The Pyramid Impact of Property Taxation

I was recently reading a report on the impact of applied business to business sales tax transactions and saw an interesting diagram demonstrating how these multiple layers of taxation affect the cost to the final consumer (here’s a link to that report: link).

The same principles apply to property taxation.

Most of us see property taxation only through the actual property tax bill we receive annually without thinking about how the property tax is also inflating the cost of every thing we do…every good we purchase and every service we use.

Here’s the chart from the sales tax impact booklet:

Property Tax Pyramid

Let’s apply this to our normal purchases by looking at something as simple as purchasing a loaf of bread.

It all starts with the farmer who grows the wheat.  When the land on which that wheat is grown is taxed it impacts the cost of the wheat that is sold to the baker but’s let’s also remember that the wheat doesn’t magically appear and grow on the farmers land.  The land must be cultivated and the seed to grow the wheat must be purchased.  That will take equipment and the raw material necessary to turn that land into a field of wheat.  Everything the farmer purchases to do just that comes from a supplier who is also paying a property tax, so the price the farmer is paying for those things is impacted by the increasing property taxes.

The farmer provides the raw material for the ingredients necessary to bake the bread but just as the wheat doesn’t magically appear on a farmer’s land, the final product also doesn’t magically show up at the bakery.  It must be shipped and a portion of the cost involved in a shipping company is impacted by the application of a property tax.

The baker, or manufacturer of the bread, needs more than just the wheat to produce a loaf of bread.  There are other ingredients involved and the likelihood of those separate ingredients coming from multiple farms is an obvious conclusion.  However, it’s not just the ingredients for the bread.  The bread must be packaged and the packaging is coming from another business paying a property tax.  Those little twist ties that seal the bag maintaining the necessary freshness and all the items necessary to protect that product when packing it for shipping are all coming from some business that is paying a property tax.  The cost of that will be realized in the final cost charged to the distributor.

So now the loaf of bread must, once again, go through the shipping process to go from the baker to the distributor.  That will incur another inflation of cost on the final product as a result of the property taxes applied to the distributor.  But let’s not forget that the distributor also has other costs and everything they purchase or every service they use is coming from another business that is paying a property tax.

From the distributor, the product finally arrives at the retailer which is also paying a property tax which will add another layer of cost to the final product before the consumer picks up that loaf of bread, takes it to the register before finally getting that loaf of bread home for consumption.

The point is a simple point but yet it evades most people.  We can complain all we want about the cost of a loaf of bread but let’s not forget the role that property tax has played in making that loaf of bread more expensive.

Let’s also not forget that it is not just the loaf of bread….it’s everything you purchase…every service you use….it’s all seeing an inflation of final cost because of the property tax itself and in most cases it’s seeing the application of multiple layers of property taxation applied to the final cost of that product.

As we enter another back-to-school season, we are once again hearing about the need of donations of school supplies for our children attending our public schools which are largely funding by the personal property taxes we pay on our homes.  It’s not likely that we’ll think about the multiple layers of taxation through property taxation that’s applied to those book bags, notebooks, pencils and pens, school clothing, school lunches and all the other good you’ll purchase as a result of sending your children off to school.

Paraphrasing from the sales tax booklet, multiple taxation is an undesirable outcome of the property tax imposed on business because it affects business choices of input purchases, location of jobs and investments, and organization of business structures. It favors larger organizations over smaller businesses because they can internalize certain costs where the the smaller business cannot, putting the smaller businesses at a significant cost disadvantage purely because of a distortive property tax policy. With such multiple layers of taxation along the production chain, different products and services purchased by households from different sources would be subject to varying
effective tax rates. This distorts consumer choices by penalizing the purchase of goods and services subject to higher effective tax rates.

According to the National Taxpayers Union Foundation (link), while statistics vary by area, experts estimate that between 30 and 60 percent of taxable property in the United States is over-assessed, and this leads to higher property tax bills. Adding insult to injury, these same studies demonstrate that middle- and lower-income taxpayers are among the most often over-assessed.

These same studies also tell us that typically fewer than 5 percent of taxpayers challenge their assessments, even though the majority who do so win.  Could that have anything to do with the fact that middle and lower income households are less likely to be able to afford, both in time and resources, to fight back?  Isn’t that, in itself, a serious flaw of property taxation?   After all, I wouldn’t like to think that such a thing was actually intentional!!!!

Wouldn’t the same apply to the smaller business who most likely does not have a team of lawyers and accountants on their payroll to fight back against this injustice?

And yet let’s not miss the most critical aspect of that whole portion of this dialogue.  Not only are we paying more for the final product because there is a property tax, we are paying even more because the chances are pretty good that somewhere along that whole production cycle with it’s multiple layers of property taxation, the taxes are devised from a system that over-assesses property worth resulting in even higher prices.

Every homeowner and business who is paying taxes based on an over-assessed value of their home is paying property taxes on property they do not physically own.  When this is happening in the application of a system of multiple taxation, distorting costs at every step of the way, we need to stop and ask ourselves if it’s time to put an end to this feudalistic system of taxation.

So today, on Labor Day, as you gather with family and friends for that cookout in celebration of the labor and industry of the Pennsylvania Worker and Family take a good look at that grill and at the picnic spread.  The hot dogs, hamburgers, buns, salads, chips, sodas, beer and anything else spread out in front of you and even that grill, picnic table, canopy and bug zapper…it all cost you more than it should have thanks to the property tax and the multiple layers of taxation applied to each and every one of those items.

In the name of justice, if the property tax is unfairly being applied to middle and lower income families through over-assessment; if it has a distorting and negative impact on smaller family owned and operated businesses; if it results in paying taxes on property you don’t physically own while inflating the cost of all the goods you purchase and every service you use all based on a system where as much as 60% of properties assessed are over-assessed….how can anyone justify clinging to this archaic and harmful system of taxation?

Only total elimination of the property tax will work.  Property tax reduction schemes never work out well in the long run but there is also that moral component.

Maintaining just a portion of the property tax leaves behind a system that has not corrected the over-assessment issue, still adds multiple layers of cost to the final consumer product and will continue to more adversely impact those who can least afford it.

Maintaining even just a slight portion of the property tax, replacing that revenue by increasing other taxes, will see the continual increase in property taxes estimated by the Independent Fiscal Office to average an increase of 3.2% over the next several years making those least able to afford it even more unlikely to sustain such increases all while paying higher taxes in other areas.  It simply perpetuates the injustice of the property tax while forcing higher taxes in other areas.