S.C. Begins Fiscal Year with No New Budget

Skylar Laird/S.C. Daily Gazette

COLUMBIA — A fight over property tax relief and earmarks has stalled legislators’ work on the $15.5 billion state spending plan, sending South Carolina into a new financial cycle with no new budget for the first time in years.

The fiscal year starts Wednesday with no new budget in place. After several hours of discussions Tuesday, mostly out of public view, legislators decided to return July 14 to continue hashing out differences between the House and Senate spending plans.

Because legislators passed what’s called a continuing resolution, state government keeps operating at the same spending levels as the fiscal year that ended Tuesday. Nothing changes: Agencies’ doors stay open and state employees will continue to get their paychecks.

“It’s not like in Washington, D.C., where if you don’t have a budget, you’re looking at government shutting down and all sorts of consequences in that regard,” said Sen. Tom Davis, R-Beaufort, who’s among three senators on the negotiating panel.

Proposed pay increases for state workers, teachers and legislators, however, will have to wait.

House Ways and Means Chairman Bruce Bannister said he’s optimistic there will be a compromise to approve when the six-legislator panel meets again in two weeks.

“We’ll have it worked out by the 14th,” the Greenville Republican said.

But when the entire Legislature would return to vote on the finalized deal remains unknown.

Approval by both chambers would send the final plan to Gov. Henry McMaster’s desk, who could take up to five days (six, if those days include a Sunday) to issue his line-item budget vetoes. The budget becomes law with his veto message.

As long as he doesn’t veto pay raises, employees will retroactively get their raises dating to July 1 in their next paycheck.

Property tax relief vs. earmarks

The biggest sticking point in negotiations is whether to allocate hundreds of millions of dollars toward bigger property tax breaks for older homeowners or local projects sponsored by legislators. That money, known as earmarks, flows through state agencies, to dispense as instructed in legislators’ districts.

Senators are adamant about putting $248 million into expanding what’s known as the Homestead Exemption. Under state law dating to 1972, homeowners who are 65 and older, or blind or permanently disabled don’t have to pay property taxes on the first $50,000 of their home’s value.

The Senate’s proposal would expand the tax exemption to $75,000 for those homeowners if they’ve lived in the state between five and nine years. If they’ve lived in South Carolina for at least a decade, $150,000 of their home’s value would be exempted from property taxes.

The Senate passed the expanded break in separate legislation earlier this year, but the bill never got a hearing in the House. So, senators put it in their budget plan.

And they’re unwilling to budge on that issue, Davis said.

“The Senate is absolutely committed to providing additional tax relief,” he said.

Property taxes go to counties, not the state, to fund local government services. But taxpayers generally don’t understand that — and don’t care: They just want the taxes cut. Senators say they get complaints about property taxes more than any other tax. Their plan uses state taxes to reimburse counties for the property tax revenue they’d be losing.

To cover that cost, senators want the House to reduce the $315 million worth of earmarks for projects and nonprofits that the chamber added to its plan in early May.

Those are in addition to the $130 million worth of earmarks senators put in their spending plan. All of senators’ earmarks go to local governments.

“If it’s a choice between earmarks and funding projects, or funding property tax relief, for me, that’s an easy call to make,” Davis said.

The dispute over earmarks comes a year after legislators took a hiatus on the local funding. Senate Finance Chairman Harvey Peeler stunned legislators last year by announcing there would be zero earmarks in the budget, saying the spending needed to be reined in. They’re back this year, but senators opted against funding local nonprofits.

Senators don’t want to completely zero out the House’s spending on earmarks, Davis said. But because of how the budgeting process works, legislators are faced with all-or-nothing decisions about which projects should get money.

Finding a middle ground might be easier if legislators could partially fund the projects and if senators had more information about what the money went. Instead, each project is described using only a few words, leaving senators guessing at what the money will go toward, he said.

That’s much more than legislators used to get, when earmarks were hidden among other agency funding. But it’s still not enough to vet where taxpayer money is going, Davis said.

“Trying to assess them is really a fool’s errand,” he said.

What’s already set?

Allocations that are the same in both chambers’ plans are locked in. No negotiations are needed on those.

That includes a lowering of state income tax rates, which is expected to reduce revenue by about $309 million in the coming year. About 43% of tax filers will get a reduction, 35% will see no change, and 23% will pay more next year, as per the law signed earlier this year, which continues to reduce rates yearly as the economy grows.

Both chambers’ plans also increase teachers’ state-provided pay by $2,000. For first-year K-12 teachers, their minimum pay statewide rises to $50,500. Districts often supplement state minimums with local property taxes as they compete for teachers.

Both chambers also proposed a 2% cost-of-living raise for state employees.

Legislators won’t receive their monthly allowances until a new budget is in place, either.

Both chambers approved raising that allowance to $2,500, up from $1,000, starting Dec. 1.

Contributing to the delay

Scheduling issues are partly to blame for the delayed budget, Senate Majority Leader Shane Massey told reporters last week.

Budget negotiations usually continue after the regular session ends.

But this year, minutes after the session ended by state law at 5 p.m. May 14, the governor issued an order calling legislators back for a special session starting the next day.

For more than a week, legislators worked on a bill redrawing the state’s congressional districts that ultimately failed in the Senate on May 26, the first day of early voting for the primaries.

That took up time that would otherwise have gone toward typical post-session budget work, Massey said.

And then the June primaries and runoffs sidelined discussions. Senators aren’t up for re-election this year, but several senators were seeking other offices. And all House seats are on ballots this year.

Though the runoffs ended June 23, many legislators are now on pre-scheduled summer vacations.

So, it could take several weeks past the negotiating panel’s approval of a compromise to get enough legislators in each chamber back to Columbia to wrap up budget work, Massey said.

“We weren’t anticipating this scenario,” the Edgefield Republican said.

How does this compare?

The last time the state operated under a continuing resolution was in 2024, though it lasted for just two days before McMaster issued his budget vetoes. A similar situation happened in 2018, with the stopgap funding lasting four days.

Legislators didn’t pass a budget in 2020, when the COVID-19 pandemic ended the session early. A continuing resolution kept spending at 2019-20 levels for the entire fiscal year, other than legislation passed to allocate money for the state’s COVID response.

Before that, the last time a continuing resolution went into effect was 2012, when the vetoes by then-Gov. Nikki Haley included striking all spending for the Arts Commission and Sea Grant Consortium.

Because the budget took effect with her vetoes into the fiscal year, both agencies had to close for two weeks until legislators returned to overturn those vetoes.