COLUMBIA — Owen Steel had already gone before the Richland County Council once seeking a reduction in its property tax rate as it prepared to invest $3 million in its Bluff Road facility when the company’s lawyer called.
State lawmakers had just passed legislation that would automatically take Owen Steel down to the tax rate it was seeking. Not just Owen Steel but all manufacturers in the state saw a 4.5 percent reduction in tax rates overnight. The new law essentially took them from being assessed at a rate of 10.5 percent to 6 percent — the same rate paid on commercial property, apartments and second homes in South Carolina.
Some quick number crunching told company leaders that they were better off without signing the county’s deal, Owen Steel President David Zalesne said.
“It really was fortuitous timing from our standpoint,” he said.
The legislation signed into law by Gov. Henry McMaster this year has some manufacturers, and the lawyers who represent them, rethinking their approach to economic development deals in South Carolina.
“We were all very surprised that that particular provision passed,” said Burnie Maybank, a tax lawyer with Nexsen Pruet who specializes in drawing up the tax incentive deals counties use to lure in new industry.
Before, these deals were routinely inked by county economic development directors trying to make up for a state industrial property tax rate that was among the highest in the country and made it difficult to compete with neighboring states for new investment.
Executives are now weighing whether the gains they get from signing a deal — like freezing millage, the other rate that goes into calculating a property’s taxes, for several decades — outweigh the benefits they give up — like a five-year property tax abatement from counties, Maybank said.
For Owen Steel, the $3 million investment in new equipment was relatively small when stacked beside the $50 million, $100 million or $200 million deals often signed by new companies choosing to relocate to South Carolina. For Zalesne, the tax abatement, which is not available to companies signing fee-in-lieu incentive agreements, was worth more than other potential savings.
That county abatement typically makes up 20 to 30 percent of a property owner’s tax bill, according to Maybank.
“There’s more certainty with a fee-in-lieu agreement, but we thought the benefits of going with the new tax structure outweighed the risk,” Zalesne said.
Maybank said the novelty of the tax law changes means the lawyers negotiating incentive deals likely haven’t yet seen the full impact of the adjustments. But he said he’s been advising his clients seeking smaller deals, those in the investment range of $15 million or less, they’re likely better off without them.
“The companies don’t want to fool with them,” Maybank said.
It’s also a benefit to the counties because the state has agreed to reimburse them for the lost tax revenue as a result of the rate reduction, although that reimbursement has a statewide cap of $170 million.
But the Palmetto State should still expect to see companies with larger investments shelling out money for legal fees as they seek to ink tax deals despite the rate reduction, Maybank said.
That’s because as the population in many South Carolina cities grows and inflation is on the rise nationally, cities, counties and school boards will have the option to raise millage rates.
State tax law caps increases in millage rates — which are equivalent to $1 of tax per $1,000 of a property’s assessed value — but rising inflation and population is lifting those limits for probably the first time in a decade, Maybank said.
Last year, governments were flush with federal coronavirus relief money. But those dollars are starting to run out.
“For years you didn’t see it; now, you’re going to see it,” Maybank said. “Increase in millage has people a little nervous. So for large deals, capping millage is worth it.”
There is the additional risk state lawmakers could turn around and repeal the rate reduction, leaving those companies that bypassed a tax agreement with no redress.
Zalesne said the benefits also depend on the nature of the deal.
Counties may agree to offer tax incentives because the deals often come with the promise of new jobs. But if a company is making an investment in factory automation to replace the labor it either can’t find or afford amid South Carolina’s low rate of unemployment, a tax deal becomes less lucrative due to the hiring targets involved.
“The workforce is already spread thin among existing companies,” Zalesne said. “You either have to train more people or invest in equipment to get the work done.”
Companies and counties may make a number of other adjustments to how they approach economic development, Maybank said.
Some counties have created mechanisms called multicounty business parks. These “parks” are often in name only, with no set location within a county, but they allow governments to put other tax buydowns in place
“You’ll definitely still see those,” Maybank said. “And you may start seeing those used to lock in millage.”
On the other hand, counties are likely to get pickier about what they do and don’t allow.
“It would have to be for something the county or city really wants to see happen,” Maybank said.