The Side of Tax Reform They’re Not Telling You
June 20, 2016
Deep-sixing property taxes is a popular pledge on the state and local campaign trail. But the promise is only half the story. Citizens need to ask: “And then what?”
Like a climbing wall, eliminating property taxes may take you half way up, but you are still far from the top. In fact, you are suspended in mid-air.
Pennsylvania cannot wipe out the tax without replacing it with something else. Our schools are funded almost entirely from property tax revenues, to the tune of $14 billion annually.
As a citizen, tax attorney, and member of South Middleton School District’s board, I understand the need to find a tax system that is stable, reliable, consistent, and fair. It’s a tough recipe to find, and one which centuries of American leaders have sought without success.
The good and bad of property taxes
Property taxes are a centuries-old idea. In fact, among the New World’s first colonial officers were tax assessors. Finding an alternative still eludes us because it is so stable – governments can predict with about 98 percent accuracy what they will collect each year.
Moreover, it is not dependent on economic vitality like the sales and personal income taxes, which could dry up in the face of economic nosedives. There is a fairness aspect as well — if you feel you are over-assessed, you can appeal your assessment every year.
The downside is, of course, that property taxes are applied to all property owners, save charities and governmental entities. Not being based on ability to pay means if you lose your job or your income plummets in retirement, there’s no relief. Senior citizens being taxed out of their homes does happen.
Why simply eliminating property taxes won’t work
Though basic education funding has only risen modestly over the past few years, local school boards are staring down a pension bomb and grappling with health care costs.
For example, South Middleton did not apply for an exception to raise taxes above the 2.4 percent index. Yet, even if we raise taxes to the maximum allowable, it does not cover skyrocketing increases in health care and pension costs. We are still underwater, and we will only sink further without change.
But if we erase property taxes, no one can seem to make the back-end math work. Raising the sales tax from 6 percent to 7 percent only yields about $1.76 billion. Increasing the 3.07 personal income tax by a point is only worth about $4 billion to $4.5 billion.
Doing both is still leaves us far short of the $14 billion collected annually through property taxes.
Raising the corporate income tax isn’t a great solution either. Our 9.99 percent rate is the second-highest in the nation and raises $2 billion, according to the governor’s latest budget projection. Increasing it is both politically unpalatable and hurtful to the economy in the long run.
Of added worry is this: if each school district got rid of its property tax, then the state would be collecting the money, and deciding how to spit it back out to school districts.
We would need a fair funding formula to split it evenly among 500 school districts. That is a major sticking point right now between the Legislature and the Governor, as they debate what formula should guide the division of billions of education dollars.
Practical property tax reforms
The better question we should ask is not how to get rid of property taxes, but how to adjust its application.
Perhaps we should give more relief to seniors, in a way that will pass constitutional muster. Anything that shifts local control is suspect, because most of us don’t want the state divvying up the money.
Reformers calling for an end to property taxes have good intentions, but keep in mind that the end result must be a fairly-funded school system that meets the needs of our children.
Randy L. Varner chairs McNees Wallace & Nurick LLC’s State and Local Tax Practice Group and is a member of the South Middleton School District board. He has more than 18 years of experience in commercial litigation and state and local taxation.