Hike Pa. Income Tax to Cut Property Tax?

By Melissa Daniels/PA Independent

HARRISBURG — Exchanging school property taxes for hikes in other taxes could come with a bigger increase in personal income tax for Pennsylvania wage earners than previously suggested.

The House Finance Committee on Monday held a second public hearing on House Bill 1776, or the Property Tax Independence Act. The bill, sponsored by state Rep. Jim Cox, R-Berks, aims to achieve the long-discussed goal of eliminating property taxes to fund public schools by creating increases in sales and personal income taxes, as well as the inclusion of previously untaxed goods and services. 

But new figures from the state Department of Revenue show a $3.5 billion gap between the estimated $12.5 billion earned by property taxes, and what the new tax structure would raise. In response, Cox said he and bill co-sponsors would consider increasing the personal income tax even further to meet the mark. 

Given the new figures, some representatives were uncertain about the plan's ability to support the needs of public education. At a public hearing for the bill two weeks ago, the funding gap was estimated at $500 million, said state Rep. Phyllis Mundy, D-Luzerne, House Finance Committee chairwoman. But leaving a gap of at least $3.5 billion puts districts in “a horrible bind,” Mundy said. 

 “We do need to shift sales and income tax or some sort of revenue to replace property taxes,” Mundy said at the hearing, “but in your bill, there seems to be, even now, a lot of confusion on exactly how much revenue your bill will generate.”

Cox said eliminating property taxes isn’t about sticking school districts with a shortfall. Revenue neutrality is the goal, he said, though he doubted the $3.5 billion figure. "We’re in agreement the personal income tax is the place we would need to look to fill that void,” Cox said. 

Cox has generated support for the bill among 70 co-sponsors, 20 of whom are Democrats, as well as state residents. 

Pennsylvania's personal income tax rate is just more than 3 percent, the lowest flat tax rate personal income tax in the nation. Cox’s original plan would boost that rate to 4 percent, a nearly 33 percent increase, which, according to estimates from Cox's office, would bring in $3.46 million annually. 

A sales tax increase would be from 6 percent to 7 percent statewide, with the exclusion of Pittsburgh and Philadelphia, which would see 8 percent. Mark Robyn, an economist with the Tax Foundation, a national taxation research group, said that while other states dedicate a specific tax to a specific need, focusing on income tax is a unique choice because it usually funds general government services. 

“You don’t know where your public service demand might change in the future,” he said. 

But to Cox, changing the funding from property taxes to sales and income taxes along with expanding taxes on goods and services makes the system more fair. 

"The goal of this legislation is about getting the question before the House and before the Senate: Do we want to change the source from a local school district tax which is burdening homeowners, driving people out of their homes, to something we feel is more fair and more stable and more able to directly reflect the economy, the ebbs and flows the economy more directly, without compromising home ownership?" 

Citing the 10,000 homeowners who lose their property annually because of inability to pay property taxes, Cox reminded lawmakers they were elected to represent taxpayers, and not the special interests. 

Those who opposed the legislation Monday included the Pennsylvania Bar Association on the grounds of expanding taxes to legal services and the Pennsylvania Retailers Association because of potential negatives effects of an increased sales tax. 

Groups that support the act include the Pennsylvania State Grange, Pennsylvania Farm Bureauand Pennsylvania Coalition for Taxpayers Associations. 

The committee is scheduled to vote on the act Monday.