The latest proposal to eliminate property taxes in Pennsylvania would leave school districts with $2.6 billion less in overall funding within five years, according to an analysis from the Pennsylvania Independent Fiscal Office. Matthew Knittel of the IFO presented the findings during a Pennsylvania Senate Finance Committee hearing Tuesday.
The plan — proposed in both HB 76 and SB 76 — would swap school property taxes for higher state income and sales taxes, largely on individuals. The IFO, which did not take a position on the bill, compared what could be expected from the new mix of state funding to projected property tax revenue over time and tallied the fiscal impact on school districts and state government.
Much like with previous versions of this property tax plan, the numbers don't add up. The IFO projects school districts would receive $112 million less in funding than they would have received from property taxes in 2014-15, which grows to $2.6 billion by 2018-19
The reason is fairly simple. The bills place an artificial limit (the lower of sales tax growth or rate of inflation) on how much in new income and sales tax dollars go to school districts to replace lost property taxes in future years. This is true even if those state tax collections exceed the caps, as they likely would in most years. The bill does not address how schools are to pay for increasing pension obligations, let alone costs for health care, supplies, or utilities that may increase in price faster than inflation.
Like all tax swaps, this one picks winners and losers — with Pennsylvania's school students and the state's future among the biggest losers.
Corporations, which pay about 30% of all property taxes and are among the largest taxpayers in many districts, would come out as big winners. Their school property taxes would be eliminated, but unlike individuals or small businesses, corporations would pay no more in state taxes. Instead, their share of school funding would be shifted to individuals and small business owners who pay income taxes and consumers who pay sales tax. (Many goods and services purchased by businesses would remain exempt from the state sales tax under this plan).
Renters, including many seniors, would see higher sales tax and income tax bills, but little "relief" in the form of lower rent payments. For low-income families, this plan is Robin Hood in reverse, with poor renters paying higher taxes to subsidize tax cuts for wealthy property owners.
For non-elderly homeowners, it's a mixed bag. Homeowners would see their local property taxes decline, but their state income taxes would rise. Many homeowners would also see their federal taxes increase, as they would lose a deduction for paying property taxes.
Many school districts have already adopted earned income taxes to reduce dependence on property taxes. Taxpayers in those districts would pay increased state taxes to subsidize property tax cuts in other parts of the state.
The change could make houses in Pennsylvania less affordable in the future. When California adopted property tax limits, it saw housing prices skyrocket.
Many seniors and people with medical conditions would have to pay sales tax on an array of health care goods and services.
Finally, schools would receive much less than they need to help students succeed. Good schools are the lifeblood of a community and its economy. If we shortchange our schools, how will Pennsylvania ever prepare better workers for tomorrow's economy or attract and retain businesses that need skilled workers?
Paying property taxes are a real problem for some homeowners and in some specific areas of the state. We should address those concerns with targeted reforms rather than a one-size-fits-all approach that has been adopted nowhere else in the nation. Some of the reform efforts, like Act 1 of 2006, have helped moderate property tax growth — and the IFO report reflects that. Many districts have adopted earned income taxes to lessen reliance on property taxes.
The most effective way to ease Pennsylvania's over-reliance on local sources for school funding is to increase the state's support of education. Pennsylvania trails most states in state funding for schools, creating tremendous inequities across districts. A good education should not depend on where a child lives. The state needs to make — and keep — a commitment to provide a larger share of school funding. That is the key to a healthier economy and a better Pennsylvania.