At the conclusion of this year’s legislative session, the South Carolina General Assembly passed The Comprehensive Tax Cut Act of 2022 (the “Act”). Among a number of other significant tax changes, the Act effectively increases the property tax exemption amount from 14.2857% to 42.8571% for manufacturing property. This change indirectly lowers the property tax assessment ratio for manufacturers from 10.5% to 6%. This marks a significant departure from the decades-long practice of assessing manufacturing property at 10.5%
What is the impact?
This change is tremendous news to manufacturers with real property assets which predate fee in lieu of tax agreements (“FILOTs”); manufacturers who acquired assets after their FILOT investment period had run; manufacturers whose FILOT is expiring; and small and medium-size manufacturers who never received a FILOT in the first place.
Pursuant to the Act, South Carolina counties will now be reimbursed (up to a statewide cap of $170 million) for the tax revenue losses resulting from the property tax assessment ratio reduction. If local governments hit the reimbursement cap, the Act provides that the property tax assessment ratio reduction will be proportionally reduced so as not to exceed the cap. The Act provides that the reduced assessment ratio goes into effect for “property tax years after 2021.” Given that we are currently in property tax year 2023, the reduction goes into effect this year.
Why Should Your Company Continue to Consider a Fee Agreement?
Now that property tax assessment ratios for manufacturing companies are set at 6% without the need to obtain a FILOT, when should companies still consider seeking a FILOT?
Contractually Locked Assessment Ratio & Fixed Millage Rate
FILOTs typically lock in the assessment ratio and the millage rate that will apply to covered property for 30–40 years. Just as the General Assembly acted to reduce the assessment ratio this year, it could also repeal or amend the assessment ratio again in future years. As a result, it can be beneficial to have the contractual agreement in the FILOT to guarantee the assessment and millage rates for the duration of the project. While some counties lock in a millage rate for the entire duration of the Fee Agreement and others are subject to adjustments every five years, there remain savings for companies as millage rates tend to increase over time. Given current inflation, population growth, and the possibility of reduced income due to the assessment ratio reduction, South Carolina counties may more aggressively seek to increase their millage rates. FILOTs also lock in real estate values for the duration of the FILOT. Locking in the real estate value can save projects a considerable amount of money over the term of the FILOT.
Pairing of Special Source Revenues
Additionally, counties often offer Special Source Revenue Credits (SSRCs) along with FILOTs. SSRCs are separate credits that can be applied to reduce companies’ annual FILOT payments. While it is possible for SSRCs to be offered through standalone SSRC Agreements, they are more commonly offered alongside FILOT Agreements. The process for obtaining approval of a standalone SSRC Agreement is the same as that for obtaining approval of a FILOT, so given the benefits of a FILOT as outlined above, projects that are eligible for SSRCs will likely want to continue to pair those SSRCs with a FILOT as well.
Larger manufacturing projects will still want to utilize a FILOT, particularly if they qualify for a Super FILOT. In order to qualify for a Super FILOT, a company must be planning on an enhanced investment in the State through either a $400 million capital investment or a $125 million capital investment with a commitment to create 125 new full-time jobs. Super FILOT Agreements further reduce the assessment ratio to 4%, which allows for the company to achieve greater savings during the term of the Super FILOT.
Exemption from Rollback Taxes
Additionally, for larger sites, it is also particularly beneficial to have a FILOT Agreement to remain exempt from rollback taxes. Rollback taxes occur when a property changes from agricultural use to commercial or residential use. Fee Agreements can operate to eliminate rollback taxes which can result in significant savings for companies that are changing the use of the property from agricultural to commercial.
Ultimately, while the Act provided many benefits for companies outside FILOT Agreements, there can be additional benefits from entering into a FILOT Agreement. If you have any questions or want to discuss your company’s eligibility for a FILOT Agreement in South Carolina, please reach out to the author of this article or your Womble Bond Dickinson attorney.