Property Tax: The Last One Standing – Part 2

Part 1 of Property Tax: The Last One Standing introduced “Property Tax Independence Act” (PTIA) and the proposal for a constitutional amendment in the state of Pennsylvania for the sentimental sobriquet of “House Bill 1776.” Read part one here.  

The Spirit of 76?

Tax protesters everywhere put the economic and human costs squarely on the property tax while ignoring Pennsylvania’s other, far more harmful taxes. The solution proffered to the property tax “problem” is to increase the sales tax (or the state income tax). Their boilerplate handouts claim that cross-border sales jumping won’t happen because neighboring sales taxes are higher than Pennsylvania, which is 6% statewide. The document does not count local levies, as it does for localities in New York State, thus excluding levies like Philadelphia’s extra 2% sales tax, as an example.

Pennsylvania’s 6% rate is higher than Ohio’s 5.5%, the same as Maryland’s 6%, a little under New Jersey’s 6.625%, and higher than New York’s state rate of 4% (leaving out eye-watering local levies like New York City’s of 4.875%). And who can forget Delaware’s sales tax of 0%? Shoppers in the six-county Southeast Pennsylvania area sure don’t

The PTIA bill would have to raise about $25 billion a year to replace the school property tax.  The plan would have to increase the sales tax rate by at least several percentage points (A common trick used by many governments to hide the reality of a tax increase is “All we ask is that the sales tax goes from 6% to 8%. We think everybody can handle a 2% increase!” Of course, the actual increase is 33%.). Pennsylvania would become less competitive and certainly hit small businesses hard. They have to do their commerce inside Pennsylvania cities, towns, and boroughs.  Among the goods taxed under this program would be food, textbooks, flags, horses, and services like trucking, funeral parlors, cable TV, veterinarians, etc. You get the picture.

Other States’ Property Taxes.

An underpinning of the rationale to eliminate the property tax is that people leave Pennsylvania because of property taxes. There are many reasons people are leaving Pennsylvania, but property taxes are not one of them; Pennsylvania is steadily gaining in population.

Let’s go back to the political reality that regional tax competition is real.  New Jersey indeed has very high property taxes, high enough to cause real distress, especially in the face of very high income, sales, and business taxes. New Jersey is a sore thumb style outlier regarding absolute taxation levels on investment, commerce, and work.            

Yet, when we look at states that rely on one tax more than others, differences begin to tell.  For example, states that dodged the Great Recession – like Texas, New Hampshire, Nebraska, and the Dakotas – have historically high property taxes coupled with little or no income tax, and reasonable business tax.

Historically poor states like New Mexico, Louisiana, and Mississippi, have relied to a far higher degree on local and state sales taxes.  Why? They use semi-feudal 19th Century tax systems still based on race and class-based separation. They still ladle up privilege to landed wealth and near-monopoly business.

These states have lousy schools, lousy public health, terrible infrastructure, and, overall, are not great places to build a future. It is doubly true if trying to raise children and grow family wealth.

Income taxes

The bill also swaps out locally controlled and collected income taxes (which citizens can theoretically battle at the municipal level) to a newly increased statewide personal income tax.  Proponents don’t even know the tax rates they want, but they’re not letting that stop them.

Pennsylvania is top-heavy with retirees.  A one or two-point increase in the income tax will put the Commonwealth into Connecticut, California, and Ohio territory for income tax burden (recall that a two-point rise is a 33% hike). The numbers don’t add up. In a flat tax state, the PTIA protesters now suggest a tax on retirement income to make it all fit. This policy disconnect was floated by an HB1776 allied member of the General Assembly. What a Hail Mary. How does taxing retirement income help the senior citizen demographic?

Observations and Alternatives

The sponsors of HB 1776 long pointed to the one state that was considering eliminating its property tax in recent years.  North Dakota is one of the most sparsely populated and agricultural states in the USA.

Note that North Dakota WAS considering a change to its constitution to eliminate the property tax.  Many in that state cautioned against a simple (or simplistic) solution. The property tax dumpers’ vision is that North Dakota’s coffers are full of revenue from gas, oil, and other natural resources.  That couldn’t last forever, and petro-revenues are in a long trough of despond.   

North Dakota would be scrounging for revenue streams to pay for the basics with the property tax eliminated. After all that drama, citizens would still be subject to statewide income, business, and sales taxes. One-size-fits-all?  No. Just like HB 1776 (and California after Prop 13), after Saturday night, comes Sunday morning.

In our federal system, the states are indeed the laboratories of future policy.  The differences between North Dakota and Pennsylvania are extreme, however.  There is no natural – or Commonwealth – resource tax in Pennsylvania. The population of Pennsylvania and the infrastructure within are many magnitudes larger than North Dakota’s. Apples and kumquats. Above all, the North Dakota measure failed at the voting booth! And wouldn’t you know it, though thrashed at the polls, they’re going to try it again? In a sense, perhaps North Dakota should have passed the measure, so that other states can see what happens.

The property tax, as constructed, is indeed lousy. In Pennsylvania, the property tax falls disproportionately on what people do on their dime and their time. The property tax is two taxes, as it is a tax on land value and a tax on building value.

The tax on land values is the only tax that collects what a community creates.  What do we mean by that?  It means that with every police department, fire department, and yes, excellent schools, land values increase. No individual and no company spark nonspeculative land value increases. All of us create land value.

“Commonwealth’s” meaning implies an environment in which to make a living, be a success, be happy, and be legally secure in what you have earned with your labor and capital. The corollary is that Commonwealth provides for all, not just a few.

The other part of the property tax, the tax on buildings and structures, is corrosive to prosperity and freedom, much like the worst income tax, business tax, or sales tax.  As we all know, when you buy a house or fix it up or build one from scratch, your tax liability increases significantly.  On that, we can all agree.

That’s why Pennsylvania has the Keystone Opportunity Zones (KOZ), a confused, privileged, and clumsy subsidy program to get out from under a broad-spectrum lousy tax system.

Pennsylvania must chart a careful yet daring course to a place that encourages economic growth, a reasonable level of government, and leaves people alone.

Don’t trade one lousy tax for a basket of corrosive taxes.  Pennsylvania must expand the land value tax, so Pennsylvania resembles nations that encourage economic freedom and broad-based prosperity like Australia, Singapore, and Hong Kong.

The land value tax serves 20 cities and school districts in the state of Pennsylvania.  In jurisdictions like Clairton and Aliquippa, property taxes were cut for some homeowners up to 70% a year. And all of this without resorting to other, higher taxes. Instead, needed revenue comes from land value, an immobile source of community income created by local effort, taxes, and community. We have seen the future, and it’s not 1776.