Another Proposal to End School Property Taxes

Member Group : Allegheny Institute

(November 29, 2011)–Every so often the idea comes up–shifting the
school tax burden from property to something else such as the sales
tax or the personal or earned income tax. And as quickly as the idea
comes up, it goes away quietly without any real action. This year
the House Majority Policy Committee resurrected the notion once again
through House Bill 1776 that, according to a recent newspaper
account, will be introduced sometime in the near future[1] – .

The Committee’s Property Tax Reform Development Team has identified
school property taxes as a significant problem for homeowners across
the state and has floated a proposal that would shift that burden
onto the state’s personal income tax and sales tax. The latest plan
calls for a 0.92 percentage point rise in the income tax and a one
percentage point increase in the sales and use tax. An extra twist to
the sales tax change is the elimination of previously exempt items
such as food at home, clothing, prescription drugs and orthopedics,
and on advertising and PR services. The Team estimates that
residential properties will raise more than $9.1 billion in school
district property tax revenues. Since the Team proposes to replace
only the residential tax, the $9.1 billion figure is the amount we
will use to gauge the amount of other taxes that would have to be
raised in order to replace school property taxes for homeowners.

To start the analysis, we’ll look at the State’s personal income tax
(PIT) and the increase in revenue a one percentage point rise in the
tax rate would generate. In the 2010-2011 fiscal year the state
collected $10.44 billion in PIT with a rate of 3.07 percent. Dividing
the total amount collected by the rate gives the total amount of
taxable personal income in the state–$339.93 billion. The proposed
increase 0.92 percentage point increase (a 30 percent increase in the
tax rate) would produce an additional $3.13 billion in revenues
assuming the tax hike has no impact on taxable income earned. That
incremental revenue gain would account for only a third of the $9.1
billion needed to eliminate school property taxes on residential

The proposal to shift to the state’s sales and use tax (SUT) takes
two forms: raising the rate; and removing the current exemptions.

In the 2010-2011 fiscal year consumers in Pennsylvania paid a six
percent sales tax that garnered nearly $8.6 billion in revenue, which
means there were $143.17 billion in taxable sales. Each percentage
point of taxation will bring in, assuming no impact on spending,
around $1.4 billion.

But what happens if the exemption on food at home and clothing are
eliminated? As noted above the amount of taxable sales in the state
topped $143.17 billion. Dividing that number by the state’s
population of 12.7 million puts the per capita taxable sales at
$11,273. According to the U.S. Bureau of Labor Statistics’ Consumer
Expenditure Survey, the average consuming unit (household) contains
2.5 people. Multiplying the Pennsylvania per capita amount by 2.5
puts a household spending on taxable sales items at approximately
$28,200. The Survey also reports that the average household spends
$3,600 on food at home and $1,700 on apparel and services, neither of
which are currently subject to the sales tax in Pennsylvania. If
these items are removed from exemption, it would push the average
household taxable expenditures to just over $33,500. That would make
taxable sales $170.18 billion. And at a tax rate of 7 percent, the
tax would produce $11.91 billion in revenue or $3.3 billion more than
the current sales tax structure is bringing in.

By removing the prescription drugs and orthopedic devices sales tax
exemption revenue could be increased by $350 million for a total
increase from consumers of $3.65 billion. Adding the revenues
possible from taxing medical services and advertising could boost
sales tax revenue by as much as another $1.5 billion. All told the
proposal to broaden the tax base and raise the tax rate to 7 percent
could generate about $5.2 billion in revenues above the amount
produced by the current structure. And this assumes no impact on
spending levels.

In total, the sales tax change and the increase in income tax has the
potential of generating about $8.3 billion in additional revenue
using current income and spending. The replacement of the current
$9.1 billion in school property tax is not complete but it is close.
With growth in the economy, revenue would presumably grow apace with
sales and income.

Of course the above represents only the mathematics of raising
revenues to shift from local property tax revenues for school
districts. But what are the practical and political ramifications of
such a proposal?

As noted in the Team’s presentation any shift in the source of a
school district’s revenue does nothing to control spending.
Districts could easily revert to raising property taxes unless that
option is taken off the table or severely restricted by legislation,
as it appears to be in the proposed Bill. Moreover, because the
districts would still be eligible to tax nonresidential properties
they could choose to increases taxes on those properties. Not a
desirable thing to do from the standpoint of maintaining a business
friendly environment.

Second, how would the revenue, which would be collected by the State,
be allocated back to the districts? Current allocations of the
State’s Basic Education Subsidy and property tax relief money derived
from gaming favor poorer, low income districts. Wealthier districts
would stand to lose much more if they lost the ability to tax
residential property. Or will the state give every district the same
total per pupil allotment or simply replace the amount of property
tax lost in the tax shifting plan?

Finally, if the state does collect adequate revenues from a shift to
the PIT and SUT, how does this affect the autonomy of the school
districts? With the state providing the overwhelming majority of
revenues for most districts, the Commonwealth will have an obligation
to ensure the money is spent effectively with all the new bureaucracy
that entails. Then too, with the onus of collecting the majority of
revenues no longer the responsibility of school districts, the
balance of power between school districts and the teacher unions will
change. Teachers could no longer hold districts hostage as readily
and force them to raise taxes to meet higher compensation and more
generous work rules or pit one district against another in contract
negotiations. This tax reform proposal–if enacted and
implemented–could completely change the dynamics of labor
negotiations in school districts.

A real drawback of the plan is leaving the schools with the power to
tax non-residential properties. Some districts with very large
fractions of their tax base made up of commercial properties will
obviously have an enormous advantage over districts with little or no
nonresidential property. But even more important, businesses and
commercial property owners are unlikely to accept the continuation of
school property taxes on them without a major political pushback.
Non-corporate business owners paying a 30 percent higher income tax
as well as higher sales and use taxes and still having to pay school
property taxes would not be very happy. The signal being sent as it
relates to the state’s business climate would not be beneficial.

On top of the objections we have raised here, the Team notes that
there are regional issues as well that will complicate any plan to
shift away from property taxes. In some areas of the state property
taxes are not as much concern as they are in others. And of course
there are problems raised by the patchwork system of property
assessments across the state. Moreover it is crucial to keep the
problem of spending growth front and center in any discussion. The
fact that the idea of tax shifting continually comes up indicates
there is a huge problem engendered by both the level of taxation and
the structure and sources of tax revenues. It is vitally important to
make progress in addressing this issue. The plan being discussed by
the House Committee is a good start, but some tweaking will be

[1] –
Proposal Calls for Equity in Taxes. Pittsburgh Tribune-Review.
November 10, 2011.

Jake Haulk, Ph.D., President
Frank Gamrat, Ph.D., Sr. Research Associate

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