The South Carolina General Assembly authorizes municipalities and counties to levy local accommodations and hospitality taxes to create a funding source for tourism-related buildings, facilities and infrastructure. These A-taxes and H-taxes, as they are commonly called, are intended to enhance the local economy by attracting visitors and improving their experiences. Local governments are authorized to allocate funds generated by the taxes for projects that will benefit tourism, such as facility upgrades, infrastructure improvements and events that draw visitors.
Private entity funding
As long as the purpose of the funding is approved by state law, municipalities can allocate A-tax and H-tax funds to private entities. Any contribution to a private entity must conform with the South Carolina Constitution, which requires the use of public funds for public purposes. In the 1986 SC Supreme Court case Nichols v. South Carolina Research Authority, the Court established a four-part test for funding:
- What is the intended ultimate goal or benefit to the public?
- Are public parties or private parties the primary beneficiaries?
- Is the benefit to the public speculative?
- What is the probability that the public interest will be ultimately served, and to what degree?
To make sure that the public is the primary beneficiary, and that the project serves a legitimate public interest, municipalities should consider these Nichols factors before making any contribution to a private entity.
In 2023, the Office of the Attorney General issued an opinion that municipalities can contribute funds to both nonprofit and for-profit entities. In reviewing the Local Accommodations Tax Act, the Attorney General’s office found no statutory limitation on the type of entity eligible to receive funding.
The opinion studied a case in which private entities received funding for the development of workforce housing. Presuming that the expenditure was for a tourism-related purpose approved by the Act, the Attorney General’s office concluded that as long as the use of the funds satisfied the public purpose requirement, as well as the Nichols factors, it would be within the discretion of the local government to allocate funds to either a for-profit or nonprofit entity.
Religious entity funding
There are more factors involved when a municipality is considering making funding contributions to religious institutions.
The Religion Clauses of the First Amendment of the U.S. Constitution provide that “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” This sentence has two parts — the Establishment Clause and the Free Exercise Clause. — and public funding for religious institutions must comply with both.
The Establishment Clause requires any funding for a religious institution to have a secular purpose. The funding should not advance religion.
At the same time, the Free Exercise Clause prevents governments from prohibiting institutions from receiving otherwise available grants “solely on account of [the institutions’] religious identity,” as determined in the 2017 U.S. Supreme Court case Trinity Lutheran Church of Columbia, Inc. v. Comer. Funding, in other words, should not inhibit religion, just as it should not advance it.
Generally, direct financial aid to religious institutions is impermissible under the Establishment Clause. However, the U.S. Supreme Court has allowed some indirect aid to religious institutions as part of a neutral program benefiting a broad range of recipients, regardless of religious affiliation.
As stated by the Supreme Court in the 2020 case Espinoza v. Montana Department of Revenue, “We have repeatedly held that the Establishment Clause is not offended when religious observers and organizations benefit from neutral government programs.”
In South Carolina, the Blaine Amendment, found in the SC Constitution, Article XI, Sec. 4, states that public funds may not be used “for the direct benefit of any religious or other private educational institution.” This amendment is generally considered more restrictive than the First Amendment’s Establishment Clause.
Because of this, municipalities may generally offer public funds to religious institutions only through a neutral grant program. They may not directly fund religious worship, instruction or proselytization. If the proposed recipient is a religious or private school, the municipality should apply stricter standards and generally avoid grants that might fund or offset ordinary expenses or school programs.
In all cases, the municipality should require the religious grant recipient to agree that the grant proceeds will be used solely for non-sectarian, secular purposes benefiting the community, and not for the direct benefit of any religious institution or private educational institution.