Push To Eliminate PA Property Taxes Would Have Major Implications For Schools, Prioritize Homeowners

Jun 8, 2017

A telecom technician by trade, Schuylkill County homeowner Ron Boltz is not your typical suit-and-tie Harrisburg lobbyist.

He's a self-taught policy wonk who walks the halls of the Capitol in jeans and polo shirt — burning endless vacation days in an effort to convince lawmakers to abandon nearly 200 years of history and reimagine the state's tax structure and school finance scheme.

And he's made a lot more traction than many would have guessed.

"It's kind of a 'David and Goliath' fight," said Boltz. "I do feel like David."

His group, the Pennsylvania Liberty Alliance, is one of dozens of taxpayer organizations supporting a bill that would completely eliminate the local school property tax, which garners roughly $12.6 billion statewide, 41 percent of the total revenue of Pennsylvania public schools.

In order to replace that local revenue loss, the bill would hike the state personal income tax from 3.07 to 4.95 percent and raise the sales tax from 6 to 7 percent. Philadelphia's sales tax would rise from 8 to 9 percent. The items eligible for sales tax would also widen to include purchases such as groceries, some clothing and certain professional services.

"Why not treat every single individual taxpayer exactly the same?" said Boltz. "We all would pay the exact same income tax [rate]. We all pay the same sales tax rate."

The bill would allow school districts to continue collecting property taxes only to pay off existing debt, which is very high in some districts, potentially leaving some homeowners with a steep legacy bill on top of the new levies.

Voters could agree to more school revenue through something like a local income tax. Municipal property taxes would still be collected.

Opponents warn that the existing structure exists for a reason, and that a tax shift would severely disadvantage some of the most vulnerable Pennsylvanians while throwing public schools into fiscal chaos without making school funding more equitible.

A hardship

School property taxes are often a sore subject for Pennsylvania homeowners, who've seen rate increases grow faster than the state's economy over the past few decades — with some regions especially hard hit.

"I can't go to a cub scout meeting or buy a hamburger without somebody complaining to me about their school district property taxes," said State Senator David Argall (R-Schuylkill County), the bill's lead sponsor.

The map below shows how people in some counties have been affected by sharply rising property taxes.

 

Credit Pennsylvania Independent Fiscal Office

For Boltz, the issue is personal.

Shortly after he bought his home in 2008, his local school district performed an unexpected property value reassessment. Overnight, the amount Boltz had calculated he would need to pay in property taxes more than doubled.

"It was very much a hardship. It increased my monthly tax burden, I believe, it was like two hundred and sixty dollars a month. And I wasn't even close to being the worst case scenario..." he said. "I mean that's a car payment for middle class folks. That's food on the table. That's real life."

That experience propelled Boltz on what's become a nearly decade-long journey of activism. First, he did a stint on his local school board — fighting against tax increases. Ultimately, that led him to connect with other taxpayer advocates, and he's since then he's become a fixture in some backroom political strategy sessions.

Argall has become one of his closest allies, as has State Senator Mike Folmer (R-Lebanon), who affectionately calls Boltz "the man."

"This is a true citizen grassroots effort which helps me as a legislator to get fired up," said Folmer. "This is what America was built on."

This sort of idea has been batted around Harrisburg for decades, long thought a pet project of a small fringe.

But the measure supported by Boltz has made significant headway, coming close to passing the Senate in November 2015. It made strange bedfellows, dividing the two highest-ranking Senate Republicans, while finding both bipartisan support and opposition. It was defeated by Lt. Governor Mike Stack's tie-breaking vote.

After a few senators who were 'no' votes were ousted in the 2016 election, proponents grew optimistic that it could pass the chamber.

Argall's office quietly reintroduced the bill, known as the "Property Tax Independence Act," on Tuesday.

Matthew Knittel, director of the state's Independent Fiscal Office, isn't surprised that the issue has gathered steam, especially as Pennsylvania's elderly population grows larger, lives longer and suffers from less retirement income security.

"What we're seeing is a lot of homeowners — in particular elderly homeowners — are having an increasingly difficult time meeting their property tax obligations. And these are individuals who are aging in place at their home. They're not going into nursing homes. They're living on a fixed income. Many are now outliving their savings," said Knittel.

In some counties, property taxes have increased by an average of four percent every year for about a decade. Social Security cost of living adjustments have lagged far behind that rate. There was no COLA in 2016, and a meager .3 percent increase for 2017.

As a whole, Pennsylvania residents bear a total state tax burden that's on par with the national average, and lower than New York, New Jersey, Maryland and Ohio.

Winners and losers

Knittel's office does non-partisan analysis on legislation and warns that the massive tax shift proposed would have major consequences.

"It will create winners and losers," he said. "That is, some will recognize a significant tax cut; others will recognize a significant tax increase."

The IFO says all homeowners would see a windfall gain, as it predicts that axing the tax would immediately boost home values. Retirees who own their homes would benefit the most.

Working renters would take on the greatest new tax burden, left at the mercy of landlords paying forward any of their benefit.

The tax implications for businesses, industries, and corporations would depend on size, scope and circumstances, with some benefiting greatly, and others incurring greater tax burden and more business risk.

The federal government also stands to gain from the proposal, as Pennsylvanians filing income taxes would not have real estate taxes to deduct.

School districts say they would fare the worst.

"It is absolutely frightening to think that the legislature has tred this far into something so significant and something so detrimental," said Jay Himes, executive director of the Pennsylvania Association of School Business officials.

PASBO's concerns, shared by the alphabet soup of other state education organizations, are manifold.

And aggressive opposition by these groups has proponents worried that support for the measure is now waning.

The bill proposes that the new sales and income tax revenue generated to replace property taxes would accumulate into a special fund in Harrisburg that would then flow back to school districts.

Funds would rise over time along with the rate of inflation or the rate of average weekly wage growth — whichever is lesser. Student factors, including yearly enrollment changes, wouldn't be considered.

With the shift away from property taxes, PASBO says schools would become especially vulnerable to the swings in the economy, which can dramatically affect the amount of money generated by sales and income taxes.

The IFO did an analysis on the issue in 2013 that included a simulation exercise. If this property tax elimination plan was implemented in 2002, the IFO found that — ten years down the road — school districts would have had $4.1 billion fewer dollars than they would have otherwise. This is based, in part, on a downtick in state revenue collection through the Great Recession.

 

Credit Pennsylvania Independent Fiscal Office

Proponents argue that this is precisely the point: that if the economy is sagging and Pennsylvanians are struggling, school districts shouldn't be able to continue levying property taxes, which can bear little relation to a homeowners' ability to pay.

"We need to start looking at things in terms of the taxpayer, not just the school district or not just, you know, Harrisburg," said Boltz.

No state in the nation has completely phased out the local school property tax. Indiana and Michigan have gone the furthest. In 2012, North Dakota voters overwhelmingly rejected a property tax elimination proposal.

PASBO says it would make much more sense for lawmakers to address the issue at its root — working to reduce the underlying cost drivers behind the surge in property taxes.

Most notable in this category are school employee pension obligations, which have sharply risen in recent years due to a series of decisions by state government in the 2000s that coincided with a pair of stock market downturns.

"We know what drives cost and nothing gets done," said PASBO's Himes. "So this is an attack on the funding that's necessary to pay off all of those mandates we face every year."

Reworking the state pension system has been a top legislative priority in recent years, but has thus far failed to get the needed support to become law.

A plan, though, did pass the Senate this week. Even if, as expected, it earns the approval of the House and Governor Tom Wolf, the fiscal benefits of pension overhaul will take years to materialize — meaning, in the near-term, districts would still be required to devote large sums to pension payments that could otherwise be returned to taxpayers or spent in classrooms.

In a world without property taxes, as pension payments continue to rise faster than the rate of the economy, districts would be forced to either trim budgets or beg local voters or the Republican-held state legislature for additional revenue.

Himes predicts this would ultimately force massive programming cuts that would be out of whack with what parents really want.

"This is a major step towards big government and towards state government control of local education..." he said. "We will have lost a lot of local determination and the ability of residents to determine how they want to fund their school districts."

Skeptics on all sides

School advocacy groups are not alone in their opposition to the bill. The Pennsylvania Chamber of Commerce and the Pennsylvania Manufacturers Association, among others, have also come out against it.

Many fiscal conservatives are also wary.

"We'll now have $13 billion new dollars collected in the commonwealth. That's going to sit in a fund. I can tell you being on the House Appropriations Committee, there's no such thing as a sacred fund in Harrisburg," said State Rep. Seth Grove (R-York). "If state government needs money we're going to raid funds and pull it into the general budget."

Grove contends that fervor over property taxes is a regional issue.

He has a bill that would give localities the option of eliminating property taxes and replacing revenue with another local levy. It passed the Pa. House overwhelmingly in 2013. The Senate declined to take it up for consideration.

Grove also advocates for a bill that would allow localities to freeze property taxes for senior citizens.

Short of those measures, Grove notes that all school boards in Pennsylvania (except Philadelphia) are democratically elected and accountable to voters.

"School boards are repeatedly re-elected on increases," he said. "Obviously the general public wants property tax increases to fund their local schools."

School equity a non-factor

From the perspective of schools, there's another major point to consider. Typically, when a state (or province) takes on a larger share of education funding, it's to level the playing field between schools in poor and wealthy areas, redistributing money based on student need.

A Keystone Crossroads analysis of 2015-16 state data shows that a quarter of school districts across the state collect 68 percent of all school property taxes.

Argall says making Pennsylvania school funding fairer would be a noble goal given the stark disparities between the state's wealthiest and poorest districts.

"It's unfair. I can't believe that the state Supreme Court hasn't stepped in by now," said Argall. "The current system is rotten at the core."

But, with political realities in mind, his property tax elimination bill specifically avoids confronting this issue.

"We can have that discussion someday. We tried not to get lost in the swamp of distribution," said Argall. "It's a very complex bill. So first things first."

Instead, it says the state should give money to districts at the same exact levels they're currently funded.

So this means, for instance, that poorer renters in Western Pa. would, in essence, help subsidize a massive property tax cut for homeowners in the wealthy Philly suburbs — while locking into place the same massive per-pupil inequities that already exist between their schools.

"It doesn't sound good on the surface," said bill proponent Ron Boltz, "but what's the answer: to reject it and keep that system in place? Or do we completely revamp the way we fund school districts. And now we have the ability to address that."

This sort of 'domino theory' philosophy is common among proponents of the bill, who believe that eliminating property taxes will ultimately trigger a cascade of legislative action.

The thinking goes that — with Harrisburg taking all of the heat on education funding — state lawmakers will be forced to find ways to slash school spending, regulations and mandates in a way that holds the line on taxes while keeping parents and students happy.

"This bill, I believe, is a status quo breaker," said Folmer. "This is going to force us to prioritize our spending. This is going to force us to make sure that we can get more money into the classroom."

Even if the bill makes it out of the Senate, it faces a steep road. Republican leaders in the House are divided over it. Governor Wolf has signaled interest in eliminating property taxes, but doesn't like the specifics of this plan. Wolf advocated for targeted property tax relief, not elimination, in his inaugural budget address.

In the midst of the prolonged budget standoff of 2015, that priority receded into the background.

Find this report and others at the site of our partner, Keystone Crossroads