HB 1776 Creates a Dilemma for Liberals

Ken Rainey asks:

Is anybody doing serious, nonpartisan research on H. B. 1776? I was in Harrisburg yesterday to lobby for restoring the general assistance cuts and saw the 1776 rally. At first I was dismissive, but then considered that the property tax has long been viewed by liberals as the wrong way to fund schools. 1776 as it stands would be a disaster because, while relieving angry seniors of their property tax burden, it would create windfalls for very wealthy land owners and would expand the regressive sales tax. The constitutional amendment would make an outdated document worse. But we should try to capture the enormous energy of the anti-property tax movement to at least draft an acceptable alternative. I fear this is just a right-wing get out the vote effort without any serious core.

I already addressed some of these issues in this post on HB 1776, but let’s do it again since it’s in the news.

The short answer is that a school finance reform bill worthy of liberals’ support must have:

1. Revenue neutrality
2. Retain the option to tax land rents
3. Equal spending per pupil

Here’s the dilemma for liberals:

On the one hand, we really should want to see school funding moved to the state level. Tying local school revenues to local property values is unconscionable in my view. The resulting racial and economic segregation is a totally predictable consequence, and I think it’s wrong that PA doesn’t have equal spending per pupil. Moving school funding to the state level would sever the link between school funding and economic geography, taking the most persuasive argument against equal spending off the table.

On the other hand, the land tax is easily the best tax for funding public services. It basically just captures some of the windfall that individual property owners reap from the community’s collective efforts to make the neighborhood or town a more attractive place.

If I’m a vacant lot owner, and all my neighbors improve their properties, the value of my vacant lot increases even though I didn’t do anything. It’s the community’s efforts that made my land more valuable. Taxing that windfall is a good way to fund public services, because the community created that value, and this captures the value back for the community as public goods and services.

Unfortunately in most municipalities, the land tax is combined with a tax on property improvements, which I think has bad economic effects. The property tax discourages reinvestment in properties and encourages land speculation. Going back to my example, the property tax takes a bigger bite from my neighbors who are doing a good thing and investing in improving their properties. Meanwhile, the vacant lot owner who’s not improving his property pays a lower rate despite reaping a windfall. The incentives are perverse.

Some municipalities have split their real estate tax rate, levying a higher tax rate on land values, and another lower tax rate (or none at all) on buildings.

This tends to reduce the tax burden on low income people, and raise the tax burden on vacant lot owners, surface parking lots, properties with excessively high land-to-building ratios, and any other kinds of properties where there’s a lot of unimproved land in an expensive area. According to Pat Toomey, 75% of Allentown residents got a tax cut when the city introduced the two-rate tax.

So I really want to see the land tax option retained, even though I also support moving school finance to the state level. As long as HB 1776 only applies to school districts and not cities and towns, I will probably support it.

What do you guys think? Is it worth giving a windfall to land speculators in order to get more equitable funding for education? What if the trade-off is more sprawl and land-hungry development?

Comments

  1. John says:

    I’d only consider this if the opposite were also true – when the “community” takes action that results in a decrease in the value of my property, I automatically get a reduction in my tax bill.

  2. Trish says:

    Hi John,
    I have lobbied our state reps and senators to consider removing the 1% EIT from local collection, and allow it to be collected by the state, so that school funding could be more equitable. The answers I got are summarized:

    1. It wont work. No rep will vote to remove money from its district for what may wind up being a 50% return, with larger amounts directed to failing urban districts.

    2. I think it should be done, its a great idea

    3. We should be focused on proving equitable funding, and the statewide collection procedure would be much more efficient, and would provide a greater pool of funding because there would be fewer collection costs deducted from the revenue by tax collectors.

    4. This is something we should consider…..this is the direction and options which should be on the table.

    I think eliminating the property tax altogether would cause a mass expansion of the regressive sales tax, and only make poor people poorer.

    However, I think senior citizens deserve a cap on their property taxes, and this might be the right direction to look within for property tax reform.

    I am enjoying a $250 discount on my school taxes, thanks to the Casino fund. Quite humorous though, despite the $250.00 discount, my taxes go up each year.

    • Jon Geeting says:

      There’s a way to make the sales tax progressive. Rather than exempting individual items, you would just tax people on the difference between their income and their savings, and exempt the first $30K or so of consumption. That way people who make $30K, whose spending roughly equals their income, wouldn’t pay the sales tax. Would encourage more saving too, since savings wouldn’t be taxed, only consumption.

      • John says:

        So in a down economy we’d incent people to not spend? Or buy used instead of new? Or are you trying to drive more borrowing/spending, which was part of the fiasco that got us here?

        You lost me on this one.

        For some frame of reference, go back and read about the luxury yacht tax put into place in 1991. ” That tax, similar in effect to what you’re proposing here, single-handedly destroyed an entire industry.

        When Congress imposed a 10 percent luxury tax on yachts, private airplanes and expensive automobiles in 1991, Sens. Kennedy and Mitchell crowed about how the rich would finally be paying their fair share of taxes.

        Within eight months after enactment, Viking Yachts, the largest U.S. yacht manufacturer, laid off 1,140 of its 1,400 employees and closed one of its two manufacturing plants. Before it was over, Viking was down to 68 employees. In the first year, one-third of U.S. yacht-building companies stopped production and the industry lost 7,600 jobs. When it was over, 25,000 workers had lost their jobs building yachts and 75,000 more were lost in companies that supplied yacht parts and material.

        Beware consumption taxes. They have unintended consequences.

        • Jon Geeting says:

          The sales tax already creates an incentive not to spend. It just hits the lower end of the income scale harder.

          See, I don’t like that yacht tax because it targets specific items. I just think people who consume a lot, in absolute terms, should pay higher taxes. I feel like you should support this because of how pro-investment it is.

    • Dan says:

      Hi Trish,
      The argument about the poor paying a higher percentage of their income if 1776 is enacted could be argued. However, the bottom line is that with the sales tax we get to make the choice. I can choose to buy or not to buy. That will determine my contribution to edication. As it stands, I am subjected to the whims of the school board and some stranger who takes an educated guess at the value of my property. There is a huge discrepency between the government assessed value of my home and the bank assessed value of my home. It really comes down to the opinion of the person who assesses my property. It is not an equitable system.

  3. John says:

    I agree – but if consumption taxes like you propose are too punitive, then the unintended consequences (like buying used) come into play.

    In the yacht example, the rich guy decided a $25 million used boat was just fine as opposed to the $35 million new boat.

    Taxes matter, and behavior changes based on them. And when you have politicians as dim-witted as ours are, alot of damage can be done before they realize what happened.

  4. My concern with HB 1776 is based on some of the earlier comments, especially with the difficulty of making a sales tax truly progressive. As an aging state, Pennsylvania really needs to be careful with any increases on wage taxes and sales taxes, in order to stop driving out young people and families. That said, HB 1776 strikes me as an ironic expansion of the state’s power to tax coming from the right wing of the Commonwealth. But, let’s run with it.

    A state property tax, based on land values would well be a progressive form of taxation (i.e. Montgomery County would pay a share for an Appalachian school district in Cambria County). Australia and Denmark do it, and Vermont sort of does it with a statewide property tax to fund education.

    http://www.fig.net/pub/fig2010/papers/ts01f%5Cts01f_mangioni_4385.pdf
    http://education.vermont.gov/new/pdfdoc/laws/act68/act68_overview.pdf

    HB 1776 which I discuss in a little essay (http://www.urbantoolsconsult.org/blog/2012/04/20/Eliminating-the-property-tax-It-must-not-happen-but-well-see-what-happens.aspx) would seem to require both sales and use taxes and income taxes falling at a very high rate in order to protect the anecdotal few who have lost homes through high taxes.

    Getting documentation on who has lost their homes through taxes (NOT foreclosure) seems very difficult. I contacted some of the anti-property tax groups and ask for the numbers to back up their claims, and the best I got was the amount of foreclosures in 2005 in Allegheny County:
    “The original source was a survey compiled in 2005 by Bob Logue of Allegheny County, a supporter of the former STOP plan that called for total elimination of all property taxes. There has been no further research done since then but, considering the economic downturn in the intervening years, I have no doubt that the number is more than accurate and is probably grossly understated.

    I live in Berks County, home of the Reading Eagle newspaper. They annually publish a listing of all homes listed for sheriff’s tax sales in Berks County; there were more than 1,100 homes in the latest listing in August 2011, and I have seen similarly sized lists in York and Schuylkill County newspapers. Using this as an average, the total across Pennsylvania would be in the neighborhood of 67,000 and if only one in five of those actually went to sheriff’s sale the total would exceed the 10,000 that I cited. As an example, please see this: http://www.co.berks.pa.us/Dept/Sheriff/Pages/SheriffSaleListings.aspx.”

    My view is the property tax can be fixed in property tax protections can be implemented along the following lines, with my preference being property tax deferral:

    Comparative National Use of Property Tax Relief Measures
    Four property tax relief mechanisms have been instituted nationally for selected groups of homeowners. These relief measures apply variously to elderly and to low income households, and less often to disabled and veterans. Sometimes they are employed as a local option.
    The Homestead exemption was adopted by legislative design in several states during the 1960s and 70s, and now exists in all states but Missouri and North Dakota in some form;
    The Circuit Breaker is available in 34 states and provides reimbursement to localities by the states for revenue forgiven.
    The Property Tax Freeze, has come out of property tax revolts in a few states largely due to public initiatives in the 1980s and 90s.
    The Deferral option again arises from legislative design in 25 states and has the highest employment as a local option.
    The 2002 NCSL (National Conference of State Legislatures) study, A Guide to Property Taxes: Property Tax Relief, reports that Pennsylvania authorizes some localities to opt for Homestead Exemption or Credit, and for Property Tax Deferral. The Circuit Breaker is available statewide.
    As applied in Pennsylvania, the local option homestead exemption may be no larger than one-half of the median assessed value of homestead property.

    Comparing the four relief measures, which one is best?
    Homestead and Circuit Breaker instruments quickly become out of date and distorted.
    Assessment freezes and tax rate freezes both corrupt the tax regime.
    All three foregoing measures all cost the government in revenue forgone.
    All three foregoing measures often rely on homeowner initiative to be eligible.
    All three foregoing measures are difficult to understand and enforce.
    The Deferral provision has the following advantages:
    It does not alter the market value of the parcel, as the tax will ultimately be paid.
    It does not affect the use of sites, because the titleholder has no incentive to alter use.
    It is self-selecting for households desirous of employing the option, reflective of real income circumstances rather than arbitrary factors such as age.
    Local governments are not deprived of revenue, even if it may be delayed.
    It is fair to other homeowners in the community.
    The program is simple to understand. The Deferral program assures what it is primarily intended for: security for elderly or low income households as long as they wish to reside at that site.

    I think I was too wordy. Sorry.

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