Penn. Considers Property Tax Cuts

Published March 1, 2006

In December 2005, Pennsylvania’s state House and Senate each passed plans to reduce school property taxes paid by homeowners. But the plans have significant differences, and it is unclear whether the General Assembly and Gov. Ed Rendell (D) will come to an agreement soon.

Property taxes, long a contested issue in the Keystone State, gained additional attention during 2005 when the governor called the legislature into special session to address the matter. Rendell had pledged during the 2002 campaign to reform property taxes.

Schools Have Tax Option

The call for a special session came little more than a year after the House and Senate each passed a property tax reduction program known as Act 72. Act 72 gave Pennsylvania school districts the option of accepting revenue from gambling enterprises and also allowed them to increase the local earned income tax. The new revenue would lead to reduction in property tax bills for homeowners in the school district.

If a school district adopted the program, however, that district would have to seek voter approval for future property tax increases that exceeded local inflation rates. Prior to Act 72, a local school district did not have to seek voter approval for any local property tax increase.

Just over 100 of the state’s 501 school districts opted into the program by the May 31, 2005 deadline. The complicated plan did not create a groundswell of support among Pennsylvania residents. Some objected to the plan because it used gambling revenues. School districts objected to the referendum requirement for future tax increases.

House Proposes Statewide Plan

In December 2005, the state House met as a Committee of the Whole for the first time in more than 40 years and dedicated 10 hours to discussing 26 different tax cut plans. On December 13 the House approved a plan that would lower property taxes for all owner-occupied homes by about 50 percent.

The plan is projected to replace about $2.8 billion in property taxes with revenue gained from an increase in the state personal income tax to 3.26 percent from its current 3.07 percent, from gaming revenues, and from a broadened sales tax.

The sales tax would be expanded to cover numerous items currently not taxed, such as local newspaper advertising, airline catering, amusement devices, automobile parking, candy, commercial sports admissions, horses, storage, and magazines.

All Districts Covered

Under the House proposal, all school districts would be subject to the referendum requirements contained in Act 72.

Pennsylvania Department of Revenue Secretary Gregory Fajt, testifying before a Special Senate Committee on January 4, 2006, said the plan would fall about $400 million short of the revenue needed.

Jake Smeltz, policy director for state Sen. Noah Wenger (R-Lancaster), the majority caucus chairman, agreed with Fajt’s assessment. He added it was Wenger’s position that the broadened sales tax would “have a negative impact on Pennsylvania’s economy.”

Senate Wants Local Choice

The Senate passed its own plan on December 15. Known as SB 40, the measure would allow all but the largest school districts the option of letting voters choose an increased local earned income or personal income tax that would knock at least $200 off the tax bill for each owner-occupied home. Under the Senate plan, homeowners in Philadelphia would get a break on the city’s wage tax.

The Senate also has established a 23-member Special Committee on Legislation, chaired by Wenger. This committee will consider all legislation on property tax reform. During January the committee held six public hearings on reform measures.

The Senate plan, like the House plan, also would make use of gaming revenues and require local voter approval of any future property tax increases that exceed the rate of inflation.

“We think this should be a local decision because not everyone across the state sees property taxes the same way,” said Smeltz.

Smeltz, who is also a local school board director, said the larger problem is “the cost of public education is outpacing the ability to pay for it.”

Michael Coulter ([email protected]) teaches political science at Grove City College in Pennsylvania.