It’s Time for a Declaration of Independence from Pennsylvania Property Taxes
The Current System Is Choking the Keystone State
It’s a constant source for amazement just how heavily taxed Pennsylvanians are.
I went through trying to outline how much every Keystone Stater is hit, and even my eyes glazed over at the sheer volume of taxation. And despite a combined tax burden of up to 45%, most working class, middle class and business owners don’t get much if anything in the way in return.
This is not a typical right-wingers kneejerk dislike of taxes – the heavy tax burden levied on Pennsylvanians hurts everyone.
The American Legislative Exchange Council annually releases their “Rich States, Poor States” report that ranks states based on 15 factors of economic competitiveness. In the latest issue from January 2019, Pennsylvania was ranked 38th worst in overall performance, including 35th in terms of economic competitiveness.
Pennsylvania, in fact, only improved its rankings marginally over the last five years because of the growth of shale oil and gas production, but that one driver is pretty much kaput now with oil priced at its lowest level since, I don’t know, there were whaling ships getting oil for lamps. (Seriously though it’s bad and it’s going to decimate the production side for years.)
It’s the Property Taxes, Stupid
Antony Davies, professor of economics at Duquesne University, described these rankings as a symptom of increasing property taxes, which, along with increased income taxes, affects where young college graduates chose to move and live. Davies said, “They can go anywhere they want, so of course the states that are going to attract them on average are states with lower property taxes.”
The shared experience of Pennsylvanians has been oppressive tax rates, mindless and meddlesome regulation, bloated social welfare states, and a steady stampede of outward migration.
Pennsylvania’s corporate income tax is the second highest in the Northeast – at 16.98%. In fact, Northeastern states make up half of the 10 states with the highest corporate income taxes, and all of them fall within the top 23.
But the property tax is the real monkey wrench in the state’s economic gears.
Over the past 40 years, Pennsylvania has had negligible growth in population — just 8% over four decades. Without an influx of foreign immigrants, Pennsylvania would have lost residents over the decade ending in 2016, while at the same time people and businesses are flocking to the Sunbelt and the Southwest.
State Sen. David Argall (R-Berks, Shuylkill) is trying once again to push through a tax reform policy that makes a lot of sense. The tax reform bills in the state legislature, SB 76 and HB76, would eliminate the property tax in favor of reforms to the state income and state sales tax.
“There just has to be another way to fund our public schools. The current system is unfair and very outdated–with its roots in the 1600s, and it hurts homeowners throughout the state,” Argall said. “This time around my colleagues and I will be meeting with every member of the Senate–including all of our new freshmen as well as our most senior veterans to ask if they could vote for the bill.”
Variations of this tax reform approach have been tried in past legislative sessions, often falling at the last minute to parliamentary tricks or single vote losses. (Good grief, the list of those who oppose property tax reform is a freak show of special interests and socialism advocates.)
Anyway, the goal, Argall says, is to eliminate all school property taxes across the Commonwealth and replace those taxes with a combination of funding from changes to the existing sales and income taxes.
The bill would increase the Sales and Use Tax by one percentage point and broaden the base of the state sales tax to include more services and products. Necessities and business-to-business transactions will continue to be exempt from the sales tax. It would also increase in the state’s personal income tax from 3.07% to 4.95%.
“Eliminating the oppressive school property tax has a result that almost everyone recognizes: To finally allow true homeownership for Pennsylvanians,” Argall says.
Any property tax reform measure will involve shifting the tax levy from one type of tax to another – there’s no free ride. But there are ways to fund schools and to ensure a better education for children that are fairer and more effective than property taxes.
“Senior citizens on fixed incomes are increasingly forced to sell their homes because of unrelenting increases in their tax burden. Young families cannot afford to purchase a home because the per-month property tax escrow is simply too high. Multigenerational family farms are being sold piece by piece to pay property taxes, devastating Pennsylvania agriculture,” he says. “School districts in areas of the state with limited population and no commercial tax base are in distress and are unable to afford to give their children a quality education.”
It makes sense. I was appalled at how homes are seized and the level of property taxation here.
This plan is revenue neutral, meaning that the legislation is crafted to ensure that the tax swap provision of the plan does not raise one dollar more than is already collected by the school property tax mechanism. It just does it more fairly and in a way that spreads burden more fairly.
Now granted, the state’s tax burden needs to be cut overall – and there’s plenty of fat on the spending side that could be trimmed as well. But that’s for another day.
The following are some details on the plan from the Pennsylvania Taxpayers Cyber Coalition, who go deeper into the woods than I can on this.
On the Sales Tax
· The Property Tax Independence Act utilizes a modernized school funding plan based on 21st century economic realities.
· The Property Tax Independence Act will abolish the school property tax on all homesteads, farmsteads, and businesses.
· School property tax elimination will be accomplished via a two year phase-out of school property taxes. In the first year after enactment, school property taxes will be frozen at their current level; in the second year they will be completely eliminated except for a small portion that will be retained in each school district to retire the individual district’s outstanding long-term debt, typically 10% of the original school tax bill.
· The Property Tax Independence Act utilizes our current sales tax mechanism to fund schools, restoring the original intent of the tax. The “The PA Education Sales Tax” was enacted in 1953 for this specific purpose and virtually 100% of the revenue from the sales tax is still dedicated to education funding.
· The sales tax provides a predictable and stable funding source that automatically increases revenue in sync with economic growth. This is in clear contrast to the school property tax which is not based on economic growth and is subject to much variation, forcing annual increases in the tax to increase revenue.
· The sales tax is also the most desirable revenue source because, unlike the property tax that has no relationship to family income, it is directly tied to a person’s ability to pay.
· The Property Tax Independence Act moderately broadens the base of the state sales tax to include more services and purchases at a new 7% rate. Items to be added to the taxable base include candy and gum, newspapers and magazines, dry cleaning and laundry services, haircuts, and spectator sports admissions. Food items not included on the WIC list and individual clothing and footwear items with a value greater than $50 will also be subject to the expanded sales tax. Generally, food items exempt from the sales tax will be fresh meats, produce, and dairy, along with many packaged and canned foods that are in their natural form, without added sugar or other adulterants. The complete list of newly taxed items and services is here as a PDF document.
· While there are those who might object on an instinctive level to a sales tax on the last two items mentioned, consider this: If you spend eight thousand dollars annually on individual items of clothing over $50 and non-WIC food purchases combined, the total sales tax would be $560. If this is less than your school property tax bill you still will realize a substantial reduction in your overall tax burden.
· Items that will continue to be exempt from the sales tax include food stamp purchases, all utilities, home heating fuels, health, hospital, and dental services, prescription drugs, home health care, tuition, day care, charitable organizations, and business-to-business transactions.
· While the sales tax is The Property Tax Independence Act’s primary revenue source, small increases in other taxes are blended into the total to spread the cost of education over the broadest possible base. As part of the funding mechanism, the Property Tax Independence Act finance package also includes a modest increase in the state income tax from the current 3.07% to 4.95%.
Funding the Schools
· The Property Tax Independence Act works to fully fund all Pennsylvania schools.
· All schools will initially be fully funded at their current levels.
· Schools will receive their property tax replacement funding directly from the state. The Property Tax Independence Act will fully fund all districts by replacing the property tax dollar-for-dollar at each district’s current level. All students in Pennsylvania, regardless of their location or their area’s economic condition, will have the opportunity for a quality education.
· Equity in schools is guaranteed because the state assumes the responsibility of school funding. Each school will receive the resources it needs regardless of the local ability to pay. This solves the funding problems faced by rural, urban and fast-growing districts.
· The Property Tax Independence Act calls for a dedicated lockbox account for all property tax replacement revenues that is separate from the General Fund. All replacement funding for the schools will be disbursed from this account through the existing Department of Education funding mechanism, requiring no growth of the current infrastructure.
· In addition, The Property Tax Independence Act completely eliminates the taxing ability of local school boards. The only exception would be a possible local EIT or personal income tax for major projects such as new school construction, and that will be subject to a no-exception taxpayer referendum.
· It is important to note that The Property Tax Independence Act imposes no mandates of any kind on Pennsylvania school districts. The plan provides replacement funding only and the funding provided by the plan may be used in any manner the school district deems necessary. The Property Tax Independence Act does not interfere in any manner with local school district decisions
· Current school spending regularly exceeds tax revenue and The Property Tax Independence Act addresses it head on.
· At enactment of The Property Tax Independence Act, all districts will receive 100% funding sufficient to meet all financial obligations with a dollar-for-dollar replacement of the eliminated property tax. In the future, every district will receive identical percentage annual base funding increases that will be limited to the increase in the Pennsylvania Average Weekly Wage (AWW) or available revenue, whichever is less, effectively tying annual school budget increases to increases in economic activity.
· If a district desires additional revenue, they can present a no-exception ballot referendum to the voters of their district to raise additional revenue by either an earned income tax or a personal income tax. However, property taxes will not be able to be re-instituted to raise revenue.
· School property taxes need to be prohibited from ever being imposed on Pennsylvanians again.
· Companion legislation to the Property Tax Independence Act will provide for a constitutional amendment which guarantees that, once eliminated, school property taxes would be gone forever and that a future legislature could never re-institute the taxing of our properties.
That’s the bulk of it.
When the legislature is able to resume session, this needs a strong push from the people of Pennsylvania. Pennsylvania has no future with tax policies mired in the past.