Let's talk about abolishing property taxes in Pennsylvania and reaffirming our constitutionally guaranteed right to acquire, possess and protect our property. Before we start, though, let's get a couple things out of the way.
First, let's look at the goals taxation should meet. I believe any tax plan must pursue three very simple objectives:
- Adequately funding the functions of government set forth in the Constitution for the common good.
- Assessing that tax burden fairly, directly and equitably to all citizens of the Commonwealth and others who benefit from those governmental functions.
- Developing a system which minimizes the impact to our state's economy and does not cause any undue hardship to any citizen, especially those in the humblest of economic circumstances.
Second, true reform is not accomplished through revenue replacement alone. Let me repeat that: true reform is not accomplished through revenue replacement alone.
Controlling government spending is the other half of the solution. I have some fantastic ideas on how to control spending - and I will come forward with them at a later date - but today we're only going to talk about my plan to abolish property taxes - without changing anything else.
The Nature of Property Taxes
The revenue generated by property tax in Pennsylvania is used to fund three different things: public education, county governments and municipal governments. By all available accounts, property taxes generate $11 billion annually to fund these things, with the lion's share going to public education.
It is important to understand how property taxes are collected to understand how unfair they are.
Each county in Pennsylvania assesses the value of individual properties and charges a portion of that value - or millage - in annual taxes to the property owner. In addition, school districts, cities, boroughs and townships use the same assessed value and charge their own millage rate.
The assessment process is extremely labor intensive and therefore a very expensive job for counties to undertake. As a result, counties are reluctant to update their assessment records with a regular countywide reassessment.
Also, newer homes are assessed on a completely different basis than existing homes, which may not have had their assessed value updated for years or even decades. This has created an extremely unbalanced and unfair system of taxation. By abolishing property taxes, we would also eliminate this arcane system of assessing the value of properties. It is important to note that the County Commissioners Association of Pennsylvania has requested that the state legislature allow them to use methods other than property tax to pay for county government. They have a keen understanding of how unfair and expensive the property tax system is to maintain.
One of the most popular arguments against abolishing property taxes is that property taxes are a reliable and stable form of taxation. In my book, this line of thinking is backwards.
I believe the stability of any government entity should not take priority over the ability of citizens to enjoy the God-given - and constitutionally protected - right to acquire, possess and protect their property. Government should be responsive to the ability of its citizens to thrive economically, not the other way around.
Replacing the Revenue
So what does state government have to do to abolish unfair, punitive and unconstitutional property taxes?
In short, we have to find a way to replace $11 billion dollars every year. To get an idea of how much that means in Pennsylvania, consider that the Commonwealth's entire General Fund budget will total around $25 billion dollars this year.
To replace the $11 billion collected annually through property taxes, state government must shift that burden to some other form of tax.
Let me make one thing crystal clear - there is no free ride. If we are to abolish property taxes, the revenue must be replaced somehow. Of all the various taxes the state collects, there are three major sources of revenue.
The biggest is the Personal Income Tax (PIT), which is expected to generate $9.8 billion this year. At a tax rate of 3.07%, every 1 percentage point of PIT generates $3.2 billion. This tax is pretty straight-forward, as everyone pays the same rate - although there are some reductions for low income Pennsylvanians.
Next comes the Sales and Use Tax (SUT), which is expected to generate $8.3 billion this year. At a tax rate of 6%, every 1 percentage point of SUT generates $1.4 billion. This tax is a bit more complicated, as not every sale is taxable, and trying to figure out what is and what isn't taxed can sometimes be a bit confusing.
Then comes the Corporate Net Income Tax (CNIT), which is expected to generate $2.1 billion this year. At a tax rate of 9.99%, this means that every 1 percentage point of CNIT generates $213 million. Although this is the least of the top three sources of revenue for the Commonwealth, it is important to note that less than 30% of all corporations in the Commonwealth pay this tax at all.
If we're simply looking to replace the $11 billion that property tax generates, we can just start doing some math to see which tax rates we want to modify to get the money from somewhere else.
Without changing the way any of these taxes are charged, you could do it - at least mathematically - with any one of them alone:
- We could generate $11 billion by raising the PIT to 6.5%, but most Pennsylvanians would balk at more than doubling their income tax.
- We could generate $11 billion by raising the SUT to 13.65%, but that would cause merchants to lose business to other states.
- Or we could generate $11 billion by raising the CNIT to 61.6%, but I'm sure you'll agree this is certainly not the way to go.
Realistically, it will take a combination of modifications to these tax rates - and the method by which they are assessed - if we're serious about replacing that $11 billion dollars.
Sharing the Burden
Let's mention again the three things that property taxes pay for: public schools, county government and municipal government. In general, we all benefit from these things, so it's only natural that we all share the burden - fairly and equally.
Once upon a time, citizens were only allowed to vote if they owned property. It quickly became apparent that this wasn't logical, so Americans abolished that practice. Likewise, it doesn't make any sense that only people who own property should be directly taxed for schools and other local government functions.
Since we all benefit from these things, then it's only logical that we all chip in - in a direct manner.
Sales and Use Tax
Of all types of taxation, I believe consumption taxes are the most fair and direct, and the Sales and Use Tax (SUT) is a consumption tax, so let's start there.
Realistically, the SUT rate could be raised to 7% without losing too much business to other states, but it wouldn't generate the kind of revenue we need.
The solution here is to broaden the base by making more items taxable. If we broaden the base sufficiently enough, we may actually be able to lower the rate and still meet our goal.
My starting point would be to apply the SUT to all goods and services - no exceptions. As soon as we grant even one exception, we'll see a parade of special interests demanding their own exceptions, and that's why the current SUT is such a puzzling patchwork quilt.
Frankly, I see no reason whatsoever why services and tangible products should be treated differently. For businesses which provide both goods and services, it would simplify their bookkeeping.
Of course, there are those who would argue that taxing food, clothing and prescription drugs would be regressive and would be an unfair burden on the most needy of Pennsylvanians.
But if the SUT base is sufficiently broad, the tax rate could be low enough that this burden is minimal. On top of that, we already subsidize food and prescription drugs for the most needy of Pennsylvanians. Additionally, Pennsylvania provides for income tax forgiveness for the poorest of the poor, and additional considerations could be made in this area if necessary.
Again, no system of taxation should cause any undue hardship to any citizen, especially those in the humblest of economic circumstances.
Personal Income Tax
After modifying the SUT, then we need to look at the Personal Income Tax (PIT). Frankly, increasing the tax on personal income by a point or two will not necessarily make Pennsylvania uncompetitive with other states.
In fact, there are states whose income tax rates are in excess of six, seven, and even nine percent. Admittedly, some of those states have a graduated income tax, but in Pennsylvania our Constitution forbids that, and I firmly believe it should remain that way.
Because the PIT provides $3.2 billion for every percentage point assessed, there's plenty of room to adjust it and get great positive results in the pursuit of abolishing property taxes.
Corporate Income Tax
We must also look at the Corporate Net Income Tax (CNIT), because one of the big worries about abolishing property taxes altogether is that we'd be giving big business a free ride.
But first, let me say this about all business and corporate taxes:
Businesses and corporations do not pay tax. Really, they don't. Any tax applied to a business is eventually paid by individuals. Business owners are individuals. If the business is a corporation, that corporation is owned by a group of individuals. In general, most of these individuals are already paying taxes.
Sometimes, business and corporate taxes are absorbed by these owners, but usually, those taxes are simply passed on to consumers through higher prices. This is indirect taxation. In a perfect world, there would be no indirect taxation, but we don't live in a perfect world. We live in a world with borders and sometimes, the people on the other side of those borders play by different rules than we do - and we have no control over that.
The problem - as I see it - is that eliminating property taxes and shifting that revenue burden to the SUT and PIT leaves the door open for people from outside Pennsylvania to set up shop here, take advantage of the infrastructure and education system that we're paying for, and then take their profits back out of Pennsylvania to spend elsewhere.
I am not opposed to non-Pennsylvanians coming here to do business - in fact I encourage it - but I am opposed to them being able to place undue burdens upon the communities where they situate themselves.
The CNIT is part of a cornucopia of corporate taxes the state levies against businesses. Because the corporate tax system is so complicated, businesses can waste a lot of productivity simply trying to figure out the most profitable way to play the system.
I believe we should completely scrap the current corporate tax structure in Pennsylvania in favor of a CNIT which can be reduced through credits based on a corporation's ownership, employment and reinvestment within the Commonwealth.
This is how it would work: If a corporation is wholly owned by Pennsylvanians, employs only Pennsylvanians and reinvests only in Pennsylvania, that corporation would pay the lowest amount of tax on the profits they generate within the Commonwealth.
On the other hand, if a corporation is wholly owned by individuals from elsewhere, employs only people from elsewhere and only reinvests elsewhere, that corporation would pay the highest amount of tax on the profits they generate within the Commonwealth.
Most corporations, who fall somewhere in between these two examples, would pay a pro-rated tax, based on their proportion of native ownership, native employees and their reinvestment in Pennsylvania.
Our goals in overhauling the corporate tax structure must be to foster Pennsylvania's economy while encouraging businesses to be good neighbors and participate in planning for the future.
This should only be considered as an interim solution. I believe that ultimately, the fairest way to deal with businesses who want to locate in our communities is to assign a fair impact fee which would cover a proportional amount of any expanded infrastructural needs required in the future to serve that business location.
The Big Picture
The ability to work with these three tax systems - the SUT, the PIT and the CNIT - to abolish property taxes in Pennsylvania forever is real and tangible. All we need is the collective will to do it and the realization that we're all in this together.
There are a few things we should discuss that go beyond just the task of abolishing property taxes.
First, abolishing property taxes would give an opportunity for rental property owners to take a huge windfall at the expense of their tenants. It would be my hope that all rental property owners would reduce their rents dollar for dollar in an amount equal to their annual savings in property taxes on those properties. But I realize that not every property owner will do that, so it remains a detail which needs to be discussed and worked out.
Should we mandate one-time rent reductions or should we let the free market decide? Or should we do something in between?
Second, we need to consider the idea of local control. We all know the golden rule: He who controls the gold, makes the rules. Should we send all our tax dollars to Harrisburg first, or should we keep them at the local level?
I believe we can do a little of both. Many states have mixed collection systems. Colorado has a statewide sales tax rate and allows local governments to stack their own sales tax rate on top of it - up to a certain limit. We could do the same thing with income and corporate taxes as well.
Third, because public education is both critical and constitutionally mandated, it must be funded in a stable manner, so as not to threaten the future of our children by subjecting educational budgets to widely fluctuating revenue streams. The stability of constitutionally mandated public education must take priority over state programs not mandated by the supreme law of the land.
Controlling Spending
Finally - and I know I'm repeating myself - true reform is not accomplished through revenue replacement alone. Controlling government spending is the other half of the solution. If we do not get government spending under control, we'll just end up with runaway increases in the taxes we modify to replace property taxes.
Again, I will be addressing spending at later date. At the state level alone - if Ed Rendell's budget is approved as proposed - spending will have increased by almost 23 percent during his tenure over the last four years - almost double the rate of inflation. The clear victim of state government growth is the standard of living of Pennsylvania's citizens.
In addition to abolishing property taxes, we must decide whether we will continue to grow government or grow the economy. We can't do both.
It's time to abolish property taxes in our Commonwealth - because I believe Pennsylvanians deserve better.
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