SB76: The Sales Tax Myth

This is part three of a series of articles intended to expose the misinformation circulating about SB 76, the School Property Tax Elimination Bill.  Here are links to the two previous articles:

  1. SB 76: The Retained Debt Myth
  2. SB 76: The Myth Of Local Control

Part of the mechanics of generating the replacement revenue for School Property Tax Elimination involves increasing the Sales Tax by 1%.  Most of the State is at 6% meaning that for the majority of Pennsylvanians the sales tax would go from 6% to 7%.  Allegheny Sales Tax is at 7% and it would go to 8% and Philadelphia is already at 8% taking it up to 9%

We’ve heard countless times that if we increase our sales tax from 6% to 7% residents of Pennsylvania will flock to neighboring states to make their purchases.

So how do the neighboring states fair with sales tax when compared to Pennsylvania.  For the Northern tier we would be looking at New York.  New York has a very complicated sales tax system.  The state sales tax  tax rate is currently 4.0%. However counties and local municipalities can also levy a sales/use tax where the total tax rate can be as high as 8.875%.  Looking at the New York Counties that border Pennsylvania the total tax is already at least 8% so increasing the sales tax to 7% is not an issue for New York.

The Western side of the state borders Ohio.  Ohio has a similar approach as New York when it comes to the sales tax.  There are 4 border counties in Ohio .  Two have a sales tax rate of 7.25% and the other 2 counties are 6.75%.  I would be skeptical of Pennsylvanians flocking to Ohio to make their purchases to save .25% on sales tax.  There may be minimal savings for Allegheny residents but we’ll show the fallacy of that logic a little later.

To the east we have New Jersey.  New Jersey Sales Tax is 7%.   Philadelphia’s sales tax is already higher than New Jersey’s sales tax and the exodus to nearby New Jersey doesn’t seem to be a problem.

To the south we have Maryland and Delaware.  The Sales Tax in Maryland is 6% and there is no sales tax in Delaware.   Is this a potential problem for the southern tier?

Let’s look at logistics for just a minute.  According to http://www.pennsylvaniagasprices.com/ the average price for a gallon of gas in Pennsylvania is $1.98.  It can be lower and higher with prices ranging from $1.70 to $3.00.

Let’s go with that lower price of $1.70.   A 1% increase in the sales tax is equivalent to one penny for every dollar on taxable items. If your vehicle gets 30 miles to the gallon you would have to purchase $170 dollars worth of sales taxable items for every gallon of gas that you use just to break even on the sales tax in Maryland.   Remember, you have to drive home as well so that $170 purchase would be for 15 miles each way.  Let’s also remember that gas prices are not going to stay at these levels forever.  One year ago the average price for a gallon of gas in Pennsylvania was $2.61

You should also know that pretty much everything you are going to buy in Maryland has a 6% sales tax.  That would put you at a disadvantage if you are buying clothing items over $50.   Alcohol purchases in Maryland also carry a 9% sales tax.

The western-most part of Allegheny county is still about 15 miles to the nearest town in Ohio.  That town is in Jefferson County where the sales tax is currently at 7.25%.  So are shoppers going to flock to Jefferson County to save .75% or 3/4 of one penny for the sales tax?  Not if they are going to factor in the cost of gas.

For the majority of Pennsylvanians it is just not economical to head off to Maryland to make their purchases from a logistical point of view.  The cost of gasoline alone eats away at any savings you might be anticipating.

As far as Delaware, well we are already at 6% more than Delaware when it comes to the sales tax and we don’t see the flocking that the SB 76 opponents claim will happen.  For most of us, it’s just not economically wise to do so once you factor in the actual cost of gasoline.

For me these arguments are often little more than distractions.  They are designed to redirect our focus away from the egregious nature of the property tax.  They don’t want us to know how the property tax works and they don’t want us to realize the many ways that the property tax negatively impacts working families in the Commonwealth.   Ignore the 10,000 people who face losing their homes; ignore the 350,000 abandoned properties, ignore the blighted properties where people can’t afford to do necessary upkeep to their property because of the property tax.  Do we ignore the growing problems of foreclosures and bankruptcies that could have been avoided with the elimination of the property tax?

In the last three years alone median rent has increased by 5.47% according to the Census ACS survey.  If those trends continue we would see a 27.4% increase in rent over the next 15 years.  The Study tells us that the median rent today is $848 in Pennsylvania.  If the trend continues in 15 years that median rent would rise to $1080.35.  Can we dismiss the role that rising property taxes play in this?  Does anyone think that this rate of increase is sustainable for the average working family?  Even with raising the minimum wage to $10 an hour, the median rent would be unaffordable for most working families.

This situation is only accelerated by the fact that in most counties the school districts with the lowest median household income pay more per thousand dollars worth of property through the mil rates than their neighboring communities.  This has contributed to families doubling up in homes and rental properties leading to overcrowding creating an instability in these homes that will add to the cost of education.

Are we to continue to ignore the growing problem of homeless children in our Public Schools as a result of rising property taxes which also impacts higher cost of of rent? A recent study tells us that there are 25,260 homeless students in the Commonwealth of Pennsylvania.  Do we even bother to weigh in the additional cost to education that comes as a result of this alarming statistic?  You can read more about this problem here: https://jmrodkey.wordpress.com/2016/02/05/homeless-children/

Apparently we do or we dismiss these numbers as not being significant enough to do anything about it as Micheal Woods of the Pennsylvania Budget and Policy Center stated during a hearing in the House on HB 76, the School Property Tax Elimination Bill.

Instead our opposition will clamor for more government programs citing age, regional or class reductions which only grows the government Departments, Agencies and Bureaucracies which, in turn, only increases our tax burden creating more need for more government programs and subsidies.  These programs are not how we reduce the size and cost of government!

While we are discussing the sales tax let’s go back to that 2013 memo that went out from NFIB (National Federation of Independent Business).  They cited points about the sales tax when applied to small business related to SB 76.

NFIB claimed nearly all small business owners report their business taxes on the personal returns of the owner. So for every small business owner who hires a CPA or other tax professional to prepare the tax returns, the owner would have to pay sales taxes on those services. Meanwhile a corporation would not have to pay sales tax on tax preparation.

NFIB goes on to claim most small businesses rely heavily on outside consultants and contractors — like payroll providers, accountants, lawyers, engineers, security, insurance brokers, etc — to perform a large portion of their administrative work. A small business owner would be required to pay sales taxes for the services that a larger corporation could perform using “in house” employees and not be subject to sales tax.

Also a business owner who hires an attorney to defend against a lawsuit would be forced to pay sales taxes on that legal representation. But the plaintiff who hires a lawyer to file the lawsuit would not have to pay sales tax.

SB76 exempts all Legal services, accounting, auditing and bookkeeping services, Advertising, public relations and related services, Services to building and dwellings, consulting services, Information services and Administrative services as related to business to business transactions.  (see pages 80 and 81 of SB 76).  The exemptions are all in compliance with NAICS Standards (North American Industry Classification System) as clearly stated in the legislation.

Do then ever stop to consider how much businesses pay to law firms who specialize  in finding property tax loopholes or the cost to business in appealing wrongly assessed property values.   In the end, who really pays for those fees?

NFIB then questions the Clothing items over $50 by claiming if a small business owner sells a pair of sneakers for $52, the small-business consumer must pay 7-percent sales tax. But if a large box retailer who uses large volumes to sell the same pair for only $48, the large-store consumer pays no sales tax. How is that fair to the consumer or the small business?

I find this criticism particularly alarming since I thought NFIB supports the Laissez Faire free-market system of Capitalism.  The criticism seems more like nitpicking to me.  It gets worse as they go on to claim if a blouse costs $51, the consumer must pay sales tax. But what happens during “Black Friday” when the item is marked down 20-percent? How does the retailer deal with that administrative cost?

The sales tax is only applied at the time of purchase.  If a blouse is $51 but goes on sale for $46 no sales tax would be applied to the blouse.

We all need to understand that we were once a society that depended heavily on manufacturing jobs but society has shifted to more service related jobs.  Taxation, however has not shifted to reflect that change.  Instead, when it comes to education funding we simply rely more and more on taxation of property. SB 76 actually attempts to correct this problem by expanding the sales tax base to cover more service related items.

We should understand that this expansion is going to happen at some time.  The budget debacle we are currently in should make that obvious to all of us.  Do we want to allow expansion to simply raise our tax burden or do we want to use that expansion to eliminate the property tax?  Opponents want to ignore this fact and we think that’s disingenuous especially when their talking points often claim to be looking out for the common workers of the state.

NFIB also fails to include the fact that business currently keep 1% of the total sales tax collected to help cover expenses in record keeping and filing of taxes.  For the small business that amount is  minimal enough to break even, if it allows them to do that.  For the large box stores that 1% can generate a substantial amount of income even though, as NFIB claims, .the larger corporation has “in-house staff” that may not require the services of an outside accountant or lawyer.

NFIB also ignores the fact that a sales tax is applied once at the time of purchase where the property tax can be applied multiple times on any item we purchase.  The Computer I am typing this on came to us from Dell.  The components inside that computer can from other manufacturers.  The Hard Drives, the DVD ROM, the Card Readers, the Motherboard, the Processor….they were all manufactured outside of the Dell Facility.  Each of those manufacturers maintain a building where these items are made.  Many of these manufacturers also maintain a warehouse where those items are stored until sold.  Every building pays a property tax that affects the end cost of that item to the consumer.  Those parts arrive at the Dell plant for assembly.  The shipping company that moves those parts is also paying a property tax.  Once at Dell property tax again is applied.  At every step in the production of this computer it has passed through a facility that is paying property tax and at every facility the cost of the product is inflated as a result of the property tax.

We are talking about eliminating all of those multiple layerings of taxation through the property tax to replace it with a sales tax applied once at the time of purchase.  The difference here is that with the property tax that tax is hidden in the cost but with the sales tax we actually see what the tax is.   I continue to get frustrated with a business mindset that is perfectly okay with hidden taxes but not with taxes we, as a consumer, can see.

Now I understand that the increase may be very small amounting to a few pennies but then again, look at the number items we purchase each year.  Clothing, food, over the counter medications, gas, items for your home, gifts including things like Christmas and Birthday Cards.  Now add that to services you use, lawyers, accountants, etc.  A property tax is levied on every property that you deal with directly along with every property involved in getting those goods to you.  Now add that to your property tax bill and you’ll see that the property tax problem, as bad as it is, is actually much worse than most of us think.

The sales tax attack particularly bothers me when it comes to food.  We understand that essential food items shouldn’t be taxed….things like a loaf of bread.  Yet we tax the land for the items necessary to grow the ingredients for the bread; we tax the land of the producer of the bag the loaf of bread is wrapped in; we take the land of the business that makes the twist ties that seal the bag; we’ll take the land for the shipper that moves those items from one location to another and we’ll tax the land of the retailer that sells us that loaf of bread all the while fooling ourselves that we aren’t paying taxes on that bread.

We do the same thing with the clothing we purchase.  Just because you can’t see the actual taxes paid directly doesn’t mean we aren’t paying taxes on those items.  When it comes to the property tax, it taxes everything.   It’s a hidden tax levied upon the goods at some point during the production process and therefore raises the cost of the goods sold. However, this tax is never revealed directly to the consumer who simply pays a higher price for the good, not knowing that part of that price is due to this tax.

A hidden tax like this can raise prices of goods and lower salaries for workers. Hidden taxes, although hidden, can decrease the purchasing power of individuals significantly.

So why continue to defend the property tax?   Why hasn’t legislation like HB 1189 and HB 504, that wanted to  only reduce property tax while shifting some of that burden to other hidden taxes, met the same ire and vitriol that SB 76 has met.  Are hidden taxes somehow okay but indirect taxation like a sales tax applied only once at the time of purchase not okay?

Few of us really stop to think about the impact of property taxation outside of the bill we receive and pay each year labelled as a property tax.  We don’t realize that we pay the property taxes for businesses and corporations through higher prices for goods and services or that we are paying taxes on items that we have been fooled into believing aren’t taxed.

 

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One thought on “SB76: The Sales Tax Myth

  1. Pingback: SB76: The Reassessment Myth | On the Edge of the Precipice

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