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Study: Pa. is ‘Wild West’ of property taxes

The report from EdBuild found that an absence of state guidance results in little relationship between tax burden and ability to pay. Proposed legislation would eliminate property taxes altogether, but would not solve the inequity problem.

This article was originally published in The Notebook. In August 2020, The Notebook became Chalkbeat Philadelphia.

Pennsylvania’s system for funding schools is among the most inequitable in the country, with wide disparities in spending among districts.

Now, a new report finds that the state is also in a class by itself when it comes to local property taxes, the primary source of education funding. First, Pennsylvania’s average effective property tax rates are among the highest of the states studied. And second, they vary widely from district to district in a way that has no logical relationship either to residents’ ability to pay or a community’s ability to raise revenue.

“Pennsylvania is the Wild West of local school taxes,” said Zahava Stadler of EdBuild, a nonprofit focused on education inequity and school funding. Stadler, a co-author of the report, attributed the inconsistencies to a total lack of state guidance to local districts regarding property tax rates.

Many other states set parameters in an effort to avoid having property taxes overburden local residents and to assure that schools get the resources they need.

But in Pennsylvania, the report found “a tax effort landscape that mirrors the state’s anything-goes policy environment. Overall effective property tax rates for education do not clearly correlate with any indicator of district affluence.”

It also found, though, that the poorest taxpayers – those in the bottom 25 percent as measured by property value per household, mean household income, and median owner-occupied home value – pay higher effective tax rates than the middle 50 percent. The overall tax burden of people in this lowest group is nearly as high or even higher than those in the top 25 percent, which means they are paying a higher proportion of their income and property value to pay their tax bills for education costs.

“Overall,” Stadler said, “you are seeing a high tax burden on the least affluent districts.”

So it’s no surprise that there is unhappiness about local property taxes, which has sparked the General Assembly to consider legislation that would eliminate property taxes altogether. The bill under consideration would increase sales and income taxes statewide, expand the list of items that are taxable, and send that money back to local districts to pay for schools.

Eliminating property taxes as the primary means to pay for education is not necessarily a bad idea, Stadler said.

“The long tradition of paying for education through local property taxes is more an accident of history than logical policy,” she said. “Moving toward a system where more of the tax money is pooled at the state level and redistributed can potentially move a state toward greater equity if the way the money is distributed is equitable and progressive.”

But “equitable and progressive” does not describe the current bills that are gaining traction in the legislature. Instead, they call for districts to get the same amount of money as they do now – meaning that poor taxpayers, through higher sales and income taxes, would be subsidizing high spending in the state’s wealthiest districts without seeing any increased funding in their own schools. There is no provision to redistribute the money in a way that meets the real needs of various districts.

The legislation would also eliminate commercial, industrial, and agricultural property as a source of school funding.

State Sen. David Argall, a Republican who represents Schuylkill and parts of Berks Counties and sponsored the bill, said that “we believe this proposal will force the inequities in public education to be addressed.” He cited an analysis from the state’s Independent Fiscal Office that found eliminating school property taxes would increase housing values.

“That is very important to factor in when looking at poorer school districts with declining local tax bases,” he said through a spokesman via email. Calling property taxation an artifact of a 19th-century agrarian society, he said sales and income taxes “are much more in line with one’s ability to pay compared to an archaic property tax system.”

Under the bill, he said, “schools would receive the exact same amount they receive under the current system and each year, they would receive an increase tied to the Statewide Average Weekly Wage.”

According to the Pennsylvania Taxpayers Cyber Coalition, whose founder, David Baldinger, has been pushing this legislation for years, the bill would lead to more equity because “the state assumes the responsibility of school funding. Each school will receive the resources it needs, regardless of the local ability to pay. This solves the funding problems faced by rural, urban and fast-growing districts.”

But the legislation as it is now written doesn’t explain how this would be accomplished, and it has been greeted with skepticism from groups across the political spectrum, from the Chamber of Commerce to the teachers’ unions.

“I’m not opposed to some changes in the property tax, including bills that would provide relief to fixed-income seniors,” said Larry Feinberg of the Keystone State Education Coalition and a member of the Haverford Township school board. But elimination goes too far, he said, and the current bill is flawed in how the money would be redistributed. Most of it would go to the four suburban Philadelphia counties – and Philadelphia because it is so populous – and the well-off Pittsburgh suburbs.

This would preserve the inequities among districts, with some districts spending less than $10,000 per student and others more than $25,000.

“The biggest factor in rising property taxes is how stingy the state is with education aid,” Feinberg said. “If the state were funding schools at the level of other states, you wouldn’t see the kind of outcry around property taxes.”

School boards like Haverford Township’s are forced to raise property taxes to cover rising pension obligations, among other costs, because the state isn’t doing its part, he said.

Pennsylvania contributes about 37 percent of school costs. The average among all the states is closer to half.

Sean Crampsie, a lobbyist for the Pennsylvania School Boards Association, said Thursday at an Education Policy & Leadership Center forum that he thinks legislators "have come to the conclusion that the math doesn’t work, and it’s a massive tax shift," and there will be some kind of compromise. "Nobody wants to see anybody lose homes due to property taxes, but from our point of view, elimination is not the answer."

Said Stadler, the EdBuild report’s co-author: “Certainly, if you move to a fully state-funded system, it has to be constructed carefully and equitably, both on the revenue-sourcing side and the revenue-distribution side. Those have to go together.”

Studied 18 states

EdBuild assembled data for 18 states, and in most of those studied, local property tax burdens were aligned with either household wealth or the value of the local tax base, or both.

In 11 states, the alignment was regressive rather than progressive – in other words, the wealthier the district, the lower the local tax burden, rather than the other way around. In Pennsylvania, there was no consistent pattern. But a look at the effective tax rates for Philadelphia and its suburbs indicate that for the most part, poorer districts in this area are burdened with much higher property tax rates than richer ones.

For instance, the highest effective local tax rate is in Chester-Upland, at 4.2 percent. That means, said Stadler, “that each year, collectively, the taxpayers of Chester-Upland pay an amount equal to 4.2 percent of the total real market value of the district’s property tax base for education purposes.”

By contrast, in wealthy districts such as Colonial and Tredyffrin-Easttown, the comparable rate is 1.25 percent.

The study also found that districts in Pennsylvania are “missing the opportunity” to tax high-value non-residential property at appropriate levels to help fund schools.

“School districts are, more or less, taking appropriate advantage of the residential portion of the property tax base,” Stadler said, “But taxes on high-value non-residential property are not commensurately high.” Homeowners seem to be “pulling their weight,” she said, but “school districts aren’t asking as much of the owners of non-residential property as a group. That’s a missed opportunity for districts to bring local revenue into the system from a tax base that can support it.”

Rather than seeking to leverage commercial, industrial, and agricultural property more effectively to help pay for education, the bills under consideration in Harrisburg would eliminate them altogether as a source of tax revenue for schools.

Stadler said that because states are responsible for providing for the operation of schools, they should set guidelines for local school districts in setting property taxes. That doesn’t happen in Pennsylvania.

States can direct policy toward the goal of greater equity, Stadler said, by determining what each district needs, designing a formula to set what the state and local shares should be, and setting guidelines for the expected local contribution based on residents’ ability to pay.

Some other states, including New Jersey, do this to varying degrees. But Pennsylvania “doesn’t have any such thing,” she said.

The state finally adopted a funding formula last year that is predictable and takes district needs into account, but it applies only to new state education aid. At that rate, it would take decades to even out the current spending disparities.

“The state does not set any expectations for what local school districts should be taking in, parameters around permissible local taxes, or how that relates to how much money they need,” Stadler said. “So it’s not surprising to see this total scattering of results and lack of relationship between a community’s ability to pay and the tax rates in local school districts.”

The only state policy about property taxes is a 2006 law, Act 1, which limits increases without a local referendum. But that legislation does nothing to address existing disparities and inequities among districts.

Referring to Act 1 and to last year’s adoption of an education funding formula, the report says: “The state’s recently enacted policies regarding both the distribution of state aid and permissible local property tax levels affects only new increases to education funding, leaving untouched the tax and aid dollars that make up the vast majority of public school support.”

EdBuild did a study last year showing that school district boundaries in Pennsylvania exacerbate segregation.

“Pennsylvania is one of the few states in the country without a system for determining districts’ expected local contributions to education. … Education funding in the state is largely ungoverned by policies that would affect local tax effort,” the report said. “That we saw no relationship between tax rate and any measure of affluence in Pennsylvania – a state which has until recently gone without an education funding formula and where there is little guidance on local tax rates – emphasizes the impact state policy can have on local property taxes.”

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