Pa. plan to eliminate property tax comes up short
HARRISBURG — An analysis from the state’s Independent Fiscal Office seems to throw more cold water on a plan to eliminate property taxes in Pennsylvania.
But proponents of the plan say the analysis just gives their arguments more weight.
The proposal, contained in HB 76, would prevent school districts from levying property taxes after 2013, unless the tax is necessary to pay for ongoing debt service already on the books. The lost property tax revenue would be made up through a combination of a higher state personal income tax and a higher state sales tax, which would apply to many items now exempted from sales taxes.
There’s one problem: The math doesn’t add up, according to the IFO.
“It is true that under the proposal they will not receive as much as they would have under current system,” said Matthew Knittel, executive director of the IFO.
According to the IFO projections, the gap would be a mere $3 million in the first year, but it would grow to as much as $1 billion by 2018-19.
But rather than short-changing schools, some advocates of the property tax elimination plan see it as a way to control the spiraling cost of education, which has climbed faster than inflation over the past two decades.
Because sales and property taxes and linked to economic production, they rise and fall in line with taxpayers’ ability to pay. Property taxes are increased by a rate set by a school district, meaning they can increase – and have increased – during economic booms and downturns.
“That’s why property taxes are such a burden to the taxpayers,” said David Baldinger, spokesman for the Pennsylvania Taxpayers Cyber Coalition, one of the groups calling for the passage of HB 76.
Baldinger said the gap in future revenue is a result of education costs increasing faster than taxpayers can afford.
The HB 76 plan would increase the state sales tax from 6 percent to 7 percent and would eliminate most of the exemptions in the sales tax code – things such as candy, gum, newspapers, dry cleaning and tickets to sporting events would now be subject to sales tax, though food and essential clothing would remain exempt.
It would increase the state income tax from 3.07 percent to 4.34 percent.
The sales tax changes would generate an additional $5.5 billion for schools, while the sales tax changes would generate an estimated $4.5 billion in additional money, according to advocates for the measure.
Other, smaller, changes in state policy — such as redirecting some taxes paid by casinos — would make up about $500 million or so, they claim.
But that comes up short of the annual $12.7 billion in property taxes collected by the state’s 500 school districts.
“You look at the numbers in the report, and you’re going to have to raise a lot of money in other places,” said state Rep. Kerry Benninghoff, R-Centre, chairman of the House Finance Committee, which handles tax issues.
Benninghoff agrees philosophically with connecting education spending to consumer-based taxes like those on sales and income. But there has never been a proposal — in more than 10 years of trying — that made the numbers work.
“This is really a local, parochial issue,” he said. “And it seems like a statewide solution is just too convoluted and always topples under its own weight.”
Some opponents of the property tax elimination plan point to the volatility of sales and income taxes. While property taxes may be more onerous, they are more stable.
“Income and sales tax revenue can drop significantly during a bad economy, meaning immediate cuts to schools,” concluded the Pennsylvania Budget and Policy Center in its own analysis of HB 76.
The liberal-leaning Harrisburg think tank said revenue from sales and income taxes have dipped seven times over the past 23 years, while property tax collections have only fallen once.
But proponents of reform, like Baldinger, see that as something of a positive because it would force districts to keep spending under control. Rather than short-changing education, Baldinger sees property tax elimination plan as a way to better align education spending with taxpayers’ ability to pay.
“The bills were designed to slow the growth of education funding,” he said. “Those numbers (from the IFO) are telling us exactly what we want to know — that, yes, we are succeeding in slowing down the growth of education funding.”
A competing proposal to overhaul school district property taxes passed the state House last week and awaits Senate action. That bill, HB 1189, would give each individual district the option to replace their property taxes with a mix of income and local sales tax, but it would not shut the door on all property taxes statewide.
Meanwhile, HB 76 continues to wait for its day in the sun.
Boehm is a reporter for PA Independent and can be reached at Eric@PAIndependent.com. Follow @PAIndependent on Twitter for more.
The Pennsylvania Independent is a public interest journalism project dedicated to promoting open, transparent, and accountable state government by reporting on the activities of agencies, bureaucracies, and politicians in the Commonwealth of Pennsylvania. It is funded by the Franklin Center for Government and Public Integrity, a libertarian nonprofit organization.