If the state legislature adopts the Property Tax Independence Act, Pennsylvania would join Hawaii as the only states that don’t rely on property taxes to partially fund education.
A review of education funding methods for all 50 states reveals all but Hawaii rely on real estate taxes to some extent to fund public schools, but to what extent varies by state.
Hawaii is unique because it has a single, statewide school district. And a constitutional amendment limits increases in Hawaii’s spending on education to match economic growth in personal income.
All education funding there comes from the state’s general fund, which relies on sales, personal income and corporate income taxes, and such special taxes as inheritance, liquor and use taxes, and license fees.
Pennsylvania, on the other hand, has for decades allowed school districts to tax real estate and improvements at whatever rates local school boards set in order to supplement state and federal education funding and achieve their budgetary needs.
Limits enacted in ‘06
Only in 2006 did the legislature pass a law requiring voter referendum to approve an increase in school property taxes that exceeds an inflationary index unless a school district qualified for certain exceptions.
But even in the five years after Act 1 of 2006 went into effect, only 12 of 500 school districts have held voter referenda, while 1,345 waivers for school tax increases above the index were requested from the Department of Education, according to Nathan Benefield, policy analyst for the Commonwealth Foundation. The organization is a self-described “free market think tank” based in Harrisburg.
Benefield agrees with property owners in Luzerne County and across the state who say property taxes are spiraling out of control. Over a recent 10-year period, school district property taxes grew 66 percent while inflation was less than 30 percent, he said.
“The questions are whether there is a better system for financing government, and how we can address the drivers of high property taxes,” Benefield told a Pennsylvania House Select Committee on Property Tax Reform at a hearing in 2012.
Proponents of The Property Tax Independence Act, also known as Senate Bill 76, say the legislation would provide that better system.
The bill would essentially swap out the school property tax for an increased sales and services tax with an expanded scope, as well as an increased earned income tax. If school boards needed additional revenue for major projects, they could implement a local earned income tax or personal income tax, but only with voter approval by referendum. No exceptions.
There are several other taxation models used by states for education funding. And each relies to varying degrees on real estate taxes.
In the 2010-11 school year, the $11.6 billion in local school property taxes collected in Pennsylvania comprised 42.8 percent of all K-12 education revenue, including federal, state and local, according to data from the National Center for Education Statistics.
Excluding Vermont, which collects property taxes at the state level, the proportions of local property tax compared to all education revenue ranged from a low of 12.1 percent in Alaska to a high of 55.7 percent in Connecticut.
Other states’ taxes
• In Vermont, the state legislature sets a single rate for taxing non-residential properties annually, as well as a variable rate for taxing homesteads.
The homestead property tax rate is determined by comparing a district’s per-pupil spending amount (the total dollar amount of the budget divided by the number of pupils) to a base per-pupil spending amount set for all districts statewide. If a district’s per-pupil spending exceeds the state’s base, then the homestead property tax rate set by the state is increased by the percentage by which the per-pupil spending base is exceeded for that district.
There are also homestead tax reductions available based on household income in Vermont.
• Alaska, on the other hand, caps local district property tax contributions at 2 mills or 23 percent of the current year basic need, whichever is greater. A mill is a $1 tax on every $1,000 in assessed property value.
• In Connecticut, school district spending is capped at either the five-year average growth in Connecticut personal income or annual growth of the Consumer Price Index, whichever is greater. Only a three-fifths vote of the legislature or a declaration of an emergency by the governor would allow for more spending.
• While Pennsylvania offers property tax rebates of up to $650 to seniors and the disabled, some states, such as Georgia and New York, offer a property tax adjustment factor for the elderly. New York’s STAR (School Tax Relief) program gives a resident homeowner and spouse a $30,000 exemption off the assessed value of their home if their combined income is under $500,000. Resident senior citizens got a $63,200 exemption this school year; the senior exemption increases by $900 next school year.
Weighing the options
Asked which kind of tax is the best — or least bad — when it comes to education funding, Benefield says each tax has its positives and negatives: “It’s six of one, a half dozen of the other.”
Property tax opponents, Benefield notes, say homeowners don’t really own their homes because they have to pay “rent” in the form of taxes to the government each year. But the same can be said of income tax. “You don’t really own your income and are partly a slave to income tax. You can be fined or go to jail if you don’t pay it. Not that property tax is a better tax.”
Benefield says there are several principles for tax fairness, including that they should be transparent and broad based to the extent possible, imposed on those benefiting from services.
Even some opponents of real estate taxes admit that everyone is affected by them, not just property owners. Those who don’t own a home have to rent, and property taxes are figured into rent.
However, taxes should not cause undue harm to those who lack the ability to pay, Benefield says. And fixed-income homeowners are surely harmed when they lose their homes to sheriff sales.
Previous effort failed
State Sen. John Yudichak, the prime sponsor of Senate Bill 76, noted that former Gov. Robert P. Casey tried to pass property tax reform decades ago through voter referendum, but the move failed at the ballot box. Now, he says, a grass-roots push has been gaining strong momentum, and at least half the Senate has signed on to co-sponsor his bill.
“It’s clear from the communities I represent here in the Greater Wyoming Valley that folks are losing their homes. Folks are not being afforded (the opportunity) to enjoy the quality of their golden years because they have an inability to keep pace with property taxes,” Yudichak, D-Plymouth Township, said at a tax reform seminar last week in Wilkes-Barre.
Too many legislators in Harrisburg are “laboring under the myth that local elected officials on a school board can raise sufficient revenue to fund an adequate education. That may have been true in the 1800s. It is no longer true in the 21st century. Property tax is antiquated and insufficient to fund public education,” he said.
Regardless of what taxing method is in place, Benefield said, more must be done to address the spiraling cost of education.
Benefield recommends changing the state school funding formula to weighted student funding, redefining prevailing wage, expanding school choice, enacting state spending limits, enacting comprehensive pension reform and addressing collective bargaining reform.