Tax Reform: Opportunity and Peril

A Charles Dickens tale once began: “It was the best of times, it was the worst of times.” For Pennsylvania taxpayers the special session on tax reform may not be as dramatic, but it does present both the best opportunity in a generation for real, significant tax reform; and yet another chance for the spending interests to grab even more of our hard-earned money.

There is little doubt that taxpayers and elected officials alike view property taxes as unfair and excessively high. This view holds despite the fact that, according to the U.S. Census Bureau, Pennsylvania ranks 26th out of 50 states in real estate tax revenue per capita. At the same time, we have one of the highest sales tax rates (8th), and rank 5th in business tax collections.

The almost total dependence on property taxes for revenue by school districts, counties, and local governments is driving taxpayer animosity toward property taxes. Local governments have, almost literally, no place to turn when more revenue is needed than to raise property taxes. Thus, property owners have borne the brunt of paying for higher government spending.

The problem is further aggravated by out-of-control local spending, particularly by school districts. According to statistics compiled by the Pennsylvania Manufacturers’ Association, spending by Pennsylvania’s 501 school districts skyrocketed by 107% from 1986 through 1998, almost double the growth in average weekly wages (63.2%).

County governments also posted profligate spending increases, 120.4% between 1986 and 1997, as the Reagan-era policy of devolving social programs from the federal government to counties added significant new expenditures to county budgets. Local municipal governments (townships, boroughs, and cities) were the most successful in holding down spending, as expenditures by municipalities increased a relatively modest 59% between 1986 and 1997. The average weekly wage rose 55.7% during that period.

The increased property tax revenue needed to pay for this spending binge has finally produced a taxpayer revolt. The pain has gotten so great, and the clamor for tax reform so loud, that both candidates for Governor of Pennsylvania have called for significant tax reform. The rare invocation of an obscure constitutional provision allowing for the petitioning of a special session of the General Assembly has placed the issue in the forefront of this year’s election season policy debate.

Polling by the Lincoln Institute of Public Opinion Research has for years documented public outrage over property taxes. Taxpayer opinion on the issue is uniform across the state, from the three rivers of Pittsburgh, to the farms of central Pennsylvania, to the inner city neighborhoods of Philadelphia – property taxes are viewed as inherently unfair. For example 57% of Allegheny County voters in a recent poll said property taxes were unfair to most segments of their community.

Perhaps reflecting their constituent’s ire, municipal elected officials also islike their reliance on property taxes. Fifty-seven percent of borough officials, 64% of township officials, and 88% of county commissioners have told the Lincoln Institute in surveys that they view property taxes as unfair and would like the state to give them more options.

The public debate on the need for property tax reform has reached consensus in Pennsylvania, but now the difficult task has begun on devising a new means of funding school districts, counties and municipalities.

In polling over the past five years the Lincoln Institute has found consistent opposition to allowing property taxes to be replaced with just one new tax alternative. Rather, voters and elected officials alike favor a menu of choices that can be molded to local needs.

Then there is the issue of state funding for local school districts. The mantra from the education establishment for years has been that state government has failed to provide its appropriate share of funding to local school districts.

Statistics released by the State Senate’s policy and research office show that to be untrue. State support to local school districts rose by 141% between 1985 and 1999, while local property taxes went up by 131%. Thus, state funding has risen by a higher percentage than local property taxes.

But the real story in the Senate’s numbers is that inflation rose by 55% during that time period, and the worker’s weekly wage increased by just 62%. With school district spending rising at two and a half time the rate of inflation it becomes clear that while property taxes are a problem, the bigger problem with school districts is unrestrained spending.

That brings us back to the opportunity/risk presented by the special session. Will the spending interests prevail and use the special session to slip by a tax shifting plan that nets them more taxpayer money, or will the legislature actually place spending controls on school boards that have shown all the spending restraint of a drunken sailor on shore leave?

Several years ago Act 50 was signed into law. Act 50 provided tax reform options for school districts. Unfortunately taxpayers in only six of the 501 school districts in Pennsylvania have had the opportunity to vote on Act 50 reforms because school boards have largely refused to place the issue on the ballot.

School boards are a roadblock because Act 50 places significant spending restraints on districts. Since many school directors are more concerned about the spending interests than the taxpayer’s interests, they don’t want to return the power of the purse to the taxpayers to whom it rightfully belongs.

Act 50 gives school districts the option of shifting from property taxes to earned incomes taxes. It also requires a back-end referendum be held if directors in the district want to raise taxes above the increase in the workers’ weekly wage.

There is no doubt Act 50 accomplishes what taxpayers are demanding: diversification of the tax base, and the enactment of spending controls. In the case of Act 50, the added bonus is that ultimate spending power is returned to the hands of the voters via the back-end referendum requirements.

A simple form of tax reform would be to enact an Act 50 Plus plan that would require every school district in the state to place and Act 50 referendum on the ballot. Counties, and local municipal governments should also be given the same options, and power restored to their voters in the same manner.

The General Assembly will also have to tighten up some of the loopholes in the original Act 50. Voters in four school districts have implemented Act 50 reforms, but their school boards have proven to be resourceful in finding ways of evading spending restraints. The Central Dauphin School District in particular has abused the Act, increasing spending despite voters’ demonstrated desire for expenditure restraint.

It is quite clear the public education tax problem before us is not a lack of revenue, or a lack of state revenue. It is one of an unfair system that places too much reliance on one tax vehicle, and more significantly one of profligate, out-of-control spending. To make matters even worse, there is significant evidence that despite such a massive infusion of funds, our public school students are learning even less than they were 15 years ago.

While the special session on tax reform is a golden opportunity for significant tax reform, as well as an opportunity to return control of school districts and local governments to the people; it could also go down as the biggest tax grab in the history of the commonwealth. The need for taxpayers to remain vigilant has never been greater.