Pa. Property Tax Swap Hikes Sales and Income Taxes

By Melissa Daniels | PA Independent

HARRISBURG — Eliminating school property taxes in Pennsylvania means some will win, others will lose.

The winners are retired homeowners, who could see a 37 percent decrease in their tax liability, according to the latest analysis of the most visible proposal on the table.

The losers are working renters, who could see a nearly 11 percent increase in tax spending.

The tax reform proposal spelled out in House Bill 1776 and Senate Bill 1400 aims to swap about $13 billion in school property taxes annually with increases in sales tax, an expanded sales tax base and an increase in personal income taxes.

The latest figures, from a much-anticipated analysis by the state Legislature’s Independent Fiscal Office, show a windfall gain for homeowners but inconclusive results for the rest.

Some two-dozen lawmakers heard the analysis at a recent joint meeting of the House and Senate finance committees and the Select Committee on Property Tax Reform.

The tax swap could save homeowners — but not necessarily renters — thousands.

Matt Knittel, director of the IFO, said it could take several years to realize any rent savings, noting that leases take time to expire. Beyond that, the proposed increases in sales and personal income taxes would be greater than the potential reduction in rent.

Another effect: Residents who use property tax as a deduction on their federal income tax filings would no longer be eligible. Statewide, federal income taxes would increase by $550 million annually without school property tax deductions, Knittel said.

Rep. Jim Cox, R-Berks, bill sponsor, said renters would see benefits in other realms. Some may be able to buy a house, affording a monthly mortgage minus the property tax bill, he said, while other landlords would have extra capital to spruce up properties.

The IFO analysis showed the tax swap would create a $1.5 billion shortfall to school districts in the first year. Cox said the predicted shortfall isn’t “a death knell” for the bill, and he would suggest an increase in the personal income tax rate to close the gap.

As written, House Bill 1776 would raise the PIT from 3.01 percent to 4.07 percent, but Cox said a rate of about 4.4 percent would fill the gap. He said he plans to file that amendment and is working with House leadership so the bill is addressed.

Though only several session days remain, Cox said he’s determined to get the proposal out for a floor vote – his proposal stalled in the House Finance Committee earlier this summer after lawmakers expressed uncertainty about the revenue numbers.

Cox said lawmakers and state officials can figure out the numbers, but it comes down to one question, he said.

“Do you want to replace property taxes with a broader sales tax a little bit higher with a higher PIT of about 4.4 percent?” Cox said. “Give us the answer to our question and we’ll go away, but for now people haven’t had the opportunity see their reps or senators vote on this.”

In the likely event no action is taken this session, the issue could be pushed to the next crop of legislators come January.

The Select Committee on Property Tax Reform will draft a report on recommended legislation for property tax reform by Nov. 30.

Rep. Tom Quigley, R-Montgomery, who chairs the committee, said he envisions recommending a multitude of options for tax reform, whether that’s a statewide change or enabling local reform. He said potential changes to the school funding formula could complement any property tax reform.

But the IFO analysis gives a blueprint for those changes, Quigley said. He said he believes relying on sales tax instead of property taxes for school funding is a fair distribution, as it comes down to consumption.

Families with children in schools are out there spending the most, he said, whereas the retired homeowners who would save the most money could decide how much to spend on consumer goods.

“The senior citizens, that’s who you hear the most from,” Quigley said, “someone who owns a home being taxed out of a home because they can’t keep up with those tax payments.”