This report summarizes a study of education finance and economic development for the South Carolina School Boards Association. It extends research conducted during the summer of 1999 by the same research team for the Horry County School Board. The SCSBA wanted to expand the research conducted for Horry County and explore the statewide implications of a potential conflict between the financing of education and local economic development.

In June, 1999, the Horry County Board of Education commissioned a review and analysis of a proposal for a large-scale economic development project and its impacts on the School District. The proposal, presented to Horry County Council and the City of Myrtle Beach by a local development company, calls for the creation of a Multi-County Business Park (MCBP) in the county covering approximately 8,300 acres. The proposal would create a MCBP for up to 30 years with an option to renew for another 30 years, facilitate the annexation of several thousand acres of land into the City of Myrtle Beach, freeze zoning and limit impact fees in the Park and use 100% of commercial property tax revenues for non-educational purposes.

The Horry County Board of Education was concerned about the long-term implications of this proposal on the ability of the District to fund educational services in the District. The developer's proposal would remove over $2 billion in commercial property from the School District's tax base. Locked into a 30-60 year plan, the District was concerned that this could have a detrimental impact on the District's ability to fund education in Horry County in the future. By removing such a large and important component from the tax base, the District faces shifting the tax burden to other property owners in the County in order to maintain the quality of education.

To address these issues and others, the School district selected a team of researchers from across the state to review and analyze the Horry County development proposal. The team included the following members:

• Holley Hewitt Ulbrich, Alumni Distinguished Professor Emerita of Economics at Clemson University and Senior Fellow at Strom Thurmond Institute and USC's Institute of Public Affairs
• Edward Lewis Bryan, Professor of Accounting at Clemson.
• Frank L. Hefner, Associate Professor, Department of Economics and Finance at the College of Charleston.
• Douglas P. Woodward, Director of the Division of Research and Associate Professor of Economics at the University of South Carolina's Darla Moore School of Business.
• Harry W. Miley Jr., President, Miley & Associates, Inc.
• Randolph C. Martin, Professor of Economics and Associate Dean, Darla Moore School of Business, University of South Carolina.

The present study was conducted by the same team of researchers except Dr. Lewis Bryan of Clemson University. This report presents the results of the research team's analysis. Section II begins with an overview of the use of development incentives in economic development. Section III reviews of the major economic development incentives used in South Carolina that affect a school district's tax base.

During the past two decades, state and local government involvement in promoting economic development has expanded significantly. In earlier, post-WWII years, the federal government had taken it upon itself to assist in the economic development of the most distressed areas in the country through a variety of programs. The best know of which were administered by the Economic Development Administration (EDA). Such programs included low interest rate loans for firms locating in qualified areas plus a variety of technical assistance activities. During the Reagan years, however, a conservative turn in political philosophies plus growing budget deficits resulted in a significant reduction in federal funding of programs for lagging or distressed regions. Thus, state and local governments were left to fill what was perceived as a gap in programs designed to assist those living these distressed areas. In addition, competition among states and localities over the last 30 years has also contributed to this growth in state and local incentives. The extent of this expansion has been documented by Chi and Leathery and Fisher and Peters.

Much of South Carolina as well as much of the Southeastern United States has qualified as distressed areas for many of the early federal programs. While the list of programs is long, the focus of this section is with those programs designed to directly assist businesses (either new or existing) in the area. Economist Timothy Bartik provides a useful "topology" of state and local economic development policies that directly aid businesses. Included in the more traditional category of such policies are financial and other incentives, which are designed to attract new industry and expand existing area industries. Much of this is accomplished through the state and local tax system and has been traditionally targeted at attracting new manufacturing plants. A second and more recent summary of economic development programs focus more on smaller or existing businesses. Such programs include capital market programs (e.g., government financed equity or loan programs), information, education and technical assistance for small business, research and high technology (e.g., research parks), and export assistance programs. In all, the list of state and locally provided economic development programs is quite extensive.

Are economic development incentives effective?

The growth in state and local government offers of direct economic incentives to businesses over the past decades reflects an intense competition as areas vie for new plants and other economic development opportunities. This kind of competition was especially apparent in the Southeast during the 1980s and early 1990s, as states and localities vied for the location of highly visible Japanese and European automobile producers into U.S. greenfield sites. Such high profile events and the rapid growth in state and local subsidies to the business sector has raised the obvious question; are such programs worthwhile or effective? The answer to this question may depend on how one defines "worthwhile or effective" and how one views the evidence available on this subject.

In recent years, the more vocal of those concerned with such issues have been the opponents of using business incentives for economic development purposes. Chi and Leatherby provide a useful "check-list" of the pros and cons associated with such business incentives. Included in the list of arguments used to discourage the use of incentives are:

• Tax and financial incentives are not the only factors included in business location decisions.
• Incentives raise questions of equity.
• Empirical studies show that business incentives are not cost-effective.
• Incentives pull dollars away from the improvement of public services and infrastructure.
• Incentives create a self-defeating zero-sum game.

Consider the first item. It is argued that many other factors (labor cost, proximity to markets, unions, etc.) play a more important role in determining the location of a firm than do marginal differences in taxes or other financial considerations. Thus, such policies have little impact on location decisions. In a recent study of industrial location in Puerto Rico, the researchers found that a targeted incentive policy affected the decisions of relatively few greenfield plants investments.

Opponents of such incentives are also able to point to selected studies in the literature which raise some real questions about the effectiveness of business incentives in creating employment opportunities, especially for the locally unemployed. It is often argued that with a mobile labor force, new jobs are filled by more skilled immigrants, leaving the unemployed in the area no better off than before the new plant opening.

Critics also point out that public funds used for incentives often have a very high opportunity cost. In states with lagging infrastructure and below average school systems, such incentives may come at a very high cost in terms of other uses of the tax revenue foregone. Finally, there is the "zero-sum game" argument. If it is assumed that state and local governments compete for a fixed number of new firms, then a plant that decides to locate in one area is lost to the others. From a national perspective, the net effect of local incentives on job creation is zero and the opportunity cost of using local public resources is very high. The issue of the net impact of economic development, with or without incentives, on local public services (including schools) is an important and controversial one. Part III of this report explores that question in the specific context of South Carolina school districts.

The other side of the coin is a similar list of positive arguments. These items include reasons that business incentives should be provide by state and local governments. The "pros" list contains the following items:

• Incentives have a positive effect on business location decisions.
  
  
• Incentives fund job creation.
  
  
• Incentives are cost-effective.
  
  
• Incentives help foster competition.
  
  
• Incentives have a political element.
  
  

In this view, tax and financial incentives do have an impact on firm location. Specifically, the argument is that many state and metropolitan areas are close substitutes as potential industrial sites from a business perspective. Thus, even a small cost differential provided by tax or financial incentives can prove to be decisive in the location decision.

The second item represents the argument that new firms attracted by the incentives create net additional jobs for the local area. From a local perspective the "zero sum game" argument is irrelevant. Even from a national perspective, it can be argued that it is desirable if jobs are "taken" from low unemployment areas and "given" to high unemployment areas because the social benefits of these jobs is higher in the high unemployment area. It is also possible that competition for jobs between states and areas may actually reduce overall unemployment and increase national output.

The third item in the "pro" list indicates a belief that such incentives are cost- effective, which means that the benefits (wages earned, taxes paid, etc.) outweigh the costs (opportunity cost of incentives given). A positive cost/benefit ratio is even more likely when the multiplier or spillover benefits of an expanded industrial base are included in the calculation.

The last two items are concerned with the competitive nature of state and local incentives to business. First, the competition between areas can be viewed as a positive factor as noted in the discussion of job creation. The wisdom of one area unilaterally withdrawing from this competition is also certainly questionable. Also, local leaders unquestionably feel pressure to attract business, especially in areas of high unemployment. Thus, the political process leads to the desirable result that those areas that stand to gain the most from such incentives are most motivated to provide those incentives.

To summarize this brief review of economic development incentives, it is apparent that:

• Incentives were originally intended to promote jobs and income creation for economically distressed areas.
  
  
• Incentives were originally a federal government activity but their use by local and state governments has substantially grown over the last 20 years.
  
  
• Incentives were originally intended for relatively, footloose manufacturing plants.
  
  
• Incentives were originally intended to act as a locational attraction factor to reduce costs that would help entice industry to move to an area.
  
  
• Incentives are generally intended to encourage economic activity that would otherwise locate elsewhere.
  
  
• Incentives raise questions of equity.
  
  
• Incentives may pull dollars away from the improvement of public services and infrastructure.
  
  
• Incentives may or may not be cost-effective.
  
  
• Incentives can help job creation.
  
  
• Incentives can help attract new industry.

Value of economic growth

There is little dispute about the value and importance of economic growth and development for South Carolina. The state remains near the bottom of the fifty states in such measures as personal income, health status, SAT scores, infant mortality, and other measures of quality of life that are highly correlated with the quality and diversity of the state's economic base. Economic growth offers the incentive, the opportunities, and the resources to change these measures of economic and social well-being.

Schools and school districts are important players in economic growth in several dimensions. The quality of the public schools is an important factor in locational decisions for business firms in deciding to move in, expand, contract, or shut down plants. Firms need educated workers. Management and workers want quality education for their own children. School millage is often an important factor in locational choice as well, because the correlation between local taxes and school quality or even school spending is weak. A district that is already well endowed with a tax base can raise more revenue with a low mill rate than another district can with a much higher rate. State equalization through formula funding is not adequate to significantly alter that situation which handicaps poorer districts both in attracting industry and in providing quality education. So school districts are an important factor in fostering economic growth.

On the other side of the equation, economic growth affects schools. Nationally, there is evidence that rapid growth puts strains on both operating and capital budgets for local governments, including schools, even in the absence of any tax incentives that might drain potential revenue from schools. Residential development in particular tends to add more to the cost than the revenue side of local government budgets. Loudon County, Virginia, just outside Washington D.C., offers one good example:

"In Loudon County, Virginia, officials in 1994 estimated that a new
home must sell for at least $400,000 to bring in sufficient property taxes to cover the cost of all the services the county provides. By contrast, the average home  sold that year for less than $200,000. The fastest selling properties in 1995 were town homes averaging between $120,000 and $160,000."

This estimate confirmed an earlier study in Culpepper County, Virginia, which found that residential development cost $1.25 in county services (including schools) for every $1 of revenue, while service costs were only 19 cents per dollar of revenue generated for industrial, commercial, or agricultural land. Likewise, a study by the American Farmland Trust found a revenue-to-cost ratio for residential property is 1:1.11, while the ratios are 1:0.29 for commercial and industrial property and 1:0.31 for farmland, forests and open space. In other words, residential property generates 11% more in costs than it produces in revenue, while commercial and industrial property only costs 29 cents and farmland and open space 31 cents in services for every dollar generated in revenue. However, these ratios may overstate the benefits of nonresidential development. According to one researcher:

"A 1991 study by the DuPage County, Illinois Development Department found that, between 1986 and 1989, areas of the county with significant nonresidential development experienced a greater increase in taxes than did areas without nonresidential development . . . commercial development may create a demand for additional nearby residential development which . . . brings a fiscal drain that offsets the benefits."

The impact of nonresidential development on school finances is the central question of this chapter.

Sources of school district revenue

What happens to school funding as new plants open and new pupils come into a school district? In order to answer that question, it is helpful to consider the sources of school funding. Schools get their funding from two major sources: the property tax (28%) and various kinds of state aid (44%). There are also three minor sources: fees and charges (5%), miscellaneous revenue (6%), and federal aid (7%). In addition, they can issue bonds for capital improvements subject to constraints on their bonded indebtedness, which in 1996-97 accounted for the remaining 10%. For purposes of this study, we focus entirely on property tax revenue and state aid because the other sources are minor and also much less likely to increase in response to either new industry or more pupils.

State aid. New pupils will generate more state aid. In the current year, one weighted average pupil would, in the average district in 1996-7, bring in an additional $2,650 in Education Finance Act (EFA) funding and some additional EIA funding, depending on available funds. In 1996-97, the average per pupil EIA funding was $530, for a total of $3,180 in state funds per pupil. However, the average per pupil expenditure in that same year was $6,526. Additional state aid covers less than half the additional cost on average. Clearly additional local revenues must be generated if the school districts are to fund the additional cost of new pupils generated by economic development. A district that is experiencing rapid growth in its tax base will also see an increase in its index of taxpaying ability, which is part of the EFA funding formula. Its per pupil allotment, relative to the state average, will decline, because its enhanced property tax base is expected to make up some of the difference.

Property taxes. Most of the local share of school funding comes from property taxes, a base that is shared with cities and counties. Over the period 1990 to 1996, the assessed value of property grew at an average annual rate of 4.9%. The combined demands of inflation and pupil growth required a growth in tax revenue of 3.6%. Any increase in costs over and above those two sources had to come out of the difference of 1.3% between tax-base growth and inflation/pupil growth, or in the form of higher millage, or some of each. School millage rates have increased at an average rate of 1.6% from 1990-91 to 1996-97.

Legislative changes in property tax structure in the early 1990s were designed to protect school revenue while reducing the tax burden on specific groups, such as new and expanding industry and homeowners. Currently, school district revenues are at risk in at least two respects: the potential effect on school districts from existing and future county-negotiated property tax breaks to business firms, and the proposed change in the assessment rate on automobiles. Personal vehicles account for 18% of the property tax base. A reduction in the assessment rate on automobiles from 10.5% to 6% would, other things equal, reduce the property tax base by almost 8%.

The concern in this report is only with the changing property tax implications of business firms. The next section presents an analysis of industrial (and utility) property in recent years.

Industrial Property and School Revenue: 1997 comparisons

Using data from South Carolina Department of Education and the Department of Revenue, it is possible to sort school districts into those with high, low, and average shares of industrial and utility property in the appraised values of property that goes into their tax bases. This sorting makes it possible to explore differences in educational finance--mill rates, per pupil local and state revenues, and per pupil expenditures--in relation to the degree of industrial development. This industrial development measure, rather than one that also included commercial development, was chosen for several reasons:

1. Manufacturing, utility, and associated business personal property is assessed annually by the Department of Revenue and is therefore not subject to variations in county reassessments.
2. Most of the business tax incentives are aimed at and used for industrial and utility development.
3. It is difficult to separate commercial from residential rental property in the available data.

District size. It is difficult to make meaningful comparisons among districts of vastly different sizes. Some of this problem is overcome by making percentage share comparisons or by measuring everything on a per pupil basis, but even those corrections do not fully capture the differences between small and large districts. For some of our analysis, therefore, the state's districts were sorted into four size classes as shown in Table 2.

Sorting districts by degree of industrialization. Sorting by degree of industrialization yields meaningful categories for all but the coastal districts, which have a low percentage of their tax bases in industrial and utility property but still have high per capita or per pupil values of property because of extensive commercial development and high values for residential property. In a second sort that identified districts with very low shares of industrial and commercial property but per pupil total property values well above the state average, two groups of school districts fell out. One group was, as expected, the coastal districts of Beaufort, Horry, and Charleston. The others were generally urban or bedroom communities-- Lexington 3 and 5, Richland 2, Clarendon1, and Dorchester 2. These eight districts were analyzed separately as Subgroup E.

Because of recent consolidation of school districts in Orangeburg County, it is difficult to find satisfactory comparison data for the old and new Orangeburg County districts. These three districts were therefore not included in the study.

What remains are a total of 76 districts with two different property tax-base mixes, each divided into two subgroups: There are 33 districts below the state average of 21.22% of assessed value in the tax base from state-assessed property.

Subgroup A consists of 13 districts (noncoastal/bedroom) with less than 15% of the value in state-assessed property: These are the least industrialized noncoastal, nonbedroom districts. Within this group, there are seven very small districts (less than 2,000 students) and six small districts (2-6,000 students).

Subgroup B consisted of the other 20 districts with 15-21.1% of their property tax bases consisting of state-assessed property.

There are 43 districts above the state average of 21.22% of value in the tax base from state-assessed property (37 districts).

Subgroup C consists of 29 districts with 21.3% to 33.7% of their property tax bases consisting of state-assessed property.

Subgroups B and C contain a cross section of size classes, as might be expected: 5 in the smallest size class, 21 in the second size class, 15 in the middle size class, 4 in the 12-24,000 class, and 3 of the state's five very large districts.

South Carolina's economic development program includes many types of incentives to help encourage a company to locate or expand in the state. Some incentives are designed to reduce a company's corporate income tax liability. Other incentives allow exemptions that can reduce sales and use taxes on various types of equipment and purchases. Still other incentives reduce a company's worker training costs. The list of incentives is quite extensive. South Carolina is well known in the economic development industry as being very successful and very aggressive in its economic development incentive packages.

Although the list of incentives in South Carolina is long and varied, the focus of this study is the state's incentives that affect property taxes and in particular, the property tax base of a school district. The impact on property taxes is critically important to schools because property taxes are the primary source of local revenue for schools. Other local governments, especially cities and counties, also depend on property taxes are affected by these incentives, but not to the same extent as schools. These other governments only rely on property taxes for an average of 50% to 60% of their local revenue portion of their budgets.

School districts in South Carolina receive a large portion of their funds from state sources, so property taxes only support a portion of total school funding. The average school district in South Carolina receives about 60% of the funds required for its operations from the state. This percentage varies according to how wealthy a district is, ranging from a low of about 1% for the wealthiest district to about 95% for the poorest district. But regardless of what proportion of funds are provided by the state, nearly all of the funds that are required to be generated locally must come from property taxes. In addition, almost all of the debt service and capital improvement expenditures for schools must come from local funds.

Therefore, since schools must rely heavily on property taxes to fund the local share of their operating costs and most of their capital improvement costs, any business incentive that affects the flow of property tax revenues is extremely important to school districts.

Relevant economic incentives

The following economic development incentives can affect the property tax base of a school district:

• Tax Increment Financing Districts (TIF's)
  
  
• Fee In Lieu of Taxes (FILOT)
  
  
• Special Source Revenue Bonds in Multi-County Industrial Parks
  
  

Tax Increment Financing Districts will only be addressed briefly in this report for two reasons. The first is that while TIF's are an important economic development tool, they are generally used for community development in cities and counties rather than direct incentives offered to attract new industry. (The original intent of the law was to redevelop blighted areas in decaying inner cities.)

Second and perhaps more importantly, the state laws for TIF's were amended in 1999 to allow school districts the ability to choose whether to participate in a TIF. Prior to 1999, a municipality could create a TIF and use school tax revenues for up to fifteen years without the consent of the affected school district. This opt-out provision gives school districts protection from having any property tax revenues generated by millage assessed by the school district being used for non-school purposes without the school district's consent. This change has not eliminated the use and effectiveness of TIF's. Several TIF's have been created in South Carolina since these changes were implemented. These TIFS have included some where the school districts have participated and some where they have declined.

The other incentives are used as direct incentives to attract new and expanding industry and schools have no voice or vote in their use.

The purpose of this report is to examine economic development incentives in South Carolina that reduce property taxes and in so doing so, may adversely affect a school district's ability to provide adequate funding for public education.

These incentives and their associated diversion of funds for economic development are one of the more recent economic development tools employed in South Carolina. Over the years, first the federal government and then state governments have utilized a variety of incentives to created economic opportunities for less developed or distressed regions. South Carolina is well known in the economic development industry as being very successful and very aggressive in its economic development incentive packages.

As noted in Chapter II, the efficiency and equity of such activities have come under increasing scrutiny and the study reviews the various arguments associated with this discussion. Of particular relevance is the observation that such incentives have historically been for distressed regions with low incomes and high unemployment. This may be less true today with more well-to-do areas utilizing incentives to attract additional economic activity. Further, critics point out that such activities divert dollars from the improvement of public services which may have a greater social benefit than that associated with the development activity. This possibility could be particularly relevant for public education needs in rapidly growing regions of the state. In these areas, the pressure on public infrastructure (including public schools) is already significant. The additional demand created by the development activities plus the diversion of financial resources could potentially create significant problems for the future of school districts in these areas.

One way to approach this issue is to empirically examine the relationship between economic development and school finances. Since the objective of all development incentives is to promote economic expansion of the area, such data yields important insights into the process. Thus, Chapter III focuses on the impact of nonresidential development on school finances in South Carolina. Nonresidential (industrial and utilities) development is used since these are the sectors that economic development incentives are generally intended to impact.

A great deal of data is analyzed to determine if there is any strong statistical relationship between the size of an area's industrial base and /or growth of that base on fiscal variables such as mill rate, local revenue per pupil, and per pupil spending. It is observed that having a large industrial base seems to have a modest but positive impact with lower mill rates and higher revenue per pupil. In terms of industrial growth, the positive benefits of additional local revenue are modest and more than offset by reductions in state aid resulting from the higher index of tax paying ability. One of the more interesting results of this statistical work is that school districts in small, less industrialized areas appear to benefit more from growth than those in larger, more industrialized areas. The end result of this analysis is that little evidence exists supporting the notion that industrial development per se has a major impact on school financial variables.

As noted above, the focus of this report is on economic development incentives directed toward reducing the property tax liability of firms. This involves reducing the tax rate on local property for firms who are willing to invest in the area. By doing so, the property tax liability is reduced, the cost of doing business is lowered and firms are attracted to the area. The concern for schools is that basically all funds that are required to be generated locally must come from property taxes. In addition, the majority of capital improvement expenditures are similarly funded from property tax revenues.

The key property tax-based economic development incentives, which are examined in Chapter IV of the report, are Fee In Lieu of Taxes (FILOT) and Special Source Revenue Bonds (SSRB) in Multi-County Industrial Parks. To promote economic development, counties have interpreted that Article X of the South Carolina Constitution allows them to negotiate with a company to pay a Fee instead of paying property taxes. So manufacturing firms, who would normally be assessed at 10.5%, can enter into an agreement with a county to reduce its assessment ratio down to 6% without the knowledge or consent of the affected school district. This could even be as low as 4% for a very large investment. Originally, the law concerning FILOTs allowed such reductions for only very large investments ($85 million or more). This amount has be lowered over the years so that now such tax breaks are available for investment levels of only $5 million (and as low as $1 million in six counties).

However, research for this study found one South Carolina County had given a company such a large SSRB credit that it effectively lowered the company's assessment ratio to less than 1%. Another County negotiated a FILOT agreement with a company that was investing $200 million and in the agreement, the county prohibited the school district from receiving any of the tax revenues from the project -- a loss to the school district of over $1.24 million a year.

As the numerical example in Chapter IV shows, even though a negotiated FILOT incentive lowers the overall level of taxes paid by the company, school districts will still receive the same share of the "fees" paid as they would have received without the incentive. So a school district whose mill rate is 67% of the total will receive 67% of the Fees collected form the company. FILOTs have become a very popular economic development tool in South Carolina.

Of more concern to school financing in South Carolina is the use of FILOT agreements within Multi-County Industrial Parks (MCIP) and SSRB incentives. Here, school districts are not guaranteed that they will always receive their prorated share of the property tax revenues since the County Council negotiates the agreement and doesn' t have to notify or have consent from the school district. Instead, it is possible to divert all or a portion of revenues that would have gone to the schools to support Special Source Revenue Bonds (SSRB) or other county expenditures. With SSRBs, funds from the bonds are then used to support the infrastructure investment associate with the development project (roads, sewerage, etc.). A much-publicized case in Horry County involves just this type of development proposal.

It is very difficult to estimate the impact of these incentives on the state's school districts. Preliminary projections in this study estimate that school district revenues would have been more than $121 million greater than they were had all manufacturing property been assessed at the normal 10.5% rather than the lower 6% allowed by FILOTs. At the present time, there are no statewide requirements for counties to report the creation and use of multi-county industrial parks or the use of special source revenue bonds. Data is thus unavailable to even begin such an effort. Further, there is no definitive answer to the development community's argument that without the incentive, the schools would have received no funds since the companies would have located in other states. It is clear, however, that the use of FILOTs within MCIPs and using SSRBs puts the schools in double jeopardy in that not only is the pie smaller, but they are likely to receive a smaller share of that pie – all without the school board's knowledge or consent.

The last topic covered in the report is a review of South Carolina's neighboring states' property tax related incentives (Chapter V). All of neighboring states examined (Georgia, North Carolina and Tennessee) have a similar portfolio of state level economic development incentives. This includes a variety of state business income or franchise tax credits tied to either investment levels and/or job creation. Also they implement a similar tiered or layered approach where the size of the tax credit is inversely related to the economic vitality of the locale. That is, the tax credit increases for firms that locate in poorer regions of the state.

In terms of local economic development incentives and property taxes in particular, differences do exist between this group of states. First, in North Carolina, abatements or reductions in real property taxes for development purposes do not exist. Other incentives can be offered, but tapping the local property tax base, which is a major source of school revenues, is not one of the choices. In Georgia and Tennessee, local development authorities become "owners" of property and as such are not subject to property taxes. Reduced fees are assessed which in essence lowers the actual tax rate on the property of concern. None of the state contacted, however, had an economic development program similar to South Carolina's multi-county business park with special source revenue bonds.

The above results should serve as an alert to those concerned with public education in South Carolina. The study recognizes the many benefits that the citizens of the state have enjoyed as the result of past economic development efforts. Investment in public education has also been one of the tools of economic development and should be recognized as such. Thus, funding public education and economic development packages should be complements, not competitors, in this effort. What is needed is a more careful evaluation of the growing number of incentive packages in a true public cost/benefit framework so that the opportunity costs of foregone revenues and the additional demands on public infrastructure (including schools) are given appropriate weight in the decision process. An important first step in this process would be a more formalized reporting process involving the use of FILOT and SSRB so that such decisions can be made in the light of better data.

The following descriptions are verbatim excerpts from the South Carolina Department of Revenue publication; South Carolina Tax Incentives for Economic Development 1999 Edition, pp. 69-133.

1. Fee In Lieu of Taxes

Under Article X of the South Carolina Constitution, manufacturing real or personal property is assessed at 10.5% of its fair market value. Commercial personal property is assessed at 10.5%, while commercial real property is assessed at 6%. To promote the growth of manufacturing within this State, the Legislature enacted three Fee in lieu of property tax statutes (referred to as "Fee in lieu" or "Fee".) The first Fee in lieu statute was enacted in South Carolina Code #4-29-67 and is commonly referred to as the "Big Fee." The second statute is contained in Chapter 12 of Title 4 and is commonly referred to as the "Little Fee." The third statute was enacted in the "Fee in Lieu of Tax Simplification Act of 1997" and is referred to as the "Simplified Fee." Special Fee in lieu provisions exist for very large investments. These provisions are known as the "Super Fee" with respect to the Little and Big Fee and as the "Enhanced Investment Fee" with respect to the Simplified Fee. Property subject to the Fee usually consists of land, improvements to land, and/or machinery and equipment (excluding some mobile property) located at a project. See South Carolina Revenue Rulings #93-7 and #97-21. The Fee statutes permit a company to negotiate to pay a Fee instead of paying property taxes. The 10.5% assessment ratio can be, and often is, negotiated to 6% (4% for very large investments under the Super Fee or Enhanced Investment Fee.) In addition, the company and the county can agree to freeze the millage rate applicable to the property at the current millage rate, or adjust the millage rate every five years, for the period the Fee is in effect. During the period of the Fee, the value of personal property is deemed to decrease each year by a statutory depreciation rate (subject to a 10% floor) while the value of real property remains constant, and therefore, is not subject to inflation. The period of the Fee is 20 years for each item of property (30 years for the Super and Enhanced Investment Fee) with an overall limit of 27 years (37 years or 40 years for the Super and Enhanced Investment Fee, respectively). The additional 7 years allows for a 7-year period to complete the project and have property at the project subject to the Fee and still obtain the maximum 20 or 30 years for each item of property.

Super And Enhanced Investment Fee

Both the Little and Big Fee contain a provision that allows certain entities to apply for a Super Fee. The Simplified Fee contains an equivalent provision, but calls it an

Enhanced Investment Fee. The Super or Enhanced Investment Fee may be equal to what the property tax would have been if the property was assessed at 4%. In addition to a possible assessment ratio of 4%, if a company qualifies for the Super Fee, the company has 8 years from the end of the property tax year in which the lease agreement is executed to make the investment required by the statute and may obtain 10 years to complete the project. If the company is under the Enhanced Investment Fee, the company has from 60 days before the county takes action identifying the project until 8 years from the last day of the property tax year in which the first piece of economic development property is placed in service to make the required level of investment and may obtain up to 10 years to complete the project. The first piece of property must be placed in service no later than 3 years from the end of the property tax year in which the company and the county enter into a Fee agreement. If the property is subject to the Super or Enhanced Investment Fee, qualifying property may be subject to the Fee for 30 years. For those projects placed in service in more than one year, the Fee is available for a maximum of 37 years for the Super Fee, and 40 years for the Enhanced Investment Fee. South Carolina Code ##4-12-30(C)(3) and (D)(4), 4-29-67(C)(3) and (D)(4), 12-44-30(9), (13), and (20), and 12-44-40(D).

The following types of companies may qualify for the Super or Enhanced Investment Fee:

1. A company which invests at least $200 million, which when added to the previous investments, results in a total investment of at least $400 million, and which is creating at least 200 new full-time jobs at the site qualifying for the Fee.
   
   
2. A company which invests at least $400 million and creates at least 200 new full-time jobs at the site qualifying for the Fee.
   
   
3. A limited liability company in conjunction with one or more of its members which makes a $400 million investment in a least developed or under developed county and which creates at least 100 new jobs with an annual average compensation of $40,000 at the site subject to the Fee. (See South Carolina Code #12-6-3360, the job tax credit statute.) The company has four years from the date of the millage rate agreement to hire the new employees.
   

Additionally, a company which invests at least $600 million in South Carolina can qualify for the Super Fee if it is using the provisions of the Big Fee for its Fee transaction. For purposes of the Little and Big Fee, the new full-time job requirements described in items 1-3 above do not apply to any company which for more than 25 years ending on the date of the agreement paid more than 50% of all property taxes actually collected in the county where it is seeking the Fee. For purposes of the Simplified Fee, if a company paid more than 50% of the property tax in the county for the 25-year period and invests $400 million at the site (item 2 above), then it does not have to meet any new job requirement.

2. Multi-County Industrial Parks

South Carolina Code #4-1-170 provides that a multi-county industrial park can be established by two or more counties pursuant to a written agreement between those counties as provided in Section 13 of Article VIII of the South Carolina Constitution. That agreement must include provisions which address the development of the park, the sharing between the participating counties of the expenses and revenues relating to the park, and the manner in which such revenues must be distributed to each of the taxing entities within each of the participating counties. The park area is exempt from property tax. The owners or lessees of any property situated in the park must pay an amount equivalent to the property taxes or other fee in lieu of payments that would have been due and payable.

3. Special Source Revenue Bonds

In connection with a Little or Big Fee, a county (or municipality or special purpose district) where the project will be located may issue special source revenue bonds. These special source revenue bonds allow the political subdivision to generate revenue for infrastructure projects usually at or surrounding the project that enhance its economic development, and then to pay back the bonds with money it receives from the Fee payments from the project. The rules regarding special source revenue bonds are contained in South Carolina Code #4-29-68. Special source revenue bonds cannot be used with the Simplified Fee.

To issue special source revenue bonds, the governing body of the issuer (or county) must adopt an ordinance calling for the issuance of the special source revenue bonds, hold a public hearing, and then pass a resolution authorizing the issuance of the bonds. The bonds must be issued solely for the purpose of providing infrastructure that benefits the issuer's economic development. Bonds may be issued for improved and unimproved real property on which the project will be located. The face of the bonds must provide that they are payable solely from the proceeds of the Fee, are not secured by the full faith and credit of the issuer, are not payable from any tax or license, and are not a pecuniary liability of the issuer or a charge against the issuer's general credit or taxing power. The bonds can be issued as a single issue or several issues. The bonds can be payable in installments. The bonds may be sold at public or private sale, and the expenses of the issuance of the bonds may be paid out of the bond proceeds. A county, municipality or special purpose district that receives and retains revenues from a Fee can also use a portion of the revenue received from the Fee for the purposes of providing infrastructure or providing unimproved or improved real estate for the project without the requirement of issuing special source revenue bonds. If the special source revenue bonds are issued to a third party, and the project should fail to generate the necessary Fee payments to pay off the bonds, the company that is subject to the Fee must make up any shortfall.