In response to the Senate Finance Committee IFO Hearing (10-15-2013)

During the hearing on SB 76 concerning the IFO report, there were several points that I felt were missing in the analysis.   The historic aspect on the charts should raise some concerns of sustainability.

chart 1The 10 year trend shows that while the CPI increases at 61%, the cost of education spending related to the property tax increases at 146%.  If this trend is to continue, compounded by the additional weight of additional needs related to the pension, limiting education funding through the property tax to property owners will bear a devastating impact on home owners in the state and as a result negatively impact the economy of the entire state.  This will have a most profound impact on the business community.  With less more to spend, sales will decline and revenues from the sales tax will also decline.  By creating a less favorable business environment for both the consumer and the business community than already exists in the state this will hinder private sector job creation which will only drive down PIT revenue to the state.

chart 2That trend can be seen in the sharp drop in sales tax revenue during the two recessionary periods of the last decade the the 2nd graph.  The 2nd chart reveals that during this time education spending related to the school property tax increases while income in the consumer base dropped sharply.   During a time when property taxes should have maintained a 0% increase it places a heavier burden on homeowners during a time when they were less able to pay the property tax.  Without a school property tax there would have been more discretionary spending revenue available to the consumer which may have actually contributed to less of a negative impact on the sales tax revenue.

I am of the opinion that the analysis works off several assumptions that do not correctly address the entire picture.  First, the report looks at all PIT and Sales Tax which all working families pay and contrasts this to the Property Tax, which is only paid by property owners.  Removing the school property tax infuses 11 billion dollars back into the economy that allows for more discretionary spending increasing the sales tax revenue in the state.

This, in turn creates a greater demand for more goods and services which can have a positive impact on job creation in the private sector which has the possibility of generating more PIT income.  This will not only provide for the replacement funding of the school property tax but will also add to additional general fund revenue collected through the existing 6% sales tax to better provide for the State funding of education.

At the same time, while making these assumptions, there are some glaring omissions related to future projections that are not part of the historical analysis but should not have been ignored in consideration of future impacts.

During this discussion, the increase in tax liens was also not discussed.  According to the Department of Revenue we are seeing a 1 billion dollar debt related to tax liens in the first 3 quarters of 2013 demonstrating that the current situation has already reached unsustainability for many property owners in the state.  That brings up yet another glaring exclusion from the IFO analysis in relation to the negative impact on certain sectors of the property owners.  The school property tax is a regressive tax that bears the heaviest burden on seniors on limited fixed incomes and on the lower income working families in the state revealing a discriminatory nature of the school property tax.

According to census information the average property tax is $2,270 dollars in the State Of Pennsylvania.  If we take three families living in in that average home paying that average property tax we can begin to see just how discriminatory the property tax is.

If family #1 has a household income of $40,000, 5.68% of their household income goes to their property tax.  Family #2 with a household income of $60,000 pays about 4.55% of their income to the Property Tax.  Family #3 with a household income of $80,000 pays 2.79% of their income to the property tax.

During economic downturns the discriminatory nature of the property tax on those with lower household incomes results in so limiting their discretionary spending as to impact on their ability to provide for necessary needs for their family or to make necessary home improvements.  I believe this helps us to understand why we are seeing so many of our homes in our cities falling into disrepair or actually being abandoned.

The discriminatory nature of the Property Tax is such that it prevents families with lower household incomes from attaining home ownership.   This generates an instability in our communities where increases in rent related to increases in the property tax has the potential of forcing the lower income families to relocate to a more affordable rental home which contributes to overcrowding in rental units because of the unaffordable nature of a rental unit capable of housing their family adequately.  As evidence by the historic trend graphs in the IFO report, in down economic times, Personal Income severely drops while the Property Tax increases only further resulting in the ability to more readily come back from the economic downturn which has the potential of slowing an economic recovery.

The IFO analysis also stated that SB 76 completely removes the school district’s ability to incur any future debt which is not true.  The school district may incur future debt through a no exemption voter referendum applied through a local income tax.  This places those decisions solely in the hands of those who will have to pay for the increases providing them with a choice that is currently not available to them.

The IFO analysis also stated that the limitations of the current referendum have slowed education spending.  That might be true but this ignores that the Department of Revenue just increased the amount before such a referendum is required which will only serve to accelerate that spending.  That will yield an increase in the disparity between the CPI and future education spending.  This will further be accelerated by the IFO’s decision to ignore the additional costs realized through the property tax to provide for the pensions of public sector school employees.   These increases will also drive up the costs of materials necessary for renovations and the labor related to those renovations or new building projects further out dating the prevailing wage limitations currently seen driving up the need for a larger amount of debt service related to new school construction.

As noted in the hearing, the analysis of impact in relation to winners and losers is not in this IFO report and the original report based on SB 1400/HB 1776 was referenced.  Here are just a few observations for the previous study.  To correctly assess winners and losers you must contrast the losers and winners under the current system to the losers and winners under the proposed system.  To simply state that some will people will pay more while ignoring that they are currently paying a lower percentage of their income to the property tax.  The questions is not so much a question of win or lose, but a question of whether or not the new system under HB/SB 76 is a more equitable system for everyone.  I believe that the answer to that question is a resounding yes.

In looking at the winners and losers analysis of HB1776 and SB 1400 we find these results from that IFO report.

• The report projects that in year five after enactment HB 1776 will save $1.152 billion annually in the replacement revenue compared to the growth of property taxes if that system remained in place (Page 4, fourth line from the bottom). (Property taxes historically rise at greater than three times the level of inflation [which, by the way, is unsustainable in the long term]; HB 76 and SB 76 limit the growth of the replacement funding to the rate of inflation.)

• The elimination of school property taxes increases the disposable income of property taxpayers. The analysis assumes that 70% of the property tax cut goes to individuals. It further assumes that homeowners spend 90% of the increase in disposable income. (Pages 17-18) (This would be a huge stimulus for Pennsylvania’s economy.)

• The analysis indicates that HB 1776 will cause home values to increase, on average, by more than 10% statewide. (Page 23) (This will restore a large amount of the equity that was lost to homeowners during the 2008 housing downturn.)

• (Regarding business entities) … the income flows through to individuals as higher disposable income. For pass through entities, the analysis assumes that owners and shareholders spend 90 percent of the increase and 70 percent is spent on taxable goods and services, yielding another secondary effect of $34 million in increased sales taxes for FY 2013-14. (Page 18)

• Working age homeowners realize a tax cut. The analysis finds that the increase in federal income tax (through lower itemized deductions), state income tax, and sales tax is more than offset by the reduction in property taxes. (Page 21)

• Retired homeowners realize a significant reduction in taxes. The analysis finds that the property tax reduction easily offsets any increase from the higher sales tax. (Page 21)

• Benefits would also accrue to home builders, home developers, and other land owners who convert current land holdings into new housing plots. Employment would increase in the construction sector as well. (Page 23)

• The elimination of property taxes would significantly reduce the property tax share and would clearly increase the attractiveness of the Commonwealth for business location and expansion. (Page 25) (Expansion of existing businesses and attracting new businesses to the Commonwealth will generate jobs for Pennsylvanians.)

A full understanding of the impact of Property Tax reform should not take a singular exclusionary  report without contrasting it to other reports and observations.  The Department of Revenue Report actually stated there would be a surplus while the IFO report talks about the first year being a revenue neutral exchange.  How can the same numbers yield such drastically different results?

Furthermore, a study by PAR (Pennsylvania Association of Realtors) gives different results.  That results looks at the positive impact on home ownership which would certainly be a beneficial impact on the economy of the state in general.  To review the PAR analysis you can visit their review their analysis at http://realreform76.com/

The fact is that the current system is already unsustainable and the longer we wait to enact such legislation the more difficult it will be to make the numbers work.  Education spending must be capped to inflation and this must be followed by serious legislative efforts at reforming unfunded mandates like the pension, prevailing wage, education funding formula laws among other aspects.

Without Elimination of the School Property tax we will most likely see the same progress on those reforms that we have seen in the past.  None at all.   As long as they can keep pushing the cost of these programs down on the property owners our legislators have chosen to ignore those issues.  The results of this is a negative impact on Pennsylvania’s economy which is both resulting in a rising a poverty level matched by a declining median income.

Our legislators can choose to simply keep kicking this can down the road or they can take a bold position  of leadership that brings economic recovery to the state that begins with Property Tax Elimination that leads to the other necessary reforms this state so desperately needs.

For more information regarding School Property Tax Elimination please visit www.ptcc.us

You can also watch a video presentation explaining the details of HB/SB 76 here:

http://www.youtube.com/watch?v=qle06alZcFA

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One thought on “In response to the Senate Finance Committee IFO Hearing (10-15-2013)

  1. Great response. Now how do we boil this down to 1 page common sense words that every one may understand.

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