The HSB Economic Development Team has published its June 2022 News Update, which highlights the following topics:
Big changes in South Carolina property taxes and incentives
The big political news in South Carolina in June this year was the successful conclusion of negotiations by the House and Senate Chairmen within the Budget Conference Committee, with significant implications for economic development. In late May, the South Carolina Board of Economic Advisors increased its revenue guidance for fiscal 2021-22 (ended June 30) by nearly $1 billion and increased estimated revenue for fiscal 2022-23 by nearly $2 billion. dollars in recurring revenue and $4 billion in one-time revenue. The additional revenue helped close the gap between the House and Senate bills and included in the final conference report, issued June 10, 2022 and adopted by the House and Senate as the final budget on June 15, 2022 the following key means of strengthening South Carolina’s economic development competitiveness:
$350 million – port infrastructure
$200 million – closure fund
$134 million – rural infrastructure funding
$120 million – transportation infrastructure (to obtain equivalent federal funding)
$100 million – Economic Development Infrastructure
$39 million – Human Development Grants
Starting salaries for South Carolina teachers will increase from $36,000 to $40,000, an important step in helping South Carolina attract and retain the best teachers to educate the next generation of our workforce.
The budget includes two major changes to South Carolina’s tax structure. First, the top individual income tax rate will be reduced immediately from 7% to 6.5%, with an additional gradual reduction to 6% over the next five years and a one-time $1 billion rebate coming later this year. Second, the valuation ratio for production properties is effectively reduced to 6%, although the mechanism to implement the reduction is a valuation exemption similar to the exemption used to reduce the effective valuation ratio from 10.5% to 9% over the past six years.
The inevitable question for South Carolina businesses and counties is whether FILOT (Fee-in-Statue-of-Tax) agreements will still play a role in economic development incentive negotiations. As our thought process will evolve over the coming weeks and months as we work with our allies and partners on active projects, below are some key initial observations that will be important in determining how companies and countries adapt to this one New customize property tax scheme:
1. The most significant and valuable aspect of a FILOT agreement is generally the reduction of the rating rate to 6% (or even 4% for mega projects). In most projects, this aspect no longer brings any savings. However, a FILOT agreement contractually binds the allocation rate for the term of the agreement, which is often 30 or even 40 years. The political landscape in South Carolina today certainly does not point to tax increases in the future. However, as legislative action and economic challenges weigh on local government budgets, particularly given the restrictions limiting each county’s ability to increase fair market value under Act 388, we could easily foresee a time when local governments will look to a Increasing ratings are pushing the future. A FILOT agreement would protect companies from future increases.
2. A FILOT agreement often freezes the current millage rate for the entire contract term, although some counties use the statutory option for a five-year adjustable millage rate instead. Where FILOT agreements freeze millage rates, that freeze can bring significant benefits over time. South Carolina law generally limits the ability to increase millage rates to the sum of population growth and inflation. The inflation component has been almost non-existent for many years, but if inflation continues anywhere near current levels, counties suddenly have the ability to impose significant increases in millage rates to make up for years when they were unable to do so . In this case, FILOT agreements could be extremely valuable and would become even more valuable over time as millage rates continue to rise.
3. FILOT agreements typically fix the value of real estate investments at gross cost, rather than providing for periodic valuations every five years (although the law permits valuation at true market value if the company and county agree to use this option). . In many cases securing property value at gross cost for 30-40 years is a significant benefit, although companies should always compare the gross cost of their property investments to estimated market values to ensure their FILOT agreement does in fact offer benefits in this regard.
4. Most, though certainly not all, FILOT agreements also provide for Special Source Revenue Credits (SSRCs). If a county still offers SSRCs, the SSRC agreement must be reflected in a formal agreement approved by the county governing body. While counties can, and often do, have stand-alone SSRC agreements, often referred to as infrastructure lending agreements, including an SSRC in a FILOT agreement is common and will continue to be an easy way to implement SSRCs.
5. Most non-manufacturing businesses continue to be valued at 6% for real estate but 10.5% for personal property. Therefore, a large distribution project that weighs heavily on machinery and equipment will still benefit significantly from a FILOT agreement. As South Carolina’s distribution sector continues to thrive due to our attractive geographic location, extensive road and rail infrastructure, and well-developed traditional ports and river ports, FILOT agreements will continue to be an important tool in this area.
With these observations in mind, every company should carefully consider planned payments with and without a FILOT agreement for each project. The availability of five-year rebates – just outside the context of a FILOT agreement – will continue to inform this analysis for manufacturing companies, who will receive significant, front-loaded benefits from the production rebates. The counties will continue to grapple with this South Carolina law oddity, as the counties will not receive any revenue from most manufacturing projects for the first five years of operation due to the production cutback operation unless the counties enter into FILOT agreements these from projects or change the allocation formulas according to multi-county park agreements.
After all, our firm handles the GASB 77 compliance work for many counties in South Carolina and we have seen first hand how this well intentioned but ultimately very misleading accounting statement has created significant confusion resulting in under-informed Observers complained about the massive “giveness”. away” due to FILOT and SSRC agreements. As economic development professionals in the state all acknowledge, our manufacturing property tax structure has been extremely unrivaled for many years. Many countries do not even see a basic FILOT component as an incentive, but rather as a necessity to get to the same starting line as other states and even other countries. Reducing the manufacturing rating ratio will be a welcome change to increase our proximity to the starting line, which also means the supposed “giveaways” that misguided DSR-77 analysis is bound to report will take a huge nosedive in the years to come.
The Legislature approves welcome changes that add flexibility to the Job Development Credit Program
The South Carolina legislature has approved welcome changes that will offer significantly greater flexibility to companies seeking and claiming work development credit. The changes allow companies to nominate up to two related parties whose jobs and investments are included in determining overall investment and job creation levels. In addition, jobs created by related parties are themselves eligible for job development credits. Previously, legal restrictions presented significant challenges for companies operating through structures involving more than one entity. The new legislation will remove procedural hurdles and allow both companies and the Business Development Coordination Council to focus on the overall impact of a project, regardless of how ownership is structured (at least for up to three companies in total).
Updated policy on counting remote and furloughed employees for JDCs and grants
In April 2020, the South Carolina Coordinating Council for Economic Development (CCED) issued a policy that allowed employees who were working remotely or on furlough to continue to qualify for basic employment or minimum job requirements for existing grants and job development credits ( JDCs) to be credited ). Businesses were still allowed to claim JDCs even if the employee lived in another state.
Last week, CCED released an updated policy for furloughed and removed employees effective July 1, 2022:
1. Furloughed employees are no longer eligible for base employment or minimum job requirements for grants and JDCs.
2. Remote workers:
a. For grants and JDC applications approved before June 2, 2022:
I. Any non-resident employees hired before June 2, 2022 who worked physically on the project prior to the onset of the pandemic but are now working remotely in another state may continue to count toward base employment or the minimum employment requirement for grants or JDCs; provided, however, that a company cannot claim JDCs for non-resident employees working full-time or part-time in another state.
ii. Resident employees who work remotely in South Carolina may still count towards basic employment or minimum job requirements for grants or JDCs, and a company may continue to claim JDCs for such employees.
b. For grants or JDC applications approved on or after June 2, 2022, remote workers may not count toward base employment or minimum work requirements for grants or JDCs.
We at CCED understand that under 2(a)(ii), if a company claims JDCs under an application approved prior to June 2, 2022 for resident employees working in South Carolina, the level of the county in which the company is located located, working remote location, as opposed to where the employee is working remotely, should be used to determine the value of the loan.
CCED has said it will continue to assess the remote workers issue and its impact on incentives for economic development.
Click here to view the full update.