Getting Rid of the Vehicle Tax in South Carolina:
Watch for a Political Shell Game

By Professor James Hite
1999

Few South Carolinians like the property tax on trucks and automobiles. In fact, it is hard to find anyone who has much good to say for this tax. It is inconvenient to pay and expensive to administer. As administered in South Carolina, it makes property taxes regressive. And as the prices of vehicles have escalated, it has also become a burdensome tax. Many times the property tax on an automobile are greater than on a dwelling house. If there is any feasible way to get rid of the personal property tax on vehicles in South Carolina, we ought to eliminate the tax.

The governor and members of the General Assembly have heard the complains about the vehicle tax. Eliminating it is a centerpiece of Governor's Beasley's program for the 1998 session of the legislature.

But is elimination feasible? Is there any financially responsible way we can rid ourselves of this tax without threatening essential public services?

The revenue from the personal property tax on vehicles goes to counties, school districts, special purpose districts, and municipalities, not the state. So the state could move to eliminate the tax without its having any affect on state revenues. But such a move would leave local governments with a big hole in their revenues. As a practical matter, therefore, the state will need to dip into its revenues to help local governments offset the revenue lost from eliminating the property tax on vehicles.

A recent Strom Thurmond Institute study shows that even without setting side money to abolish the hated tax on vehicles balancing government budgets will require very careful fiscal management. If state expenditures grow with inflation and population growth, the state is likely to be hard pressed to come up with enough revenue to meet the constitutional requirements for a balanced budget. Both tight fiscal discipline and good luck with economic growth are needed. So the temptation is strong for the Governor and members of the legislature to get political points by eliminating the vehicle tax while pushing political responsibility for dealing with the fiscal consequences off on to the shoulders of local elected officials. In short, there are political incentives for state officials to play a political shell game with this tax.

The exact details of the Governor's proposal still are not clear, but two bills to abolish the tax have been introduced into the General Assembly. A Joint Resolution (Bill Number 941) would submit a constitutional amendment to the voters to exempt motor vehicles from personal property taxes. A companion bill (Bill Number 940) would, contingent upon passage of the necessary constitutional amendment, set up a scheme for partially reimbursing local governments for revenues.

The reimbursement scheme is complicated. Thirty percent of projected annual growth in state revenue would be dedicated to reimbursing local governments for revenue lost from the vehicle tax until local governments were reimbursed for all the revenue lost in the 1998 calendar year. The state does not have enough unencumbered revenue to do a one-hundred percent reimbursement in 1998. So the reimbursement money from the state will be phased in over several years.

Since the proposed constitutional amendment will take all vehicles off the tax books as early as 1999, local governments will be faced, almost at once, with less revenue than they have been receiving from property taxes. And they will not be able to count on growth in property tax revenue in the future as a result of growth in the number and value of cars and trucks.

In short, the proposed legislation tells local governments they must eat most of the costs of eliminating the property tax on vehicles. And they must eat it both now and forever. Some local governments may find that this increased fiscal discipline stimulates improvements in efficiency in the delivery of local government services, and if so, that is a good thing. Yet some will almost certainly find it necessary to raise taxes on the property that remains on the tax books. In the end, our total tax bill is not likely to decrease by very much, if at all, and the tax bill of some types of property --- especially on commercial and rental property --- is likely to increase.

If local property tax rates are increased to offset revenue lost from exempting automobiles, the losers in all this are likely to be renters and small business owners. They will take their ire out on county and municipal councils while the Governor and legislators bask in praise for eliminating a hated tax. That is how this particular shell game is intended to work.

There is another problem. A particular model car has the same assessed value in Williamsburg as in an urban county like Richland County. A parcel of land in Willimasburg, however, has lower market value than a parcel of the same size in an urban county. So eliminating the vehicle tax will cause a greater lost of revenue in rural than in urban counties. That means the shift in tax burden on to renters and small business will be greatest in our poor rural counties.

There has got to be a better way to get rid of a bad tax.

One possibility is to model gradual elimination of the vehicle tax based on the arrangement now in use to provide property tax relief for homeowners. That model provides a tax credit paid for out of state revenues against the first $100,000 of assessed value on owner-occupied dwellings. Similarly, the state could provide for and fund a tax credit against the first five or six thousand dollars of assessed vehicle value, gradually increasing the credit if it turns out the state has sufficient revenue to do so. Such an arrangement would target the reduction in vehicle taxes toward persons with older cars, presumably persons who also have lower incomes, and not risk creating a fiscal crisis in counties, school districts, and towns. The tax credit approach would also reduce the problems that eliminating the personal property tax on vehicles is apt to cause rural counties.

The personal property tax on motor vehicles ought to be eliminated. It is a bad tax. But South Carolinians should remember that if it seems to good to be true, it probably isn't true. Most of us may feel too busy to watch every move being made in Columbia, but we need to keep a close eye on the details and make sure we aren't suckered by the shell game. We could end up paying more taxes rather than less.

January 27, 1998

These comments represent the views of the author and do not necessarily represent the views of Clemson University or the Strom Thurmond Institute.

Jim Hite is a senior fellow of the Strom Thurmond Institute of Governemnt and Public Affairs
at Clemson University where he is alumni professor of agriculture and applied economics.

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