The Regressive Nature Of The Property Tax

Often times, as we talk about property tax, we only talk about the total amount paid.  It’s difficult to measure the property tax based on a person’s ability to pay by only looking at the total amount paid in establishing a comparison for demonstrating the outright unfairness of the property tax.

In order to better understand this let’s look at the PIT (Personal Income Tax).  Obviously, the more you earn the more you actually pay.  The median household income in the Commonwealth is $52,000.  A 4.95% PIT (the proposed amount for elimination of the school property tax under SB 76) on a household earning $52,000 would translate into $2,574 with about $978 of that going into a designated fund for education that returns, dollar for dollar, what your district is receiving through the school property tax.   Another household with a $60,000 income would pay more in the PIT ($2,970 with about $1,100 going to the education funding lock box).  While the household earning more pays more they are still paying the same percentage.

Frankly, I’m a little tired of hearing our opponents claim that eliminating the property tax would be a windfall for the rich on the backs of the working poor.   That’s just bullcrap.  If they had bothered to do any research at all they would know that the existing property tax is the most regressive tax there is in Pennsylvania.  What bothers me the most is that I know that most of them have done this research and most of them are fully aware that SB76 creates an equitable form of taxation that is framed around ability to pay.  This leads me to question the motivation of those who defend property tax for whatever reasons while completely ignoring the regressive nature of the tax.

Simple question here:  Would there be an outrage in the state if we changed the PIT so that the less you earn the higher your PIT rate would be?  Let’s say we levied the PIT at the 4.95% for those earning median income or less and 2.95% for those earning more than the median income.   Would there be shouting from the rooftops of the unfair nature of that type of taxation?

Our Commonwealth Constitution has a clause in it called the uniformity clause.  It is found in Article 8, Section 1 where it states:

All taxes shall be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and shall be levied and collected under general laws.

When it comes to the property tax, uniformity is an abject failure. The more fixes they come up with the more they fail in upholding their sworn duty of upholding the uniformity of taxation required by our Constitution. Property tax has become an open and festering wound that many of our legislators try to fool us into believing can be stopped with band aids.   It is destroying our economy, decimating the lives of many people who face losing their homes as a result while becoming an ever growing beast requiring more and more of our resources to maintain.

Look at all of the unfunded mandates that hit our school districts:  Pensions, Benefits; Prevailing Wage; Taxpayer funds used in collecting Union Dues and the countless unfunded but mandated regulations we find in Title 22 of the Pennsylvania Code or the Public School Code of 1949.   How many of them do you think would have happened if the state wasn’t relying on the local property tax to fund those unfunded mandates?

They may have created a system where they can hold the line on increases in taxation at the state level but when it comes to education funding they created a system where they can hide behind that “no increase” claim while watching school district taxes rising because of their actions at the state level.  State government tells us to fight this at the local level but at the local level they can show us the unfunded mandates and tell us their hands are tied.

While we fight the “who do we blame battle” we neglect to actually look at the property tax, what it does and how it works (for government not the people because it doesn’t work for the people)

When it comes to your home, the more your home is worth, the higher your property taxes will be.  The devil, as they say, is in the details and when we begin to explore those details with the property tax we find a very uncomfortable and heinous reality.

The above example is how property taxation really works but its hidden through a system that keeps most of us unaware of what it really happening.

Property tax is collected through a millage rate that has nothing to do with your income or your ability to pay.   Depending on the assessment; depending on the location; the millage rates vary across each county and across the state resulting in a wide array of differences in taxation based on assumed property worth.  Can you imagine paying different rates of Sales Tax and the confusion this would create if the only determining factor in what the Sales Tax on an item would be was determined by 5 members of a local board with your county divided into several local boards all charging different rates on the same items?

What if the actual sales tax on the items you purchased was based on an assumed worth and not the actual price at the time of the sale:  Two identically lamps priced the same but taxed differently because an assessor determined that one of those lamps was actually worth more than the price being asked?

What if, year after year, you have to continue to pay that sales tax on that lamp simply because you still owned that item until you eventually pay  more in taxes on the item being taxed than its worth.

Ironically, this is exactly how the property tax works….but its worse, much worse.   Let me demonstrate how, if we taxed items we purchased the same way we tax property, if you earned less you would pay a higher percentage of sales tax than if you earned more.

As you look at county millage rate you often see that it runs a wide gamut of differences.  Since we’ve been focusing on Westmoreland County as a result of Senator Kim Ward’s no vote on school Property Tax elimination,  let’s use that as an example.   A mill is $1 for every $1,000 of assessed property value.
Westmoreland

The above chart compares total property tax millage rates to median household incomes in Westmoreland County using data from Westmoreland’s website for the millage rates and census data for the income.

The Common Level Ratio

I don’t want this to sound overly complicated but actually it really is.   I believe it is designed to be complicated so the average person has difficulty in figuring out the actual impact of the property taxes and exposing the truly regressive nature of the property tax.

Figuring out tax data isn’t that simple because of the multipliers being applied in the counties.  Like many counties, Westmoreland is long overdue for a reassessment so homes are assessed at a much lower ratio than the home is actually worth.   A common level ratio is applied of 5.18 to the assessed value of property.  That means you have to divide an average priced home by 5.18 to get to the assessed value.  This make your assessed value seem much lower making an already complicated mess even more complicated.

The Common Level Ratio is determined by a statewide bureaucracy called the Tax Equalization Division (formerly STEB-State Tax Equalization Board) which establishes the common level ratio on property tax averages across the county.   Rather than equalizing, based on ability to pay, the Department actually produces results that make the disparity greater  further expanding on the gap between lower income families and higher wage earners.

A little history:  The State Tax Equalization Board (STEB) was established by the General Assembly in Act 447 PL 1046, 1947, to compensate for the lack of assessment uniformity statewide in distributing school subsidies.  We already saw in 1947 that there was no uniformity in property taxation so a  bureaucracy was established to fix the problem.  As Bureaucracies go, they probably didn’t fail any worse than most but they also certainly didn’t succeed.  As a result of Act 2 of 2013, STEB staff became a part of the Department of Community and Economic Development (DCED) in order to allow for greater efficiencies through the sharing of resources. Referred to as the Tax Equalization Division (TED) within DCED, the division collaborates with the board in order to fulfill its responsibilities.

The Board consists of a Chairman, two Members, and a staff of nine. The Board is appointed by the Governor and approved by the General Assembly for a term of four years.

The Board essentially determines market value of selling homes in the county to develop a county-wide average that is applied to the millage rate as a multiplier to establish what they determine to be the revenue  that the districts should be generating through the property tax.   However, it’s an average and when you look at county data you find that income levels and millage rates vary to such an extent that creating such an average that is equally going to impact everyone is an absolute impossibility.

For the layman look at this example: 5 people earn different wages.  1 at $7.00, with each person incrementally earning 1 more dollar per hour than the first.  Combined they earn $45 which creates an average of  $9.00.  If their taxes are based on that average of $9.00 only one person is taxed at the actual amount but the two lower pay a higher percentage and the two higher pay a lower percentage. The more you make over the $9.000 per hour, the more you win.  The less you make, the more you lose. When those who make less pay more we call this regressive taxation.

You can see the 2014 Common Level Ratio applied county by county through this file: LINK

All of this is only made more complicated by the fact that any assessment of a home is based on an assumed value of that property.   If it is determined your home is worth $118,000 and the common level ratio is applied it looks as though the homes is being assessed at about $23,000 but once the common level ratio is applied it hits that tax intended mark of $118,000.  This inflates the millage rates to meet demands.

This actually allows taxes to be manipulated resulting in a need for a county-wide reassessment that can be very expensive.  It can also produce data that actually isn’t consistent to fair-market values in housing.  If you can’t sell your home at the newly assessed price you wind up paying taxes on property you don’t own.   If you can’t keep up with the taxes and are forced to sell the home the home may be sold for less than the assessed value allowing for the new homeowners to apply for a lower assessment of their property and therefore pay lower taxes on that property;  A lower tax not available to the previous owner that may have been more affordable to them.  The previous owner will not get a rebate on the taxes they overpaid.

It’s a regressive tax that is based on assumed values and averaged estimates.  The estimates of the Tax Equalization Division, not matter how complicated their formulaic system may be, comes from a Board who may never have been to your county, haven’t physically looked at any homes and establishes a controlling average ration to be applied to everyone in the county regardless of income.  It fails because it assumes that the property tax can somehow be fair and equitable.  It is impossible to make something equitable that is based on a system of taxation that cannot become equitable.   There are too many varying factors.

Regressive Taxation Made Worse Through Varying Millage Rates

Okay, now let’s try and simplify all of that.

Remember 1 mill is equivalent to one dollar of assessed property worth.   Why does Arnold, the lowest on this chart based on median household income, pay $24.48 more for every thousand dollars of assessed property worth than Murrysville where the median household income is more than 3 time that of Arnold?

Perhaps a more important question is why the tax rate on $1,000 of home worth seems to consistently decrease as median household income increases?

It’s not just disparities of taxation of municipalities within the county but disparities within the municipality itself.  That’s because the property tax has nothing to do with ability to pay.  Let’s look at Arnold to demonstrate this.

The median income for Westmoreland County, according to the census data, is $50,736. Now, let’s assume for moment that two families purchase homes in Arnold.   At the average home assessed at the $118,000 average price, you would pay about $1,743 in property taxes annually.  If you are at the median household income level in Arnold which is $25,758, about 7% of your income is going to pay that property tax.   However, the median income for the county is $50,736.  If a second family in Arnold is making that median household income about 3.5% of your income is needed for your property tax.  That’s half of the 7% other families at the median income average for Arnold of $25,758 would be paying.

Contrast this to Murrysville.  Residents in that area in a home assessed at the county average of $118,000 are already already paying $24.48 less per thousand dollars of property worth than residents of Arnold.   The total property tax bill would be around $1,454 in property taxes.  That’s $3,000 less but remember that Murrysville median household income is almost 3 time more than the median household income in Arnold.  A property Tax bill of $1,454 on an income of $90,220 is only 1.6% of the income.

How is this form of taxation even remotely considered fair?

 

Actually, doing this county by county, there is a pattern where we find that where median household income levels are lower the millage rates are higher.  I live in Lebanon County where the County median household income is, according to census data, $54,818  .  However, in the City of Lebanon the median household income is again much lower.  The median income in the  city is $32,794.  That’s $22,024 less.  Yet if we look at the millage rates we find that city residents are at a much higher millage rate than the surrounding municipalities.

Because we had a recent court-ordered reassessment so the common level ratio doesn’t come into play.  While the millage rates appear to be much lower than Westmoreland we don’t multiply the assessed value by a Common Level Ration.   The assessed value is supposed to be 100% of the home’s worth.

lebanon

Once again we see the millage rate incrementally decreasing as median household income increases.   Is this because the homes that the lower median income families live in are somehow more valuable that they should be taxed higher?  Absolutely not.

City-Data tells us that the estimated median house sold in Lebanon City for $87,620 in 2013. Cornwall: $216,927; Palmyra: $144,223.

So why does a home that sells for $87,620 in Lebanon City pay $8.2813 more per every $1,000 of assessed property worth than a $216,927 property in Cornwall.  It demonstrates one of the inherent flaws of using property to raise revenue at the local level.  It demonstrates the regressive nature of using assumed property worth to generate revenue at the local level.

Recently Lebanon County suggested raising the County property tax by 1 mil which translated into a 40% increase.   While the 1 mill increase is even across the board no matter where you live in the county, when you translate that into percentage of income what you find is that that for the half of the population living below the median household income the total cost is going to be more when based on income instead of property than for those above the median household income.   It creates an illusion of the same rate being applied to all but when translated into percentage of income, the less your household earns the higher the percentage of income is needed to meet that 1 mill increase.

Assessment and the Appeals that Follow can Expand Regressive Taxation

The major flaw in taxes based on assessed property worth is that it has little to do with actual income or with ability to pay.  An assumed worth of property is established and that assumed worth is taxed.  Here in Lebanon we are finding that homes are selling for less than they were assessed at in the court-ordered county-wide assessment.  This has led to appeals which lowers the revenue resulting in the need for raising the millage rates.  Every time this happens, those earning less pay a higher percentage of their income and it’s a practice of taxation that must come to an end.

The ability to appeal an assessment and the success of those appeals should make it obvious as to to how flawed this system of assessments really is.   If the assessments are correct than appeals would be futile but that’s not what we see.

It creates a never ending cycle of appeals that results in lower assessments resulting in lower revenue being generated from those who do successfully appeal resulting in a need to raise the millage rates to meet that lost revenue.  In short,  it is absolutely impossible to look at property taxation and the way it is implemented and reach a conclusion that it is fair, equitable or moral.

It has been said that you will never truly own your home but you’ll always be renting it from the government.  That means when the governments wants exceed you ability to pay you could lose your home.

It is inexcusable that we still have legislators that fail to recognize the immorality and regressive nature of this tax to develop an alternative to the property tax.  That alternative can not mean reduction it must mean elimination.   There must be another way to raise this revenue.

Lebanon County hired an Assessment firm at $5 million dollars (paid for by property taxation) to do the county-wide reassessment.  Over 10% appealed their initial assessment and the vast majority of them saw a reduction in their assessed value. That was 4 years ago but after those initial appeals, the appeals keep coming in.  My wife works for a lawyer and she is continually filing appeals.  Again, the majority of these appeals see lowered assessed values.  The assessment is the only way under the current system to attempt to make this somewhat equitable but it’s such a seriously flawed system that continually fails to do what it attempts to accomplish.

Failed Solutions

Act 1 was enacted in 2006 in an attempt to bring relief from the rising Property Taxes.  To call it a failure is to compliment it.  It included an backend referendum that was supposed to cap future education increases.  School Districts would not be allowed to exceed a capped increase established each year by the Department of Education unless it met one of 10 exemptions.  If it failed to meet the requirements of one of those exemptions they could exceed the cap but only by voter referendum.  The problem here is that these 10 exemptions were so loose that each year about 1/3 of the school districts applied and had their exemptions essentially rubber stamped by the Department of Education.

In 2011 Governor Corbett and the General Assembly, realizing this wasn’t working, eliminated 7 of the 10 exemptions.   This solution also failed to cap spending.   School districts still apply to exceed the cap and the Department of Education continues to Rubber Stamp those exemptions.   At every step of the way Act 1 was smoke and mirrors promising relief that it never provided.  It promised spending caps that it didn’t deliver.

That failure only makes the regressive nature of the tax all the worse.  While a school district might to a specific percentage increase, that percentage is based on the current millage rate not on household income.   Once again, the less your household earns the higher the percentage of your income is needed to meet the demands of the tax collector.

We often hear the excuse that we need spending cuts to eliminate wasteful spending.   I agree but the property tax becomes the enabler of the spending.  Whatever caps we put on education spending today will disappear quickly forcing us to keep fighting a losing battle.  Sometimes I wonder if that’s not really the end goal.  As long as the property tax remains we’ll need institutions making a living out of getting us to be distracted away from eliminating this egregious tax and fooling us to believe, like our legislators fooled us, that Act 1 would actually work.  If we eliminated the property tax we might actually solve the problem which may actually result in some of those institutions from being necessary.

The Solution: SB 76

SB76 starts with the school property tax where everyone pays 1.88% of their income to fund education across the state through the PIT.  It is based on ability to pay.   To meet the balance of the necessary revenue to replace the school property tax revenue sales tax would increase by 1% while expanding it to new items currently not taxed.   Again, the people pay the same percentage, not varying percentages or a higher percentage simply because you earn less.

We have to raise nearly 13 billion in revenue to end the egregious and regressive property tax but instead of a system of taxation to fund education that lacks fairness, uniformity or any sense of ethical taxation, we seek a uniform and fair form of taxation where, based on percentage of income, everyone is paying the same rate.

If you’ve gotten this far then you’ve already read enough  from me this time around.  If you want to learn more about School Property Tax Elimination check out http://www.ptcc.us

 

 

 

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6 thoughts on “The Regressive Nature Of The Property Tax

  1. Reblogged this on Walkable Jenkintown and commented:
    Jenkintown’s problems go far beyond its sidewalks. Everything starts in the way we fund it, and despite what Andrew Smith has recently propagated about living here in his Pollyannish newsletter, our current method of finance will prove unsustainable and exclusionary. Say good-bye, Jenkintown, to everyone but the upper classes.

  2. Pingback: Homeless Children | On the Edge of the Precipice

  3. What about having a “second front” on this battle against this unfair taxation by promoting that no one should buy new houses because the return on investment is non existent? How do you think the Real Estate Industry would react when close to nothing is selling? Probably they would join this movement to approve SB76.

  4. Pingback: On Open Letter to Select Opponents of School Property Tax Elimination | On the Edge of the Precipice

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