A  Limited-Scope Review of the Residential Property Tax Relief Program
May 1999

REPORT (PDF)     SUMMARY (PDF)

Members of the General Assembly asked us to review the accuracy of property tax reimbursement requests submitted each year to the state by county governments, acting for their local school districts. Section 12-37-251 of the South Carolina Code of Laws requires the state to compensate school districts for revenue lost due to state-mandated reduction in school operating property taxes. Our findings are summarized as follows.

• The state does not audit school operating property tax reimbursement requests submitted by county governments for local school districts. As a result, there is reduced assurance that school district reimbursements paid by the state are based on accurate data.
• The practice of inflating tax rates to compensate for historically uncollectible taxes has caused the state to overcompensate counties for revenues lost due to residential property tax relief. Precise amounts for each county can be known only through field audits. However, based on total reimbursements from tax year 1995 through estimated tax year 1998, the state may have overcompensated counties as much as $35.6 million. Factors employed by counties in setting tax levies for the school operating budgets are not consistent.
• According to officials of the Department of Revenue (DOR) and the Office of the Comptroller General (CG), there is not an adequate database for ensuring that the state pays only one school operating property tax reimbursement per homeowner. As a result, an individual with more than one home could obtain multiple exemptions with a low risk of detection.
• DOR has not proposed state regulations for the property tax relief program; instead, the department has issued official advisory opinions which may not be binding on local governments. By using opinions in lieu of regulations, the Department of Revenue has excluded the public and the General Assembly from participation. This may increase the likelihood that local governments would treat property tax issues in a manner inconsistent with the intent of the law, resulting in the state paying larger reimbursements than required.
• The statutes require the state to pay counties 90% of their property tax reimbursement by December 1 of the tax year. In the 1997 tax year, the last complete year of distribution, the state reimbursed property tax relief funds to the counties in accordance with time limits stipulated in the law.
• We found indications that some school districts may not be receiving property tax relief reimbursements in the year they are collected, as required by government accounting standards. Based on our sample, approximately $594,000 may not have been distributed in FY 96-97 by counties to school entities and for FY 97-98 approximately $1.7 million may not have been distributed. The failure to credit all property tax relief revenues affects the amount of funds the county is required by EIA to raise per pupil through property taxes.
• Constraints of the South Carolina Department of Education (SDE) accounting system make it difficult to ensure that property tax relief funds are spent on operations and not on bonded indebtedness or lease-purchase agreements for capital construction, as required by §12-37-251(A)(1) of the South Carolina Code of Laws. For FY 96-97, over $33 million was transferred statewide out of the districts’ general fund accounts to the debt service and school building funds. Since it would not be possible to trace these transfers through to expenditures, it would likewise not be feasible to identify instances where a district expended funds illegally.
• The state’s process for reimbursing local governments for revenue lost through the residential property tax exemption is unnecessarily complicated, weakens accountability, and increases the potential for abuse.
• The two state agencies charged by law with administering the property tax reimbursement process, DOR and the CG’s office, have assigned responsibilities that overlap or conflict with each other. Also, participation of a number of officials on both the state and local levels of government expands the need for oversight and, without proper controls, decreases accountability in the system.