By Theodore Arapis, Ph.D.
Pennsylvania is undoubtedly an expensive state for homeowners. Ranked sixth in the nation for its effective tax rate on single-family homes (average property tax/avg. home value) by a 2016 report from Attom Data Solutions, curator of the largest property tax database, the Commonwealth is out taxed only by the states of New Jersey, Illinois, Texas, New Hampshire, Vermont, and Connecticut.
This alone partially explains why 54 percent of Pennsylvanians voted ”yes” to a potentially major overhaul of the local property tax system in the November 7, 2017, elections. This mandate provides support for legislators in Harrisburg to pass a state law that could allow up to 100 percent exemption from local (residential) property tax. But, even if such a state law is enacted, local governments and school districts still retain the right as home rule jurisdictions to decide the final amount to be exempted.
One thing is certain. Pennsylvanians, as Californians did in 1978 with the passage of Proposition 13, are standing up for their financial rights against their local governments and school districts. But, in the wake of this tax revolt, everyone should keep in mind that government services are not free. Nor should current service cost be allowed to become a burden for future generations through debt financing. Revenues, instead, should be adequate enough to cover spending. Unless Pennsylvanians want to receive fewer and lower quality services, lost revenues from high property tax exemption must be offset by other revenue streams. Such is the practice of “tax shifting.”
Local sales and earned income tax could provide some relief from lost property tax revenue. In 2015, on average, local sales tax in Pennsylvania covered just 2.3 percent of local spending, according to the United States Census Bureau survey. That is three times lower than the U.S. average. Only Allegheny county and the city of Philadelphia hitch a ride on the six percent statewide sales tax, setting their rates at seven percent and eight percent, respectively. More counties and local jurisdictions with taxing authority are likely to join on.
In point of fact, most Pennsylvania income earners already commit a portion of their labor earnings to pay for local services. According to a 2011 study of the Tax Foundation, 2,492 of 2,562 municipalities and 469 of 500 school districts impose a local income or local service tax. Following the U.S. Census Bureau survey in 2015, local individual income taxes covered 7.5 percent of local government expenditures. The average national rate was a mere 1.8 percent. Clearly, the Commonwealth’s local jurisdictions have already paved the way for high local income taxes.
Other potential remedies could include revenue from utilities since in Pennsylvania, on average, this sector covers 13.1 percent less local expenditures than in the rest of the U.S. The Commonwealth, this past July, already approved increases in the production and distribution of natural gas, electricity, and telephone service. Higher charges and fees for local jurisdictions operating their own public utility libraries, and recreation facilities, could be next.
In addition to challenging revenue adequacy, this property tax amendment could potentially hinder fiscal transparency. Today, local budget meetings are open to the public to attend and comment on property tax related reforms (e.g., increasing mill rates or changing re-assessment methods). Such would probably not be the case in debating and deciding local sales and earned income tax rates. It would definitely not be the case when increases in utility and other service charges are considered. Increasing utility charges and fees could simply be driven by inflation, not by public opinion.
Sooner or later, town hall meetings will fill with citizens commenting on property tax exemption. This time, civic participation could change for good how Pennsylvania local governments and school districts raise revenue and provide services. Taxes, I often remind my students, are the cost of civilization. And, government budgeting has always been operating against a paradox – all of us want more services, but few are willing to pay for them.
Theodore Arapis, Ph.D., is an assistant professor of public administration at Villanova University.