The property tax relief plan introduced by gubernatorial candidate Lynn Swann last month offers a radically different approach to the problem. Swann’s proposal contains some good provisions, some flawed provisions, and some provisions that can be improved.
Mr. Swann’s proposal to consolidate all school district healthcare plans has some merit. Currently, each district offers its own health coverage plan. A 2004 study released by the Joint Legislative Budget and Finance Committee found that consolidating all districts into the current healthcare plan for state employees would save taxpayers $835 million yearly. Greater savings would accrue to taxpayers if school districts adopted consumer-driven healthcare plans with greater cost-sharing by employees, as is standard in the private sector. Reforming school health plans would reduce spending, and should occur regardless of the particulars of property tax reform.
Mr. Swann also suggests that school districts allow property taxpayers to pay their taxes in installments instead of a lump sum payment. Currently, several local governments permit installment payments. This, of course, would not reduce the tax burden but it would help spread out the taxpayers’ pain.
The flawed parts of Mr. Swann’s property tax relief plan include proposing to use surplus revenue from the state General Fund to provide immediate property tax relief. For example, Mr. Swann would use much of the $722.8 million in excess tax revenue that the state collected in the first 11 months of the current fiscal year.
The problems with this proposal are twofold. First, tax revenue surpluses from year to year are highly unpredictable. More importantly, using General Fund surpluses for property tax rebates is merely tax shifting. General Fund surpluses are paid primarily by sales and income taxes and should be returned to taxpayers via sales or income tax reductions—as would be required by the proposed Taxpayer Fairness Act (HB2082)—rather than property tax rebates.
Mr. Swann’s proposal for long-term relief involves taxing property at a county-wide rate. This proposal suggests revenue neutrality—each school district and municipality will get the same revenue from property taxes as they do now—and assesses a uniform tax rate on all properties. As “revenue neutral,” school districts that currently spend more would receive more from county-wide property taxes. Mr. Swann calls for using gaming revenue (when available) and General Fund revenue to ensure that no resident will pay more in property taxes than they currently pay. It is unclear, however, how much this tax shifting will cost state taxpayers.
Mr. Swann also proposes limiting increases in property tax rates to 3% each year. This hard cap on increases will certainly slow the current tax growth rates. However, voter referendum on all property tax increases, without exemption, would make districts more accountable to taxpayers while allowing flexibility to increase spending when board members can justify it to voters.
The primary focus of Mr. Swann’s long-term plan for property tax relief is changing to a tax based on the purchase price of a property, rather than the assessed value. The problem Mr. Swann is attempting to address is very real. For example, if a district raised its property tax rate by 4% while the assessed value of a home increased from $100,000 to $120,000, the homeowner’s property tax would increase nearly 25%. This is a common occurrence in many parts of Pennsylvania.
Under Mr. Swann’s plan, the value on which a property is taxed would not change until the property is sold or is “radically changed.” Mr. Swann correctly identifies assessment as an important aspect of property tax reform. However, freezing the property value at the sale price discourages housing sales, creates potential tax evasion, encourages converting residential properties into rental units, and shifts costs to new homeowners and businesses. A better approach could be to limit increases in the assessed value of a property (with exceptions for major improvements), which would have the same effect without discouraging housing sales. For example, the state of Michigan caps annual assessment increases at the lesser of 5% or the rate of inflation.
The goals of property tax reform should be to reduce the overall spending burden on all taxpayers, give voters the power of referendum at the ballot box against unnecessary tax increases, and increase schools’ accountability through greater parental choice and competition among schools. Although Mr. Swann provides some solutions to the property tax problem in Pennsylvania, his proposal falls short of solving the crisis.
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NathanA. Benefield is a policy analyst with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.