As the special legislative session on local tax reform gets underway in Pennsylvania this week, almost everybody agrees local tax reform is needed. But is there an easy, painless solution? No.
Local taxes have been the subject of a statewide referendum, countless hearings and legislative proposals for over 30 years. All that’s resulted is growing frustration, and very little change. Local tax reform has eluded Pennsylvania policymakers for many reasons. There are hosts of complicating factors, as well as the specter of "the law of unintended consequences."
If Pennsylvania lowers property taxes, will lawmakers replace lost revenues? How? Increase the state personal income tax? Raise local wage taxes? Hike the sales tax? Expand the sales tax base? Enact a statewide property tax? Every change alters who gets taxed and how much.
Every proposal must be evaluated by how it deals with:
- Changing burdens for individual taxpayers. A lower property tax burden offset by an equal increase in state income taxes shifts the burden from property owners to income earners. While most Pennsylvanians pay both, many with low taxable income and relatively high property taxes, such as retired citizens, would get a break. But because retirement income is exempt from Pennsylvania’s personal income tax, nearly all retired homeowners, regardless of income, will pay less taxes. Also, consider renters who pay property taxes through their rent. Even though their landlord’s property tax bill will decline, there’s no guarantee their rent will drop accordingly - and their income taxes will be higher. How does the legislature balance these and other winner/loser issues?
- Public education funding. Simply lowering property taxes won’t solve the problems of education funding in Pennsylvania, but it can play a role in the solution. How much of a role should changing the school funding system play in property tax reform?
- The mix of taxes. Eliminating property taxes likely means raising rates on other revenue sources. If the state personal income tax replaces all school property taxes, the combined state and local tax rate on salaries for typical working Pennsylvanians would be approximately 6.4%, more than one-and-a-half times today’s combined rate - and would be nearly 10% in Philadelphia and over 8% in Pittsburgh. Is this an improvement?
- Business owners and homeowners. Property taxes of business owners would decline in an across-the-board reduction. Pennsylvania’s constitution doesn’t permit only a reduction in residential property taxes. Should businesses be required to pay an equal amount through another tax to make up for the "windfall"? Because businesses are taxed in many different ways, what’s the best replacement? How does this affect Pennsylvania’s economic competitiveness?
- The competitive tax position of Pennsylvania and its neighbors. Many Pennsylvanians live near and work in a bordering state, and vice versa. Others actually move to Pennsylvania to take advantage of lower property or income taxes. How would tax changes affect Pennsylvania’s position as a place to live and work?
- Schools, municipalities and counties. The public outcry often is over school property taxes, but it’s important to remember property taxes also are a major source of revenue for cities, boroughs, townships and counties. Issues of property assessment equity and revenue affect all of them. Should the focus on property taxes include all property taxes, even those for municipalities and counties?
- Pennsylvania’s changing demographics. As our population ages, relatively fewer men and women will be in the workforce. What does this demographic shift mean for Pennsylvania’s tax system? Who will pay for the services required by an increasingly older population? How can Pennsylvania’s lawmakers account for these changes and still develop a fair and equitable system?
Finally, consider the value of compromise. That’s what’s needed most if this special legislative session is to succeed. And with the best compromises, no one is entirely satisfied. Is local tax reform needed? Yes. Is there an easy, painless solution? No.