The big political news in South Carolina this June was the successful conclusion of negotiations by House and Senate leaders within the Budget Conference Committee, with significant implications for economic development. In late May, the South Carolina Board of Economic Advisors increased its revenue forecast for the 2021-22 fiscal year (ending June 30) by nearly $1 billion and further increased estimated revenue for the 2022-23 fiscal year by nearly $2 billion in recurring revenue and $4 billion in non-recurring revenue. The additional revenue helped close the gap between House and Senate bills, and the final conference report, issued June 10, 2022, and adopted by the House and Senate as the final budget on June 15, 2022, included the following major appropriations to bolster South Carolina’s competitiveness in the economic development arena:
$350 million – Port Infrastructure
$200 million – Closing Fund
$134 million – Rural Infrastructure Funding
$120 million – Transportation Infrastructure (to obtain matching federal funds)
$100 million – Economic Development Infrastructure
$39 million – Workforce Development Scholarships
Starting salaries for teachers in South Carolina will be raised from $36,000 to $40,000, an important step in helping South Carolina attract and retain the best teachers to train the next generation of our workforce.
The budget provides for two significant changes to South Carolina’s tax structure. First, the top individual income tax rate will be reduced from 7% to 6.5% immediately, with an additional, phased-in reduction to 6% over the next five years and a $1 billion one-time rebate to be issued later this year. Second, the assessment ratio for manufacturing properties will be effectively reduced to 6%, although the mechanism for implementing the reduction is a valuation exemption similar to the exemption utilized to reduce the effective assessment ratio from 10.5% to 9% over the last six years.
The inevitable question for companies and counties in South Carolina is whether fee in lieu of tax (FILOT) agreements will still have a role to play in economic development incentive negotiations. While our thought process will continue to evolve in the coming weeks and months as we work with our allies and partners on active projects, following are a few key, initial observations that will be important to address in determining how companies and counties adapt to this new property tax regime:
1. The most significant and most valuable aspect of a FILOT agreement is generally the reduction of the assessment ratio to 6% (or even 4% for mega-projects). For most projects, this aspect will no longer produce savings. However, a FILOT agreement contractually locks in the assessment ratio for the term of the agreement, which is often 30 or even 40 years. The political landscape in South Carolina today certainly does not indicate tax hikes in the future. However, if legislative actions and economic challenges stretch local government budgets, particularly given the constraints that limit each county’s ability to increase fair market values due to Act 388, we could easily foresee a time in which local governments push for an increase in assessment ratios in the future. A FILOT agreement would protect companies from any future increases.
2. A FILOT agreement often freezes the current millage rate for the full term of the agreement, although some counties are utilizing the statutory option for a five-year adjustable millage rate instead. Where FILOT agreements freeze millage rates, that freeze can provide significant benefits over time. South Carolina law generally restricts 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 will suddenly have an opportunity to impose significant increases in millage rates to make up for years of not having the ability to do so. In that event, FILOT agreements could be extremely valuable and would become even more valuable over time if millage rates continue to rise.
3. FILOT agreements usually lock in the value of real estate investments at gross cost as opposed to providing for periodic appraisals every five years (although the statute does allow for valuation at true fair market value if the company and county agree to use that option). In many cases, locking in the value of real estate at gross cost for 30-40 years is a significant benefit, although companies should always review the gross cost of their real estate investments versus the estimated fair market values to ensure that their FILOT agreement is actually providing benefits in this regard.
4. Most, although certainly not all FILOT agreements, also provide for special source revenue credits (SSRCs). If a county is still offering SSRCs, the SSRC arrangement must be reflected in a formal agreement that is approved by the county governing body. While counties can and often do enter into standalone SSRC agreements, often called Infrastructure Credit Agreements, including an SSRC within a FILOT agreement is very common and will continue to be an easy way to implement SSRCs.
5. Most non-manufacturing companies will continue to be assessed at 6% on real estate but 10.5% on personal property. As a result, a large distribution project that is heavy on machinery and equipment will still benefit considerably from a FILOT agreement. As the distribution sector continues to flourish in South Carolina due to our attractive geographic location, extensive road and rail infrastructure, and well-developed traditional and inland ports, FILOT agreements will continue to be an important tool in this space.
Considering these observations, each company should carefully consider projected payments with and without a FILOT agreement for any project. The availability of five-year abatements—only outside of the context of a FILOT agreement—will continue to impact this analysis for manufacturing companies, which will receive significant, front-loaded benefits from manufacturing abatements. Counties will also continue to struggle with this oddity of South Carolina law, as counties will receive no revenues whatsoever from most manufacturing projects within the first five years of operations due to the operation of the manufacturing abatement, unless the counties enter into FILOT agreements on those projects or alter the allocation formulas pursuant to multi-county park agreements.
Finally, our firm handles 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 pronouncement has generated considerable confusion leading under-informed observers to lament the massive “give-aways” occasioned by FILOT and SSRC agreements. As economic development professionals in the state all recognize, our manufacturing property tax structure has been highly uncompetitive for many years. Many counties do not even view 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. The reduction in the manufacturing assessment ratio will be a welcome change in terms of increasing our proximity to the starting line, which will also mean that the purported “give-aways” that the misguided GASB 77 analysis is required to report will take a tremendous nosedive in the years ahead.
With this change being so new, we welcome your input, comments, and questions. We look forward to continuing to serve our clients and allies and working with local governments across the state in this new property tax landscape. Please do not hesitate to contact a member of our Economic Development team, as we are eager and ready to be of help at any time.