The Cascade Effect Of Property Taxes

Adding Insult to Injury:  The Cascade Effect of the Property Tax

Most of us would consider it abhorrent to tax the basic essentials of life. Nutritional food is one of those essentials.  Imagine if the legislators decided that, in order to raise revenue, they would put a tax on a loaf of bread. Would there be an outcry about the impact of such a tax especially concerning the poor?

And yet, through the property tax, that loaf of bread is taxed:  not just taxed once but many times over. We tax the land of the farmer who grows the wheat to make the bread. We tax the land of the baker who bakes the bread. We tax the retailer who sells the bread.  We also tax the land of the shipping company that moves the bread from place to place. Each of these steps adds levels of taxation that drives up the cost of that loaf of bread. Let’s not forget the property tax on the company that makes the wrapper for the bread  or the property tax on the company that makes the twist ties to seal in the freshness of that bread.  Every producer in the process has their land taxed and that tax drives up the cost of the final product

It isn’t just the bread we purchase.

You might be thinking about starting a home garden.  The plants you buy at the home garden center at your local Lowe’s or Home Depot are impacted by the property taxes on those retail centers.  They didn’t grow those plants. They purchased them from another  facility that had their property taxed. Then those goods were shipped and the shipping company is paying a property tax.

Everything we purchase from our food to our newspapers to our computers to our television sets is all impacted by the property tax; it all has cascading levels of hidden property taxation driving up the costs.

It doesn’t stop with physical goods we purchase.  It also impacts every service we use: the lawyer, the accountant, the hair stylist, the waste management companies, the plumber, the auto mechanic, the doctor’s office, even the convenience store when you get your gas to drive to and from work…they are all hit with property taxes and those property taxes add to the cost of providing those services and products to us.

Let’s not forget the cost of rent.  One of the prime driving factors behind the higher rent is the ever-increasing property taxes.  Even though you may not actually see a property tax in your rent, it’s there.  You are paying the property tax through higher rents. It would be easy to blame the “greedy landlord” but if you want to stay in your rented home that’s not going to happen if the landlord doesn’t make adjustments to the rent that reflect the increases in the property tax.  If the landlord doesn’t make adjustments, the landlord will lose money on those properties and eventually the property will change hands.  If the landlord doesn’t pay the property taxes the property will be seized and you won’t have your rented home anymore.

Are you thinking about remodeling your home?  Maybe you want to add a shed to your backyard.  You’ll pay a little extra for everything you purchase because those items have been taxed through the land of the businesses that produced them and the land for the store that sold them to you.  Adding insult to injury, after you finish you face the distinct possibility of seeing your assessed value increase so you can pay more property taxes on top of the hidden property taxes you paid when you made your upgrading purchases.

That’s because property tax is the tax that just keeps taking.

Few ever refer to the property tax as a “Cascade Tax” but it does have the same effect with one important difference.

Under a cascade tax a percentage is levied based on the actual value of the product being produced.  The property tax is an arbitrarily assumed value assessed on the entire property that impacts everything that company does.  And yes, it even results in the property tax being passed through to the consumer on things that normally aren’t taxed.

As recent county-wide reassessments have revealed, using the assessed value of a property to determine the worth or the property is a seriously flawed system.  The reassessments result in countless appeals.  The majority of those appeals are approved clearly demonstrating that the original assessed value was an incorrect assumption of the property worth.  In cases where the assumed assessed value is higher than the actual worth (market value) of the property this can result in over-inflated taxes which will result in artificially and over-inflated costs for goods and services.

This is a part of the property tax we usually ignore.  We complain about higher costs, higher service fees, higher rent but often our anger is misdirected.

This cascading effect of the property tax impacts the cost of everything we purchase, goods and services alike,  but it’s all hidden from us. It is a tax that we, the consumer, must pay even though we don’t actually see it tabulated into the cost of the product or service.  The cascade effect only adds to the already egregiously regressive nature of the property tax.  That is exactly the way a cascade tax works.

This cascading effect is entirely outside of your control when it impacts the essential things for you and your family’s survival.  Whether you are visiting your family doctor, filling prescriptions at the local pharmacy, making healthy food choices for your family on providing them with clothing, shelter and essential needs: the property tax will find you.

The largest portion of this property tax is seen through the school property tax to fund education.  We believe there’s a better way.

While looking at a property tax elimination proposal (HB/SB 76) the Independent Fiscal Office did a study that demonstrated since 1994 the property tax has increased 146% as of 2013.  In contrast, the Pennsylvania average weekly wage (AWW) has increased by only 80% – just a bit more than half the increase in the school property tax since 1994.

With the property tax almost doubling the increase of wages and those property taxes impacting everything you purchase and every service you use your wages will buy less of those goods and services than they did before.

In 1994 a Big Mac at McDonald’s sold for $2.30.  In 2013 that same Big Mac would cost you about $4.00.  While the local property tax might not be the only reason for the increase, you can’t ignore that increased property taxation plays a part.

Less buying power for the consumer impacts job creation.  The less demand there is for goods and services will translate into fewer people necessary to supply those goods and services.

Now imagine eliminating the property tax by replacing the revenue with an increase in the PIT tax and an increase and expansion of the Sales tax. Remember that you only pay the PIT tax once on new income. You also only pay a sales tax once at the time of purchase.

The savings to the consumer would not just be through the money saved by the elimination of the property tax; it translates into savings on the goods and services we use. It gives the consumer more buying power which translates into an ability to make more purchases.  That creates more jobs which creates even more disposable income.

Opponents to HB/SB76 often cite the impact on lower income families as a reason for their opposition.  The Independent Fiscal Office disagrees saying that:

  •  The elimination of school property taxes increases the disposable income of property taxpayers.
  • The analysis indicates that HB/SB 76 will cause home values to increase, on average, by more than 10% statewide.
  • 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.
  • 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.
  • Benefits would also accrue to home builders, home developers, and other land owners who convert current land holdings into new housing.
  • 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.

That’s just factoring the direct benefit to working families through the elimination of school property taxes.  When you look at the additional costs to all of the goods and services because of the cascading effect of the property tax, the average Pennsylvanian will see even more savings.

By giving the consumer more buying power we are giving the consumer a raise in their income without artificially adjusting it through the interference of mandatory government wage increases. Instead of adding layers of taxation which artificially drives up the cost of everything, we get government out of the way, we still provide funding for our schools and we make living in Pennsylvania a better option for everyone.

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6 thoughts on “The Cascade Effect Of Property Taxes

  1. Jim,

    I have been thinking a lot about this over the last couple of days since reading your article above. It seems to me that states with higher property values would be negatively effect by your proposal and states with lower property values would be positively effected. But then I starting thinking about the states with higher property values also have higher wages and vice versa. So in my eyes this should not be done on a national scale.

    So lets move onto a state wide scale of your proposal. First, huge positive effect on states with no income tax (but I guess they would keep the property taxes as is). Next, we have the individuals who live near Non-Income Tax states. I would live in the Non-Income Tax state, work in the Non-Income Tax state, and shop in the Income Tax state (but I guess I am paying the stay property taxes as is) so Non-Income Tax states will not be effected. So now I guess you would have look at a greater than or less than formula to determine if it is a good deal for your state. The formula would like something like the following:

    State Income Taxable Wages * State Tax Rate > Current/Forecasted Property Tax Revenue = A Bad Idea

    or,

    State Income Taxable Wages * State Tax Rate < Current/Forecasted Property Tax Revenue = A Bad Idea

    Also an argument could made that it is easier for someone to avoid paying state incomes taxes verse paying property taxes (assuming they actually want to live indoors and they are willing to not file income taxes). So in my eyes this should not be done at the state level.

    So lets move on to the local scale (i.e., cities and counties, etc.). Now this just makes my head hurt. I live in Georgia and we have 1 major city (Atlanta) and 2 – 3 middle size cities (Macon, Columbus, and Savannah). Now Athens (Home of the University of Georgia) is also in Georgia with it's, and I am guessing, over 50% population being students with low to no income and on a per capita basis a lower income level when compared to Macon, Columbus, and Savannah. Athens, Georgia has very high property values (especially near the college) as compared to their "taxable income" amounts. I think Columbus would be the hardest hit (and any city outside of on army base like Fort. Benning). Soldiers when they can afford it and the army allows it would prefer to live off base (increasing property tax revenues for Columbus). Fort Benning is not the largest army base but it was over 100,000 personnel and a good number of them have "tax states" other than Georgia (which means if they live in Columbus they don't report income to Georgia). Without everything I have pointed out on the local scale just think about the headache of the reporting requirements!! So in my eyes this should not be done at the local level either.

    Please note – I agree with your view that property taxes is a HUGE HIDDEN tax!!

    What do you think about the following proposal:
    1. On a State level increase State Sales Tax Rate (businesses that resale don't pay so they can't pass that cost onto the customer) and states already have a structure for collecting and reporting this information.
    2. Remove property taxes (both for real and personal) on businesses that are classified as businesses who don't have to pay sales tax because of they are exempt.
    3. Collect property taxes with the end user on residential property only. The Sales Price * Rate. Residential property should be defined as any building in which someone calls home, as defined as a dwelling, or where one sleeps. Homeless shelters, batter women shelters, shelters for children, and similar organizations could be exempt.

    If I completely missed your point please don't laugh at the amount of time I used writing this!

    Thanks for the article!

  2. Pingback: A Response to Senator John Gordner’s comments on School Property Tax Elimination (SB 76) | On the Edge of the Precipice

  3. Pingback: Out-migration, Property Taxation and Pennsylvania! | On the Edge of the Precipice

  4. Pingback: An Open Letter To The Taxpayers of Pennsylvania | On the Edge of the Precipice

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