For the second year in a row, Pennsylvania is considering a major tax proposal that would dramatically alter how the state funds its schools. The new proposal would increase the state individual personal income tax from 3.07 percent to 4.95 percent while also increasing the sales tax rate from 6 percent to 7 seven percent. These tax hikes would replace the school portion of the property tax, which totaled $12.3 billion in 2014–15, around 69 percent of all property taxes collected in the state.
There are several problems with this tax plan. First, some economists argue property taxes are less economically destructive compared to income taxes. Jared Walczak of the Tax Foundation argues property taxes compare more favorably to other taxes, as they are used to pay for services tied to property ownership, including local road maintenance, law enforcement, and emergency services.
Walczak says there is a potential moral hazard associated with the tax as well. With the burden of education property taxes gone, localities may choose to fill that gap with other taxes, since the reform would not eliminate property taxes altogether. Local taxpayers will still pay property taxes to cover outstanding debt obligations, which represent 17 percent of school property tax collections, according to data from the Independent Fiscal Office in Pennsylvania. The tax shift would also place too much funding power in the hands of the state’s legislature and away from local school districts.
Taxes on income are considered by many economists to be the most destructive form of taxation, because they stunt economic growth by taking dollars out of the hands of consumers and businesses, stifling production, innovation, and risk-taking – the main factors that drive economic growth. While the state individual income tax rate in Pennsylvania of 3.07 percent is relatively low, the state also has more than 3,000 local income tax jurisdictions, with added rates that can reach as high as 3.91 percent.
High income and business taxes deter economic development by discouraging higher-income-earners and new capital from moving into a state, remaining there, or investing their money. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.
The primary stated goal of the tax proposal is to improve education funding, but Pennsylvania has already shown higher spending does not improve student achievement. Pennsylvania spends $22,350 per family of four on education, up from $8,500 in 1970, an inflation-adjusted increase of 162 percent, according to the Commonwealth Foundation.
The problem with education is not a lack of money; Pennsylvania already spends $3,000 more per pupil than the national average, according to U.S. News & World Report. The problem is wasteful, unnecessary spending and the lack of serious school choice options. According to Commonwealth, only 30 cents of every dollar in new state taxes over the next two years would be redistributed to school districts. This waste spreads to nearly all state expenditures; total state spending in Pennsylvania has increased nearly every year for the past 50 years, imposing an additional inflation-adjusted cost of $16,557 per family of four.
Eliminating the property tax would do little to address the spending problems endemic to most school districts and would shift control away from local governments, where it belongs. Instead of shifting tax dollars around, Pennsylvania legislators should embrace school choice, which empowers parents, increases competition, and lowers costs.
The following documents examine education funding and property and income taxes in greater detail.
Moral Hazard in Pennsylvania Property Tax Proposals
https://taxfoundation.org/moral-hazard-pennsylvania-property-tax-proposals/
Jared Walczak of the Tax Foundation discusses the moral hazard created by property tax cuts. “All of that is to say that state-level property tax relief can introduce an element of moral hazard: some localities may consider themselves freed up to raise property taxes further due to the existence of an offset, resulting in higher taxes across the board,” wrote Walczak.
A Flawed Property Tax Swap in Pennsylvania
https://taxfoundation.org/a-flawed-property-tax-swap-in-pennsylvania/
Nicole Kaeding of the Tax Foundation examines the proposed tax swap, known as the Property Tax Independence Act, which would eliminate local school property taxes and would increase its general education aid to localities to offset the loss of property tax revenue.
State Individual Income Tax Rates and Brackets for 2016
http://taxfoundation.org/article/state-individual-income-tax-rates-and-brackets-2016
Nicole Kaeding of the Tax Foundation analyzes the most up-to-date data available on state individual income tax rates, brackets, standard deductions, and personal exemptions for both single and joint filers.
Policy Tip Sheet: Spending Reforms
https://heartland.org/policy-documents/policy-tip-sheet-spending-reforms
The Heartland Institute outlines several reforms state legislators can undertake to address spending problems, including privatization, tax and expenditure limits, and retirement reforms.
Pennsylvania Governor Proposes Major Tax Overhaul
http://taxfoundation.org/blog/pennsylvania-governor-proposes-major-tax-overhaul
Jared Walczak of the Tax Foundation examines Pennsylvania Gov. Tom Wolf’s tax plan and argues the benefits created by the reductions in property taxes and corporate taxes would be more than offset by increases in the individual income tax, the sales tax, and the severance tax on the state’s booming natural gas industry.
How Big, Bad is Wolf’s Budget?
http://www.commonwealthfoundation.org/policyblog/detail/how-big-bad-is-wolfs-budget
Nathan Benefield of the Commonwealth Foundation analyzes Pennsylvania Gov. Tom Wolf’s budget in detail and identifies the real harm it will cause to taxpayers.
What Pennsylvania Can Do on Tax Reform this Session
http://taxfoundation.org/blog/what-pennsylvania-can-do-tax-reform-session
Scott Drenkard of the Tax Foundation outlines the organization’s findings regarding Pennsylvania Gov. Tom Wolf’s tax proposal, placing it in a national context, making note of recent legislative efforts, and recommending policy reforms for consideration.
Five Steps Toward a Balanced Budget
http://www.commonwealthfoundation.org/issues/detail/five-steps-toward-a-balanced-budget
The Commonwealth Foundation argues lawmakers can pass a balanced budget that respects three important principles: “Protect families and business from tax increases. Avoid overspending. The state should not spend more than it collects in revenue. Limit spending growth to the Taxpayer Protection Act index of inflation plus population growth.”
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The ninth edition of this publication from the American Legislative Exchange Council and authors Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the effects of income taxes.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
