Who Wins and Loses in Pa. Property Tax Debate?

By: Eric Boehm | PA Indepednent

HARRISBURG – Sometimes you win, sometimes you lose.

Pennsylvania lawmakers are trying to find a solution to the state's property tax issues.

The question that lawmakers have to weigh as they continue to bat around a proposal to eliminate school property taxes in Pennsylvania and replace them with higher sales and income taxes is this: Who wins and who loses?

In an effort to offset more than $10 billion in annual revenue for school districts that comes from property taxes, lawmakers in the House and Senate have proposed a 1-percentage point increase for the state’s sales and income taxes, along with an expansion of the sales tax to do away with many of the exemptions in the tax code.

The plan is revenue-neutral from the state’s perspective, but the tax swap means some individuals will see their taxes collectively increase while others will drop.

The Senate Finance Committee met Thursday to debate the issue.

“Like any state tax policy, shifting from school property taxes to sales and personal income taxes will result in winners and losers,” said state Sen. Mike Folmer, R-Lebanon, a sponsor of the tax swap plan.

The break even point is $14,000 worth of sales taxable purchases for every $1,000 of current property tax payments, according to Folmer’s office.

For example, a homeowner with low property tax payments might end up paying more if the sales and income taxes were increased than the comparative offset in property tax payments.  Conversely, someone with a high property tax bill might have more to gain by paying higher sales and income taxes if they can dump the property tax cost.

David Baldinger, a leader of the Pennsylvania Coalition of Taxpayer Associations, which includes about 60 local taxpayer advocacy groups, said taxpayers would win if the proposed changes became law.

He told the committee that thousands of homeowners in Pennsylvania risk losing their homes every year because they are unable to pay school property taxes.

“Eliminating the property tax is the only way to give those homeowners peace of mind and bring an end to the unconstitutional school property tax,” he said.

Folmer, one of the sponsors of the proposal, said sales and income taxes are fairer.

“Using the sales taxes to replace property taxes works because people have more control over paying these taxes,” he said.

State Sen. John Eichelberger, R-Blair, said the property tax effectively penalizes homeowners who increase the value of their property by assessing higher taxes, while homeowners who allow their property to fall into disrepair — which hurts the rest of the neighborhood too — will be rewarded with lower taxes.

But many special interests are worried they could come out losing under the property tax elimination proposal.

An increase in sales taxes would hurt purchasing patterns, which could lead businesses to lay off workers, said Alexandra D’Angola, director of governmental affairs for the Pennsylvania Retailers’ Association, which represents stores in the state.

“Such a hit to their bottom lines will likely lead to decreases in salaries, benefits and jobs,” D’Angola told the committee.

And, D’Angola said, low wage-earners who do not own homes would not benefit from the elimination of property taxes, but would have to pay more in sales taxes,

Organizations representing school districts also oppose the tax shift because the property tax is seen as more predictable than the sales and income taxes, which tend to rise and fall more abruptly with the cycles of the economy.

Those same groups also are concerned about the loss of local autonomy that would occur if school districts were reliant on state-level taxes for all their revenue instead of being able to levy local property taxes on their own.

An identical proposal to SB 1400 stalled in the state House earlier this summer, where it was positioned for a vote in the weeks leading up to the passage of the state budget.  Instead, lawmakers in that chamber passed a resolution creating a new commission to study the property tax issue and make recommendations for changes.

Like the House plan, the Senate proposal would not change the existing state funding formula for school districts.  But without property taxes to fund schools at a local level, districts would be reliant on the state formula for nearly all their revenue since the state collects sales and income taxes.

Folmer said consumers would have more disposable income if they did not have to pay the property tax.  That income would allow them to purchase more goods and services to benefit businesses and – by extension – schools that would be dependent on the new, higher sales tax.

State Sen. John Wozniak, D-Cambria, who supports changing the property tax system, said everyone wants fairer taxes, but that really means they really just want to see their taxes go down.

“Everything is neutral until you start to put numbers on it,” he said, summing up the dilemma facing lawmakers.