PA: The Property Tax Problem

AP's Marc Levy reports this week that Pennsylvania's legislature (one of the largest and most expensive ones in the country) is expected this year to once again tackle one of the great third rails of Pennsylvania politics-- property taxes.

This system is part of the mechanism that gives Pennsylvania one of the country's largest funding gaps between rich and poor districts. The state provides around 36.1% of public school funding, putting it around 45th in the nation. That means that local districts depend heavily upon local funding, and that's where the huge inequality slinks in. On the bottom end of the scale we find districts collecting $3,100 in local property tax dollars per student, while on the top end, the figure is around $13,000. Attempts were made in 2016 to fix things, a bit, but Democratic Governor Tom Wolf and the hugely GOP legislature have, well, some issues to sort out.

Levy writes that sponsors are expected to once again introduce House and Senate Bills 76, a bill that died a narrow death in the State Senate back in 2015 (a not-along-party-lines tie was broken by Democratic Lt. Governor Mike Stack), but the GOP thinks the math has changed and this year will be different (that's just the Senate, though-- this could all still tank in the House).

The goal, as usual, is to get rid of property taxes entirely. In this case, the plan is to replace them with increased sales tax and income tax revenue. Income tax would climb from 3.07% up to 4.95 %, while sales tax would jump from the already-hefty 6% to 7%-- and extended to more types of items and services that are not currently taxed at all.

The Property Tax Independence Act has plenty of fans and detractors, because it creates a whole new batch of winners and losers. If the act is going to be revenue neutral (more about this in a second), and property owners are going to pay less, then somebody has to pay more.

Renters, for instance, lose immediately, because their income and sales tax expenses go up immediately. Yes, theoretically, the landlord could reduce the rent costs by subtracting the amount that previously went to pay property taxes, but nothing says he has to.

The proverbial Little Old Lady On a Fixed Income, a person who is invoked with great dismay and concern every time any school district wants to raise taxes, would be a winner. She's retired and has no real taxable income, so the income tax hike means nothing to her. She'll just pay a little bit more at the store.

Rich folks with expensive homes win big. The pro-bill forces actually make this part of their pitch; in their example, a person who used to pay $3,500 a year in property taxes would need "to spend $50,000 annually on newly-taxed products and services" to end up spending that same $3,500, but it's better/worse than that because many of the products and services they buy would be previously-taxed, so cost only increase by 1%. In other words, the bigger and fancier your retirement home, the more unlikely it is that you will ever pay the same amount of tax under the new system.

The act shifts the tax burden for financing schools, shifts it from people who own things to people who work for a living, from the rich to the poor, from the old to the young, from homeowners to everyone else, from corporate property owners to private citizens.

Does it at least improve funding equity in Pennsylvania? Wellll.........

Remember when I said it was supposed to be revenue neutral? If that's the case, then we have a problem. Because the only way the state can distribute the exact same pot of money that was previously collected by the state and local property taxes (about $5.8 billion state dollars plus about $13.7 billion local property tax dollars) is to either

* keep funding for each district exactly as before, split up the $20 billion exactly as we would have, leaving the rich districts rich and the poor districts poor or

* giving more money to the poor districts by reducing the funding to rich districts.

Neither solution is much of a solution. We could get greater equity between districts by NOT being revenue neutral, but gathering a ton more money (estimates run in the billions of dollars)  needed to bring all districts up to the funding level of the best-funded districts, but that would require taxing enough to raise those additional billions of dollars.

Do any of these sound like they'll be terribly popular? They're a hit with some people in some districts, which is why the bill repeatedly draws both bi-partisan support and bi-partisan opposition. Oh, well-- if my local district doesn't like the funding sent out by the state can't they just make up the difference somehow, like raising property-- oh, yeah. The local school board will lose all control over its incoming revenue stream.

That's because all school money would now flow from Harrisburg, which means the distribution of funds will become hugely political, and it will be critical for districts to have Good Friends in the Capital.

Meanwhile, the sales pitch continues to focus on how everybody will pay less, or at least so little more that they'll never know the difference. Which is a pretty thought, but even in post-fact America, you can't have everyone pay less and still end up with the same sized pile of money as before.

As is often the case these days, the problem is real. But the solution will be hard, which means we'll spend a lot of hot air and hard times in Harrisburg before we get anywhere at all. Stay tuned.