PA’s Bad Penny

It’s baack! Indeed, it never went away.

The "it" here is Pennsylvania’s perpetual debate over property tax reform, a debate in modern times that traces to the early 1970s. Further back, we have been arguing about the property tax since the 19th century. It’s a bad penny that seems to keep turning up.

One current version of tax reform sponsored by Rep. Seth Grove (R-York) recently passed the state House. It provides school districts the option of replacing some or all of their property taxes with three other taxes, including the earned income tax, and two business taxes.

That bill was sent to the Senate for concurrence and then the fun began. Once in the Senate we learn that Senate Majority Leader Dominic Pileggi prefers a different version of tax reform. Pileggi’s proposal would freeze property taxes for seniors; paying for the freeze with offsetting revenues from allowing Keno in state casinos.

Game on.

For 40 years now the Pennsylvania legislature has struggled to reach consensus on a way to provide property tax relief while funding schools. In 1989 it did actually agree on a plan, one that would have replaced partially the property tax with hikes from sales and income taxes. Voters promptly rejected that proposal in a statewide referendum, three to one. The memory of that debacle offers a vivid lesson in why statewide tax reform has been difficult to achieve.

Later in 2006, school districts were authorized to hold local referenda asking voters to substitute earned income or personal income taxes for reduced property taxes. In subsequent referenda across the state, however, voters have routinely turned down this option.

Now in 2013 the issue emerges yet again: steady rate increases over many years have put enormous pressure on ordinary property owners, many on fixed incomes, who pay the tax – as well as on Pennsylvania’s 500 school districts who depend upon it.

Property owners and school districts are not the only critics of the tax. Economists, policy makers and most scholars also condemn it – labeling it regressive, hard to administer fairly, economically unstable and politically unpopular.

Pennsylvania’s property tax paradox poses a genuine mystery: if voters hate the property tax, politicians’ rail against it and policy makers criticize it, why is this tax we love to hate still in place, in fact raising more and more revenue year after year?

The short answer is that our legislators haven’t figured out how to abolish or substantially reduce the tax while still funding the schools.

The long answer is more complicated. Fundamentally no one yet has resolved how simultaneously to solve three vexing problems – problems that left unsolved, preclude meaningful tax reform.

● Sustaining Local Government Viability — The property tax is the largest source of revenue available to school districts and local governments. Consequently, if it is reduced or abolished, lost property tax revenues must be replaced. If wholly replaced by state taxes, school districts and local governments would become mere administrative units of state government, shorn of meaningful power or decision making. A government without its own sources of revenue ceases to be a government at all.

● Money, Money and More Money — If property taxes were abolished, it would take an estimated 11. 5 billion dollars annually to replace the lost revenues. Raising that amount of money would likely mean huge increases in income and state sales taxes. One estimate projects the state income tax might be raised from 3.07 % to 4.34 %, the state sales tax would be raised from 6 % to 7%. Hence the property tax conundrum: how to raise the billions necessary in new revenues to replace lost property tax revenues — but do it in a way acceptable to voters, without harming the economy or reducing local governments and school districts to sheer sycophantic status.

● Sorting out the Winners and the Losers — Just as there "ain’t no" free lunch, there also isn’t any way to reform the property tax without producing both winners and losers. Under any proposal to reduce or abolish the property tax, some would pay less and others would pay more. Everyone of course wants to be among those who pay less, while no one want to be among those who pay more. The inevitable consequence is a deepening political schism among voters amid arguments about tax fairness and unfairness.

Daunting as these dilemmas are, there are reasons to think real reform might be possible. Increasingly, ordinary Pennsylvanians are having a harder time keeping up with their property tax bills, putting growing pressure on them and on their elected representatives in Harrisburg who hear from them early and often.

At the same time, more and more policymakers and educators realize the traditional property tax base has reached its limit to finance schools. Somehow, public schools of the 21st century must be financed mostly by broad based state taxes or fees.

Driving both of these trends is the rapidly spreading sense among Pennsylvanians that it’s no longer just a "good" idea to reform the property tax. Instead, it has become urgent that we do so. Colossal catastrophes potentially threaten both local government and public education if we fail.

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