Watching the fiscal reports from the state, I’ve read how the revenue generated by the sales tax is not meeting the revenue expectations. While it’s still generating more revenue than it did last year, it’s not growing the way they expected. I then read about factors that lead into this but oddly enough, I never read anyone talking about the increased burden of property taxes and the negative impact this has on sales tax revenue.
To me, this is like ignoring the elephant in the room. Certainly when you increase the tax burden of people in one area it’s going to have a negative impact in other areas. Yet, when it comes to property taxes, it’s like the sacred cow that can’t be criticized when evaluating economic performance in a community or in the state.
Let’s go back to a chart released from the Independent Fiscal office.
This chart shows revenue growth from the school property tax, Personal Income Tax and the SUT tax.
You will notice that the Personal Income Tax (PIT) and the Sales and Use tax (SUT) generated more revenue over time as did the Property Tax. The difference that is not noted in this chart is that during this time period, neither the PIT nor the SUT, saw an increase in the tax. In order to meet the revenue growth of the Property Tax, it literally required thousands of tax increases across the commonwealth.
You will also note that there are two dips in the PIT and SUT generated revenue. Both were during an economic recession with the 2007-08 recession taking a much harder hit. And yet, during this time we can see the property tax burden keeps increasing and this is what opponents to elimination refer to as the stability of the tax. By that they mean, during bad economic times, school districts can continue to raise the tax burden to generate more revenue but we don’t stop to discuss how this negatively impacts the other revenue streams. It stable for them but to reach this conclusion they ignore the instability this causes everywhere else.
When our tax burdens increase, our spending ability decreases. We will naturally have less disposable income to purchase other items or use in service related industry. As a result, a property tax increase will create a negative impact on the revenue generated from the sales tax.
That impacts revenue to be used for other essential services in the Commonwealth so while the Property tax creates a stability for the school district in raising taxes, it creates an instability for the entire state making it more difficult to come back off a recession. It does so in ways to go beyond the realm of the SUT tax generated revenue.
You see, it’s not just this period during a recession where rising property taxes hurts the entire economy of the state, during normal times property tax increases, especially in those districts where the property tax increase exceeds the rates of inflation, the revenue generated from the sales tax and the personal income tax will become less stable and less predictable creating an instability in the economic future of the entire Commonwealth.
While we may understand this impact in our daily lives, we sometimes don’t think about how this impacts the business community. After all, they are dealing with rising property taxes as well. While larger corporations may find it easier to deal with these constant tax increases at the property tax level, small businesses continue to struggle. With less items to spread the cost of an increased tax burden, the small business world finds it more difficult to compete with the Corporate business world.
Would it be wrong to suggest that this fuels Corporate opposition to the elimination of property taxation? Why wouldn’t they want to preserve a punitive system of taxation that hurts or even eliminates their competition?
When it comes to property tax to fund education, more than 60% of the revenue is collected from home-owners. Their property generates absolutely no income to provide for the property tax. The remaining revenue comes from the business community and a very large percentage of that revenue is coming from the small business community. It’s the pizza and coffee shops, family owned restaurants and diners, small business retailers, corner stores, book shops and the many other small business entities that make up our communities. They obviously provide goods and services but they also provide jobs and revenue that supports our community and state. The jobs they provide creates income and that income will generate PIT income and Sales Tax revenue to the state.
If you force a small business to struggle through property taxes, that will translate into less jobs which will negatively impact the PIT and SUT revenue that provides other services for the state. The rest of the state will struggle while the property tax revenue remains stable in its increases. To maintain that stability for the school district we are creating instability in so many other areas.
The stability argument sounds good on the surface but when you dig underneath the surface, the stability of the property tax for the school districts ignores the instability it causes for those who have to pay it; it ignores the instability it causes in the small business community; it ignores the instability it causes in generating revenue at the state level. By ignoring the instability it causes at the state level, it also ignores the instability is causes for other services needed in the state.
When SUT and PIT increases don’t meet state budget expectations we have three choices: find new things to tax, raise existing taxes or look at cutting funding to other services.
Look, you do not need to be a rocket scientist to figure this out. If the consumer has less money to spend, they will spend less. That translates into less demands for goods and services which then results in less needs for the jobs that support those goods and services.
In order to attract more business to the State, we’ve created the Keystone Opportunity Zones (KOZ) and LERTAs (Local Economic Revitalization Tax Assistance) for the business community. While these are often sold to the public as tax abatement or even tax forgiveness and assistance programs they are, in fact, tax shifts. The burden of taxation is shifted to everyone else in order to attract new business to the community. The reason for the need of the programs is to ease the property tax burden for establishing businesses in our community and they do work. They do become incentives to businesses in where they locate. But the reason for the need is the property tax itself and it puts a higher burden on the remaining taxpayers to meet that need.
But it goes beyond the for-profit business. It also has a negative impact on charitable giving. Many of the non-profits that provide valuable services to our community depend on the charitable giving of others. When that charitable giving drops they have to turn to more of a reliance on government funding to meet their objectives. That adds to the expense at the state government level.
One way to negatively impact charitable giving is to raise property taxes higher than the rate of inflation making it harder for many working families to make those charitable contributions. While there’s still that stability for the school district tax collector, it creates an instability in charitable giving.
A 2017 story from Fortune website (http://fortune.com/2017/10/18/charitable-giving-america/) tells us that charitable giving has dropped over the past 10 years. That’s not the result of the PIT or the SUT taxes, those taxes are still the same but property taxation has dramatically increased and that was, in part, the result of thousands on tax increases over the period on the above chart.
While it isn’t entirely the fault of increasing property taxation we do not reflect on how a property tax increase impacts us beyond the personal increase to our taxes. We often fail to understand that higher property taxes will mean higher costs in goods and services. Those businesses pay property taxes to and if they want to keep their doors open, they have to make up the difference. The same holds true for rent. As property taxes increase, rent must increase, not to keep up with the demands of consumer needs, but to keep up with the demands of forced taxation. Everything you purchase will be affected by the property tax; every service you use will be affected by the property tax.
We can see the instability the rising property taxes creates for working families in the number of homes that fall delinquent in their property taxes. In some cases this eventually will result in a tax seizure of their homes where an average of 10,000 individuals will lose their homes as a result of an inability to keep up with the demands of the property tax.
The rising property tax plays a role in foreclosure and bankruptcy. The rising property tax plays a role in blight which generates higher cost for government. The rising property taxes plays a role in contributing to abandoned properties which creates more cost for government. The rising property ta plays a role in contributing to a more transient population which adds to the cost of education.
The property tax itself must be maintained by an expensive and continual reassessment of property which adds yet another level of cost to government. Without it, the expensive cost of the reassessment would be totally unnecessary.
The instability the tax creates in other areas is not so easy to see, especially since most fiscal studies looking to understand why revenue expectations weren’t met rarely, if ever, look at the growing tax burden of property taxation.
We won’t know what this years property tax increases across the commonwealth will amount to until later in this year but as I’ve followed this across the state, it appears like more districts are pushing the limits of property taxation. Every school district in my county is raising taxes this year and I’ve read of other counties where the same is true.
The total impact this will have on the economy of the state remains to be seen, but there is no escaping the inevitable. The stability of the property tax and the ease with which those taxes increase creates an instability in the economy for homeowners, the business community and the entire state.
That instability creates an unsustainable future for many individuals while adding to the cost of government. There has to be a better way to fund education and it’s time we all start seriously considering the need to eliminate the property tax and replace it with a more sustainable revenue source if we want to see an prosperous economic future for everyone in the Commonwealth!