Close the Loopholes

Few issues get politicians more exercised than the issue of tax “loopholes” – provisions in the tax code that allow affected taxpayers to reduce the amount of money they must send the government. In particular, there has been much rhetoric in Harrisburg about closing legal “loopholes” in the state’s tax laws that allow some corporations to survive in Pennsylvania’s inhospitable business climate.

However, many of the elected officials who rail against tax “loopholes” have no problem with “loopholes” that allow government to tax and spend more of our money. The latest illustration comes from the continuing debate over Pennsylvania’s school property tax system, and demonstrates why proposals under consideration fail to provide taxpayers with meaningful relief.

Any successful school property tax reform plan must include a strong voter referendum requirement for all school tax increases. According to the Education Commission of the States, Pennsylvania is the only state with no real limit on school districts’ power to tax and spend. While Gov. Ed Rendell and many Pennsylvania legislators have paid lip service to the idea of referendum, their actions have thoroughly contradicted their words.

The façade of taxpayer protections being pushed by the governor and some legislative leaders is exemplified by an amendment to House Bill 39, currently being discussed in a joint House and Senate conference committee. The amendment, which was jointly offered by Republican Rep. Stan Saylor and Democrat Rep. Mike Veon, created a dozen “loopholes” that would exempt many school district expenditures from taxpayer control. These include debt service, pension payments, health care costs, and school construction costs, to name a few. The breadth of Saylor/Veon’s spending loopholes leads one to wonder if taxpayers would be able to control any school district spending at all.

The consequences of enacting such a “referendum-in-name-only” would be felt as soon as the coming budget year. Several months ago, the Pennsylvania School Employees Retirement System (PSERS) announced that school districts will have to increase their 2006-07 pension contribution by $220 million – a whopping 38 percent – and some school districts have predicted that tax increases will be needed to meet this obligation. With a toothless referendum like that proposed by Saylor/Veon, increases like this will continue unabated.

If a strong voter referendum requirement were in place in Pennsylvania, local school boards would have to make a compelling case to taxpayers as to why a tax hike is necessary or find an alternative way of balancing the budget. In the current situation – as would be the case under Saylor/Veon – taxpayers have no choice but to dig deeper to pay their higher property tax bills.

Of course, many opponents of real voter referendum for school tax increases claim that voters will always reject increases. The evidence from nearby states with taxpayer controls on school budgets does not support this dire view. In fact, it shows that voters are willing to approve school tax and spending increases if they are convinced that those increases are worthwhile.

Over the past five years, Ohio voters have approved 53 percent of tax increases which required voter approval. In New Jersey, where voters vote on both school budgets and budget increases that exceed a spending cap, between 62 and 71 percent of the base budgets were approved, along with roughly half of all increases above the cap. In Michigan, during the 2002-03 school year, more than 60 percent of school capital bond proposals were approved. And in New York, where voters must approve school budgets on either the first vote or on a re-vote (or else the budget increase is capped), 83 percent of all budgets were approved on the first vote in each of the past two years.

Pennsylvanians will never see lasting school property tax relief unless a loophole-free referendum is required for all school tax increases. The Saylor/Veon loopholes only give taxpayers the appearance of protection from ever-increasing school property taxes. Policymakers must help Pennsylvania join the ranks of states that give taxpayers the final say – be it “yes” or “no” – on all school tax increases and reject loophole-laden referendum provisions.

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Matthew J. Brouillette is president & CEO of the Commonwealth Foundation (, a public policy research and educational institute located at the foot of the Capitol in Harrisburg.