Property tax reform proposals on legislative agenda
Published: November 6, 2013
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Education plays a vital role in the future of Pennsylvania’s economy. But exponentially growing education costs and lower state contributions have caused negative effects on current and prospective homeowners and businesses.
According to a report by Pennsylvania’s Independent Fiscal Office, school real estate taxes have more than doubled since 1996-97. Payments by homeowners to local school districts jumped 101.69 percent, from $5.692 billion in fiscal year 1996-97 to $11.480 billion in 2011-12.
In September, state lawmakers in the House passed House Bill 1189. The bill currently rests with the Senate Finance Committee for review. HB1189 would give school districts the option to expand or increase their sales or local income tax or business taxes in order to replace the property tax locally.
The Pennsylvania Coalition of Taxpayer Associations (PCTA), a grassroots taxpayer advocacy group, advocacy group, believes that’s not good enough and supports complete elimination of school property taxes across the state.
PCTA supports passage of reciprocal bills House Bill 76 and Senate Bill 76.
The bills would eliminate school property taxes, in part by raising the personal income tax 1.27 percent, from 3.07 to 4.34 percent; increasing the state sales tax from 6 to 7 percent; and reallocating property tax rebate funding to education funding.
All consumers will pay additional sales tax. For example, a wage-earner or sole proprietor earning $50,000 per year would see a $635 increase in their personal income tax. The proposal exempts sales tax from most business-to-business transactions.
“Property taxes are in run-away mode,” says David Baldinger, PCTA spokesperson. “People can’t afford them anymore. The average increase over the past 15 years is somewhere around 4 ½ percent. Inflation is about 1 ½ percent. It doesn’t take much to see that the increase in (private sector) salaries is not going to keep up with the increase in property taxes and eventually it will crash and burn.”
The proposal would distribute dollar-for-dollar replacements to schools the first year and provide for an annual increase based on inflation.
“This will limit school districts’ increases to the rate of inflation as opposed to the current system of property taxes where the annual increases could be two, three or four times the rate of inflation,” says Baldinger.
Baldinger believes passage of the elimination proposals would create a huge financial stimulus for the economy by increasing disposable income and fueling job growth in many industries, including housing and construction.
“The median sales price for a home in Pennsylvania is about $200,000,” he says. “It’s not unusual for a home in Monroe County on the market to have an annual property tax of more than $10,000 a year. That’s 5 percent of the value of the home every year. In 20 years, you will have paid the value of the home in property taxes and still have 10 more years to run on the cost of the house. It’s decimating the housing market in Monroe County.”
School property taxes have affected counties across the state, including Carbon County’s Borough of Lansford. The municipality’s real estate millage for borough, county and school district totals 98.85 mills, 16.81 mills over the next-highest millage. Taxes on a half of a double home valued at $50,000 and assessed at $25,773, compute to $212 per month.
“Who is going to buy a house with those taxes?” asks “Barbara,” a local real estate agent who prefers to remain anonymous. “It greatly impacts us in a negative way, especially with the school districts that are assessing on purchase price big time. If houses aren’t selling, people aren’t renovating, they aren’t buying carpeting, furniture, windows. It has such a trickle-down effect. To eliminate (school taxes) would greatly free up the market.”
The Pennsylvania Association of Realtors supports passage of the reciprocal bills and has launched RealReform76.com to highlight the benefits and separate myths and facts about the proposals.
Not everyone agrees.
“A tax shift of the magnitude that House and Senate Bill 76 seeks to impose could, for many businesses, result in the largest tax increase they have seen in many years or ever,” says Alex Halper, director of government affairs for the Pennsylvania Chamber of Business & Industry, Harrisburg. “The personal income tax is often the tax rate that small businesses use for their income tax liability, so increases in the personal income tax can be very burdensome to businesses, especially small businesses. Before you even consider a tax shift, significant spending issues have to be considered and hopefully addressed.”
Spending issues such as unfunded mandates, prevailing wage requirements and pension contributions top the list as significant cost drivers for many school districts.
“When a school district decides to build a new building or even smaller school repairs or rehabilitation projects, their labor costs are artificially jacked-up because of prevailing wage requirements,” says Halper. “Those are meaningful. Until you look at and mitigate some of the serious cost drivers and also school district habits — that’s more of a case-by-case basis — you really need to take a look at those before you talk about a massive kind of change in how school districts are funded and who bears those costs.”
The stability of property taxes compared to the economic fluctuations with income and sales taxes make them a more predictable and stable source of education funding.
Harrisburg’s Pennsylvania Budget and Policy Center (PBPC) also opposes the property tax elimination bills citing an October report issued by the Independent Fiscal Office showing a $2.6 billion shortfall in five years.
“What we have seen so far is that state lawmakers are very sensitive to concerns about property taxes, but thus far I think they also recognize that there are serious flaws with the property tax elimination proposals that make it unrealistic and unworkable,” says Sharon Ward, PBPC’s director. “The report that came out from the Independent Fiscal Office confirms that the numbers in House and Senate Bill 76 just don’t add up, that it would not raise enough money to replace school property taxes. In fact because of the way it is set up, it would distribute far less than school districts would otherwise get. For school districts that have had to address a billion dollars’ worth of cuts to have $2.6 billion less would just drive Pennsylvania school districts permanently into decline.”
A reduction in the state’s share of education funding has compounded the problem. State contribution dollars grew 69.48 percent from $5.262 billion in 1996-97 to $8.918 billion in 2011-12 but declined 3.6 percent in the overall scheme for funding Pennsylvania school districts during that time.
“We would certainly agree with the property tax folks that the problem is that the state is not paying up enough of the share of local school costs,” says Ward. “We are right now 47th out of 50 states and the District of Columbia in the share of state dollars that goes to public schools and we are eighth in terms of share of local dollars that goes to schools.”
But the proposals to eliminate school property taxes further compound the problem, according to Ward.
“House Bill 76 is a tax shift and there are winners and losers in it,” says Ward. “For businesses, it’s kind of a crazy mixed bag because it would get rid of local business property taxes but then there are a number of businesses that would pay higher taxes in other forms. It generally violates all tax policy rules or principles.”
Ward believes addressing other issues such as redirecting school funding distributions to areas with high property taxes and expanding the senior rent rebate program may be part of the solution.
Another industry observer does not expect either HB76 or SB76 to move forward this year.
“It’s very complicated when you are doing the shift from property tax to income and sales tax,” says Nate Benefield, director of policy and analysis for the Commonwealth Foundation, Harrisburg. “It’s got a lot of opposition from the business groups that think that kind of shift would actually hurt businesses by shifting to income and sales tax.”
According to Benefield, some studies show property taxes are an important factor in a state’s economic competitiveness.
“States with lower property taxes do well,” he says. “But a lot of the literature points to the income tax being somewhat more important in terms of property taxes, in terms of the impact on what is driving economic growth, what’s more linked to job growth in states.”
Benefield summarizes his version of the problem. “From our perspective, the biggest problem isn’t necessarily the property tax versus other forms of taxes, which tax is the least harmful, but it’s more the overall taxes versus the level of spending,” he says. “Whether you have the property or income or sales taxes, we simply have a spending problem. So for us the real solutions are talking about let’s fix the pension crisis. That’s a big driver of public-school spending. You have got to address things like prevailing wage drives up the cost of school construction. There is so much public support and animosity against the property tax but the property tax needs to start pushing on the spending side and pushing for pension reforms. We need to allow school districts in the state to lower the tax burden.”
About HB 76 – SB 76:
* The proposal repeals the ability of school districts to levy a property tax after Dec. 31, 2013, except that districts may retain a property tax sufficient to service debt that was in existence on Dec. 31, 2012.
* School districts receive distributions from a new Education Stabilization Fund (ESF) in lieu of their ability to levy a property tax. For the first year, the distributions are based on fiscal year (FY) 2013-2014 property tax collections, less FY 2013-2014 debt service, adjusted by a cost-of-living factor. Thereafter, distributions are based on the prior year, adjusted annually by a cost-of-living factor.
* Four revenue sources would fund the new ESF: 1. An expansion of the state sales and use tax base to include additional goods and services; 2. An increase in the state sales and use tax from 6 to 7 percent; 3. An increase in the state personal income tax from 3.07 to 4.34 percent; and, 4. A redirection of monies currently deposited in the Property Tax Relief Fund.
Independent Fiscal Office’s Analysis of Proposal to Replace School Property Taxes: House Bill 76 and Senate Bill 76 of 2013, dated Oct. 1, projects the fiscal impact, which is the difference between revenues collected under current law and revenues collected under the proposal. The analysis finds there is no discernible fiscal impact in the first year (FY 2014-15), but the proposal has a negative net fiscal impact over the subsequent four years contained in the forecast. A simulation of the proposal using 11 years of historical data from FY 2002-03 to FY 2012-13 confirms this general pattern.
Source: Independent Fiscal Office