What’s in the Property Tax Elimination Bill?

Icon TaxesThis week, the House Finance Committee tabled HB 1776 until the fall to have further discussion. The bill, sponsored by Rep. Jim Cox, would eliminate school property taxes and replace revenue for public schools through an increase and expansion of the sales tax and an increase in the state income tax.

Here is a quick summary of the bill:

  • Would prevent school districts from imposing property taxes (by statute rather than constitutional amendment) effective December 31, 2012, except for taxes needed to pay off school debt.
  • Would give school districts the authority to levy a personal income tax or earned income tax with voter approval.
  • Would raise the state Personal Income Tax rate from 3.07 percent to 4.01 percent, with the revenue from the increase going directly into an “Education Stabilization Fund” dedicated to funding school districts.
  • Would increase the sales tax rate from six percent to seven percent, and expand the list of taxable goods and services to many currently exempted (see table).
  • Would give schools the same amount of revenue they currently collect in the first year, FY 2012-13, (“hold harmless”) but leaves open the question of how the state distributes education funding in subsequent years.

While a sales tax is a less harmful tax than a property tax—people can’t lose their homes over it—HB 1776 should be part of a more comprehensive reform package to address excessive government spending. On its own, HB 1776 does not reduce Pennsylvania’s overall tax burden, which is the 10th highest in the country.

The problem with property taxes isn’t just in the nature of the tax, but in unbridled growth of education spending. Comprehensive reforms to reduce spending include expanded school choice, a Taxpayer Protection Act (limiting spending growth to population growth), mandate relief and reforming the student funding formula.

School Choice: Expanding school choice, including tax credit scholarships for kids in failing schools, expanding the Educational Improvement Tax Credit, and ensuring access to charter and cyber schools would save tax dollars and improve the quality of education. Schools of choice spend a fraction of what school districts do to educate children, and studies consistently show student recipients have higher test scores and graduation rates.

Spending Limits: Government spending growth should be limited to the cost of providing services. K-12 education spending could be kept in check by limiting funding increases to inflation plus enrollment growth.

Prevailing Wage Reform and Mandate Relief: One of the big cost drivers in education spending and school taxes are mandates, including the Prevailing Wage law. Prevailing wage alone costs school districts upwards of $400 million each year.

Student Funding Formula: HB 1776 doesn’t address what the public school funding formula will look like after the first year. Creating a new funding formula would further answer questions about how to distribute money to school districts. Currently (and in the first year under HB 1776), school districts are guaranteed their previous year’s funding, plus increases based on enrollment growth, the local tax burden, and the school district’s relative wealth or poverty. Ideally, the funding formula should be based only on enrollment, factoring in more for low-income or special needs students.