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Page last updated: 07/31/07

Why Reform Local Taxes?

Much of the discussion about local tax reform has focused on school taxes.  Local school taxes are the largest local tax bill faced by most taxpayers in Pennsylvania, accounting for 57 percent of all local taxes in 1995. The majority of school tax revenue statewide, 87 percent, comes from the real property tax. (see figure below). Another 8 percent comes from the earned income tax (for definitions of local taxes, see "What are PA's Local Taxes"). Because of their predominant local role, what happens with school taxes, and the real property tax in particular, has important implications for local taxpayers.

Three arguments for tax reform are commonly heard in Pennsylvania.  These include concerns about: 

• Tax flexibility for jurisdictions
• Concern about real property tax
• Concern about local voice
  

Tax Flexibility for Jurisdictions

Under Pennsylvania law, jurisdictions (school districts, county governments, and city, borough and township governments) can only use taxes authorized for them by state law.   They must choose from the menu of local tax options the Commonwealth grants them, and are unable to make up their own taxes.  Some jurisdictions, such as townships and boroughs, have a range of choices available to them.   Others, such as county governments, have relatively few options.  County governments must rely very heavily upon the real property tax because they have few other effective local tax options available to them.

Many local officials believe that the local tax choices are not flexible or fair enough for their jurisdiction.  County officials, for example, often wish they had a local income tax as an option so they could reduce reliance on the real property tax.   Other new local taxes sometimes mentioned in local tax reform discussions include a local sales tax, a personal income tax, and a municipal services tax.  One common argument for local tax reform thus is that tax reform is needed to give local officials and communities new local tax options.

Concern About the Real Property Tax

The real property tax is the most important local tax in Pennsylvania, accounting for 68 percent of all local tax dollars in 1993 (see figure below).  This heavy reliance makes concerns about the real property tax's fairness, efficiency, and complexity even more important.  Not surprisingly, given this heavy use, the real property tax has received a lot of attention from tax reform advocates.

Frequently heard concerns about the real property tax include:

1. Inconvenience:  A real property tax bill typically is a large lump sum of money, covering an entire year at one time.  Local income taxes, in contrast, generally are collected a little bit at a time throughout the year (a paycheck at a time).  Collecting the real property tax as a lump sum can make it harder for people to pay because they have to get the monies at one point in time, rather than spreading the payments out over an entire year.

2. Complexity: The language of the real property tax, such as "assessments," "millage," and "common level ratio"  can be confusing for taxpayers to understand.  In addition, the mechanisms required to keep track of what people owe (i.e. tax assessment offices who maintain detailed property records, etc) contribute to its complexity.

3. Inefficiency: Economists and others argue that local taxes shouldn't discourage good behavior.  Yet the real property tax creates a disincentive for people to take care of or improve their property; if someone improves their property, their taxes go up.  In addition, competition between jurisdictions for tax base can encourage suburban sprawl and inefficient land use patterns.

4. Unfairness: Much of the public attention to the real property tax focuses on unfairness.  Two different types of unfairness are sometimes expressed:

a. Unfairness within a jurisdiction
The amount people owe in real property tax is based on the value of the real property they own, not on their ability to pay local taxes.  Basing such taxes on property alone can create special burdens for taxpayers on fixed incomes, such as the elderly, or taxpayers who need to own a lot of land to make their living (such as farmers).  This means that some lower income taxpayers can end up paying more in local taxes than do upper income taxpayers.

How properties are valued for tax purposes also affects local tax fairness; a tax can be no fairer than the fairness of the assessment process which sets these values. But there have been concerns raised about the infrequency with which reassessment occurs in Pennsylvania, which may mean assessments are no longer fair and that some properties end up paying more and others less than they should. If reassessment occurred more regularly, property values would be set more fairly and the real property tax would be fairer.

A common misconception about the real property tax is that renters do not pay the tax.   Renters do not directly receive a real property tax bill from their school district or local government.  Landlords, however, generally set rents to cover all their expenses (including local taxes).  If the local real property tax goes up, rents end up getting raised as well.  Renters end up at least indirectly paying the real property tax.

b. Unfairness across jurisdictions
Heavy reliance on the real property tax also creates inequities across school districts. Because the amount of real property tax revenue that any one millage rate will collect depends upon the size of the real property tax base, school districts with a relatively large tax base (often resulting from being host to industrial, commercial, or expensive residential properties) can use lower tax rates to get the same amount of revenue than a district with a smaller tax base. These differences due to tax base can be significant; in 1989, Pennsylvania’s 53 wealthiest school districts raised nearly 4 times the amount of local revenue per student than did the poorest 53 districts, almost entirely due to the larger relative size of their tax bases. In fact, the poorer districts used higher tax rates than did the wealthier districts, but yet received less revenue because of their smaller tax bases (Center for Rural Pennsylvania, 1991). The size of the school district tax base affects the amount of real property tax revenue collected per pupil, tax rates, and spending per pupil (see Table 2).

These differences are one justification for state support of local education. Many people consider it unfair for taxpayers in less wealthy districts to face higher school tax burdens through no fault of their own. Similarly, people are also concerned that less wealthy school districts may have a more difficult time providing a quality education to their students than do more wealthy districts. Many consider it unfair for students to receive different qualities of education, based simply on where they happen to live.

Despite these concerns about the real property tax, the tax remains one of the most important in the United States because it does have some advantages compared to other local taxes. The real property tax is a relatively stable revenue source, fluctuating little during economic up-turns and down-turns. This makes it easier for local officials to develop budgets and to be able to provide services throughout the year. Similarly, despite its unpopularity, most taxpayers understand how it works (even if they do not agree with it). It is easily administered, and is almost impossible to avoid, compared to its alternatives.

In addition, the real property tax may not be as unfair as claimed, depending upon your perspective. When considering someone’s ability to pay local taxes, some economists argue lifetime income should be considered, not just annual income. The value of a house someone lives in, for example, reflects their lifetime income, not the income they make in any one year. Simply comparing their property tax bill in any one year to their income in that single year may be unfair because it ignores their overall wealth and ability to pay.

Some of the worst impacts of the real property tax on people with fixed incomes can be reduced by special state programs. Pennsylvania, for example, has a program called the Senior Citizens Property Tax and Rent Rebate Program that helps low income seniors pay their real property taxes so they won’t be forced from their homes.

Concerns About Local Voice

The size of school tax collections has been increasing dramatically over the past 10 years, rising 103 percent between 1985 and 1995 (source: PA Department of Education). Inflation and workers’ wages only increased 44.8 percent and 50.1 percent during the same time period (source: Pa Senate Policy Development and Research Office). Many taxpayers, particularly those on fixed incomes, have expressed concern about how quickly school taxes have been rising, and have felt powerless to do anything about it. Under Pennsylvania law up until now, the only opportunity residents have had for a direct say on school budgets was when electing school board members.

Many other states, in contrast, allow local voters to participate in budgeting through local tax referendum.  These referendum typically allow voters to approve or disapprove proposed tax rates or tax rate increases.   Up until now, Pennsylvania voters have not had a similar opportunity.