worked as expected, smoothing out changes in property tax bills, while shifting some tax burden to recent buyers who were assessed on the full value of their property. For example, in Berkeley County, taxable property values increased by at least 40 percent in the 1999 and 2004 reassessments, but were capped at a 15 percent increase for many property owners in 2009.

Berkeley County Assessor Wilson Baggett gave this example of how the cap worked during a presentation on the county's most recent reassessment. He said a property in the Daniel Island/Cainhoy area increased in value from $606,700 to $1,492,700, during the 2009 reassessment, but because of the 15 percent cap, the taxable value of that property was limited to $697,700.

Then came the recession.

Beaufort County, home to Hilton Head, was among the first to put the recession-damaged property values on the tax books. The county's 2013 reassessment compared real estate values from the end of 2007, roughly the height of the bubble, to 2012.

"As a result we had an overall county-wide decline in market value of more than 30 percent," said Ed Hughes, Beaufort County assessor.

The recession wiped out $14.1 billion in Beaufort County property value. As a result, two things that had not been seen before took place.

First, property tax rates increased substantially. Normally, when counties reassess, property tax rates go down to account for rising values. But if values drop, tax rates must rise to generate the same amount of taxes.

Second, more than nine out of 10 properties in Beaufort County had capped values going into the reassessment. While most properties were worth less in 2012 than in 2007, the capped property values were often even lower because those caps were on real estate values dating back to the county's 2002 reassessment.

The result - never imagined during the Act 388 negotiations - was a reassessment in which some properties declined in actual value, but increased by up to 15 percent in taxable value.

Crucially, this happened as tax rates were rising sharply because of the county's shrunken tax base. Hughes said some property owners saw their tax bills rise 35 percent or more.

That dire scenario could only happen where the value of all property county-wide declines between reassessments, and that hasn't been the case in the Charleston area because of the years in which counties reassessed.

Charleston and Dorchester counties will reassess next year. Charleston County Assessor Toy Glennon said she expects overall property values to be relatively flat.

In Berkeley County, which completed reassessment this year, values did not fall, but inched up 6.2 percent.

What that means for a property like the Daniel Island/Cainhoy example provided by Baggett is, the owner can expect a higher property tax bill. That property's value was capped in 2009 at $697,700, when it was really worth nearly $1.5 million. It may no longer be worth almost $1.5 million, but so long as it's worth more than the capped amount, the assessment can rise by another 15 percent, and when a property's assessment rises well above the county average that results in a higher tax bill.

So, those who benefitted most from the cap when values were soaring are now seeing some of the larger assessment increases.

Notices are being mailed in Berkeley County to property owners whose taxable values increased by $1,000 or more.

"There's really no harm, no foul, as far as I can see," said Hefner, noting that such properties are still being taxed for less than they are worth.

Despite the small gain in Berkeley County property values seen in the 2014 reassessment, the county still has $103.5 million exempt from taxation due to the Act 388 cap. That's about 16 percent of the tax base.

Reach David Slade at 937-5552