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					REAL PROPERTY TAXES IN PENNSYLVANIA1
By Thomas O. Armstrong Pennsylvania Manufacturers’ Association Harrisburg, PA 17101 I. INTRODUCTION Real property taxes can be partially avoided by individuals and firms “voting with their feet” by leaving or shifting resources from a higher-tax to a lower tax location.2 When the local property tax is higher than the national average, the local jurisdiction can expect a reduction in local investment and vice versa. For Pennsylvania‟s policy makers, there are two key issues. First issue is the appropriate measurement of the relative tax burden of Pennsylvania‟s residential, commercial and industrial property taxes. The second key issue is whether the property tax burden as part of an overall business climate burden has had an impact upon Pennsylvania economic activity. In Pennsylvania, as well around the United States, the property tax has always been a controversial source of local tax revenue.3 The property tax cannot be considered a wealth tax. The reasons are not all household wealth that includes tangible personal property (cars, furniture, etc.) and intangible personal property (stocks, bonds, cash, etc.) is taxable in Pennsylvania. The property tax is not an income tax. Real estate may appreciate in value, but since appreciation is unrealized (until sold), it is not an income stream. Therefore, a property owner may have paper wealth unrelated to property value with little or no income and thus a difficult ability to pay the tax on property. Finally, the property tax cannot be considered a benefits tax. According to the benefits principle of taxation, individuals and businesses should pay taxes if they benefit from the public services related to those taxes. Some local services, such as protection and sanitation can be linked to property ownership, but other services such as public (government-run) school services are more clearly linked to the number of children residing in a district and not to property ownership. Of course, there maybe spillover benefits as the result of education to the community paid for by taxation on property. However, many individuals and businesses do not perceive the link between increased property taxation and significant spillover benefits of government-run education.

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Information for this paper was presented by Armstrong, Thomas, “Informational Hearing on Real Property Taxes in Pennsylvania,” House Finance Committee, November 13, 2003. 2 Tiebout, C.M., “A Pure Theory of Local Expenditures,” Journal of Political Economy, vol. 64, 1956. 3 See Armstrong, Thomas and Benzing, Cindy, “The Property Tax and Pennsylvania,” Pennsylvania Economic Association Proceedings, 1996, 348-353, for the discussion of the controversy of property taxes.

The public perception is that the property tax is not linked to wealth, income or benefits received. This leads to individuals‟ and businesses‟ resentment of paying the property tax. Now no discussion of property taxes can be separated from a review of overall spending and taxation at the local level, which is presented in the next section. High local spending “drives” local taxation including local property taxation. This paper provides data on Pennsylvania‟s high commercial, industrial as well as residential property taxes primarily in urban areas. Property taxation issues within Pennsylvania rarely focus upon the business side of property taxation. Afterwards, the paper mentions some of Pennsylvania‟s high business costs that add to the concern of Pennsylvania‟s poor business climate. These costs together have resulted in poor economic performance of Pennsylvania as compared to other states. The paper then goes on to offer some principles for considering property tax policy. Finally with these principles in mind, the paper presents some improvements to the recently passed property tax bill, House Bill 113, PN 2822, now under consideration in the Senate. It is not in the economic interest of Pennsylvania to pass a property tax reform bill that does not offer true improvements to burdensome commercial and industrial as well as residential property taxes with the overall tax burden lowered for all Pennsylvanians. II. A SUMMARY OF RECENT HIGH LOCAL GOVERNMENT EXPENDITURE AND TAXATION TRENDS The fiscal data on Pennsylvania‟s local governments show nominal expenditures and revenues have risen significantly faster than the rate of inflation, Pennsylvania‟s average weekly wage increase and population growth. High nominal expenditures by local governments drive high taxation demand especially property taxation demands on individuals and businesses sometimes greater than their ability to pay for it. This situation may not be economically sustainable and a potential recipe for future economic disaster. From 1986 to 1998, nominal expenditures for Pennsylvania‟s 501 school districts more than doubled, rising 107 percent with revenues rising a little over 110 percent. The increases were more than double the size of the concurrent rate of inflation of 48.7 percent and almost double the growth in Pennsylvania average weekly wage of 63.2 percent. Even more staggering, Pennsylvania‟s population growth during this period was only 0.9 percent. Furthermore between 1984 and 1994, school district property taxes rose 108 percent.4
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Data is generally from Gulibon, Grant, “Pennsylvania’s Pricetag: The Total Cost of Government in the Keystone State,” The Commonwealth Foundation, February 2001. Looking at Pennsylvania school district figures over the past three decades, school district local revenues increased by 801.1 percent and property

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For the fiscal years ending 1986 to 1997, total nominal expenditures by Pennsylvania‟s 2,568 municipalities grew 59 percent with revenues by 75.6 percent, which is higher than the inflation rate of 46.4 percent and average weekly wage growth of 55.7 percent for the same time period. Pennsylvania‟s population grew significantly lower by 1.1 percent during this period. Concerning municipal property taxes, they rose 61 percent between the years 1984 and 1994. From 1986 to 1997, Pennsylvania‟s 66 second-through-eighth class counties (not including Philadelphia, whose statistics are counted in the municipal data) had a nominal expenditure increase of 120.4 percent and nominal revenue increase of 118.9 percent. Notice that these figures are almost three times higher than the rate of inflation and over twice the growth in Pennsylvania‟s average weekly wage of 46.4 percent and 55.7 percent respectively. Again, Pennsylvania‟s population grew by a miniscule 1.1 percent. Between 1984 and 1994, county property taxes rose by a sizeable 120 percent. In Pennsylvania, the real estate tax is the only tax authorized by law to be levied by all classes of local government. Every property owner generally pays real estate taxes to three independent classes: the county, the municipality and the school district. Real estate taxes in 2000 accounted for 85 percent of the total tax revenues of school districts, 31 percent of the total tax revenues of municipalities and 97 percent of the total tax revenues of counties. Pennsylvania’s Local Governments, 2000, Millions of Dollars Local Total Total Real Real Real Governments Revenues Taxes Estate Estate Estate Taxes Taxes as Taxes as % of Rev. % Taxes School $15,647.0 $8,582.7 $7,267.1 46.4% 84.7% Districts (501) Counties (67)* 6,382.3 1,616.9 1,564.2 24.5% 96.7% Municipalities 11,271.3 4,476.5 1,403.4 12.5% 31.4% (2,567) Total 33,300.6 14,676.1 10,234.7 30.7% 69.7%
* County totals include 66 counties. For purpose of this chart, Philadelphia is considered a municipality. 1999 data was used for Cumberland and Lawrence Counties. Department of Community and Economic Development, Center for Local Government Services.

taxes by 814.4 percent – or more than twice the concurrent rate of inflation, 394.8 percent - from 1968-69 to 1999-2000. The state government has provided its appropriate share of funding to local school districts. State support to local school districts rose by 141% between 1985 and 1999, while local property taxes went up by 131%. Inflation during that period rose by 55% and worker’s weekly wage increased by 62%. Pennsylvania’s average per pupil spending is estimated from $7,777 to $8,300 as compared to the national average of $6,662.

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III. PENNSYLVANIA’S HIGH COMMERCIAL, INDUSTRIAL AND RESIDENTIAL PROPERTY TAXES Pennsylvania ranks 26th out of 50 states in real estate tax revenue per capita and 30th in real estate tax revenues as a percent of personal income for FY 1999, according to the U.S. Census Bureau (Sourcebook 2002). Pennsylvania‟s property tax burden per capita is 9.4% lower than the national average.5 Even though Pennsylvania‟s property tax burden on a per person or income basis is relatively low as compared to other states, the effective tax rate, ETR, or tax due divided by the total market value, is relatively high for various property classes. The real estate tax revenue per capita measure looks at property tax revenue on a per person basis, while the ETR looks at property tax revenue on the per dollar market value of property bases. The higher the effective tax rates, the less after-tax money is available for taxpayers. From the Utah Foundation Research Report, Pennsylvania‟s ETR is 3.401% (for a property tax bill of $40,812) on commercial property in an urban area with a value of $1.2 million for the year 2000.6 This figure is above the U.S. average of 2.256%. For the same value of property in a rural area, the ETR is 1.226% compared to the U.S. average of 2.256%. 7 For industrial property in an urban area with a value of $2 million, Pennsylvania‟s ETR is 2.427% (for a property tax bill of $40,820), which is relatively higher than the U.S. average of 1.725%. The same valued industrial property in a rural area maintains its relatively high ETR with a figure of 3.021% relative to the U.S. average of 1.436%.8 Finally, Pennsylvania‟s ETR is 1.964% (for a property tax bill of $3,928) on a primary residential property in an urban area with a value of $200,000. This figure is above the U.S. average of 1.136%. For the same value of property in a rural area, the ETR is 1.103% compared to the U.S. average of 1.004%. 9
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Possible reasons for Pennsylvania’s relative low property tax burden on a per capita or personal income basis are the following: a) a tangible personal property tax is not imposed, such as on cars, and b) a wider range of tax options exist for local governments, including the earned income tax. 6 Utah Foundation Research Report, “Property Taxes in Utah and the 50 States,” Utah Foundation, July 2001, 85-96, that was reproduced from the Minnesota Taxpayers Association, “50-State Property Tax Comparison Study”, January 2001. 7 For commercial property in an urban area with a value of $120,000 and $30 million, Pennsylvania’s ETR is 3.401% each. The figures are above the U.S. averages of 2.217% and 2.262% respectively. For the same values of property in a rural area, the PA ETR is 1.226% as compared to the U.S. averages of 1.655% and 1.702% respectively. 8 For industrial property in an urban area with a value of $200,000 and $50 million, Pennsylvania’s ETR is 2.041% each. The figures are above the U.S. averages of 1.694% and 1.730% respectively. For the same values of property in a rural area, the PA ETR is .735% as compared to the U.S. averages of 1.396% and 1.436% respectively. 9 For residential property in an urban area with a value of $80,000, Pennsylvania’s ETR is 2.291% that is above the U.S. average of 1.248. For the same value of property in a rural area, the PA ETR is 1.287% as

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Property Tax Comparison – Effective Tax Rates
PA U.S. Avg. Commercial: $1.2M Urban Rural 3.401% 1.226% 2.256% 2.256% Industrial: $2.0M Urban Rural 2.427% 3.021% 1.725% 1.436% Primary Residential: $0.2M Urban Rural 1.964% 1.103% 1.136% 1.004%

The data suggests that, generally, commercial and industrial property taxes as well as residential property taxes measured by their effective tax rates are higher relative to the U.S. average that pay the substantial portion of property taxes relative to rural areas. Any property tax reform that does not reduce the high business property tax burdens will continue to have a negative economic effect upon Pennsylvania‟s already poor business climate. IV. PENNSYLVANIA’S HIGH BUSINESS COSTS A number of Pennsylvania business associations, including the Pennsylvania Manufacturers‟ Association, argue that high commercial and industrial property taxes on top of Pennsylvania‟s already high business costs have led to poor economic performance. Some of the high business costs are the following: 10 In 2000, Pennsylvania‟s business taxes per employee ($613.17) were 158% of the U.S. average ($388.18). In addition, Pennsylvania ranks 5 th out of 50 states in total business tax collections per employee (Pennsylvania Economy League, “A Comparative Analysis of Major State Business Taxes in Pennsylvania and Other States,” June 2001). Pennsylvania‟s business tax burden is high for following key reasons: a) Pennsylvania‟s Corporate Net Income Tax (CNIT) rate of 9.99% is the third highest statutory rate in the nation and about 50% higher than the average of all states‟ CNIT rates of 6.64% as of January 1, 2002. b) Furthermore, Pennsylvania‟s Capital Stock and Franchise Tax (CSFT) is 6.99 mills as of November 2003, virtually tied as the highest rate in the nation and significantly above the U.S. average of 0.75 mills for 2002. In 2001, Pennsylvania‟s Unemployment Compensation taxes were 3.6% of taxable wages, the highest in the nation and above the U.S. average of 1.9% or 0.9% of total wages, the 7th highest in the nation and above the U.S. average of 0.5% of total wages (State Policy Reports, Vol. 19, Issue 22, 2003).

compared to the U.S. average of 1.126%. For apartments in an urban area with a value of $650,000, Pennsylvania’s ETR is 2.493% relative to the U.S. average of 1.922%. For the same apartment value in a rural area, the ETR is 1.401%, which is a little below the U.S. average of 1.506%. 10 The Pennsylvania Manufacturers’ Association, August 4, 2003, PMA Bulletin, p. 3, at http://www.pamanufacturers.org/bulletins/bull_pdf/bull_8_4_03.pdf provides a “Cost of Doing Business” summary.

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In 2002, lawsuits cost Pennsylvania businesses $4.2 billion – a tort tax - more than they did in states with a $250,000 cap on non-economic damage awards. The tort tax is almost twice the combined state business taxes, CNIT and CSFT, collected by Pennsylvania in a fiscal year (Statement by Thomas Armstrong, PMA, Informational Hearing on the Liability Crises in Pennsylvania, House Republican Policy Committee, Wednesday, March 19, 2003, on-line at http://www.pamanufacturers.org/bulletins/press/press_release_03_19_03.html). V. POOR ECONOMIC PERFORMANCE OF PENNSYLVANIA Pennsylvania‟s high business costs including high commercial and industrial property taxes have caused relatively low after-tax return on investment dollar within the Commonwealth. From Armstrong and Benzing (1996), a state could suffer a decline in economic growth if its tax differential was higher than average.11 The result is a predicable poor economic performance for Pennsylvania. Pennsylvania's real per capita GSP growth rate was 17.9 percent from 1991 to 2000, a rate 5.3 percent lower than the national rate per-capita of 18.9 percent. Pennsylvania‟s growth rate ranked 26th among the 50 states and the District of Columbia. (Source: United States Department of Commerce, Bureau of Economic Analysis.) Pennsylvania‟s real per capita personal income growth rate was 15.2 percent from 1991 to 2000, 13.6 percent slower than the national rate per-capita of 17.6 percent. Pennsylvania‟s growth rate ranked 35th among the 50 states and the District of Columbia. (Source: United States Department of Commerce, Bureau of Economic Analysis.) Pennsylvania‟s employment growth rate was 12.7 percent between 1991 and 2000, 76 percent below the national rate of 22.4 percent. Pennsylvania‟s growth rate ranked 47th among the 50 states and the District of Columbia. (Source: United States Department of Labor, Bureau of Labor Statistics.) The poor economic trends may result from relatively less firms locating to Pennsylvania partly due to relatively high effective property taxes. From KishGoodling‟s 1995 research, where she investigates the effect of property tax rate differentials on the birth of firms in Pennsylvania‟s jurisdictions from 1976-1980, she finds statistically significant relationships where:12 a one per cent increase in the average school tax rate will lead to a 1.57% decrease in the number of manufacturing firms births and a 3.22%
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Armstrong, Thomas and Benzing, Cindy, “The Property Tax and Pennsylvania,” Pennsylvania Economic Association Proceedings, 1996, 348-353. 12 Kish-Goodling, Donna M. Property Taxes and Local Economic Development: Pennsylvania, 1976-1980. New York and London: Garland Publishing, Inc., 1995.

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decrease in the number of nonmanufacturing firm births. The state average number of manufacturing firm births is 87.46. Therefore, on average, a one per cent increase in the average school property tax rate would lead to 1.37 less manufacturing firm births per county. Finally, Pennsylvania‟s manufacturing job losses were 228,300 from January 1990 at 959,400 to May 2003 at 731,100 (Bureau of Labor Statistics). Hypothetically, if Pennsylvania continued to lose manufacturing jobs at the current pace between May 2002 and May 2003 (35,300 job losses per year), all manufacturing would be wiped out by mid-February 2024. VI. PRINCIPLES FOR PROPERTY TAX POLICY The Pennsylvania Manufacturers‟ Association has provided 12 recommendations for improving Pennsylvania‟s business climate within its presentation “Slaying the Silent Killer,” October 2003, at www.pamanufacturers.org. The number one recommendation is for state and local government to enact Taxpayer Protections. Taxpayer Protections or Tax and Expenditure Limitations (TELs) provide sound economic principles for property tax policy as well as local government expenditure policy that drive property tax increases. If a TEL is enacted in Pennsylvania, economic performance is expected to improve. Below are the relevant principles for property tax and local government expenditure policy as put forth by authors of TELs (for example, “The Case for Pennsylvania „Tax and Expenditure Limitation”‟ by Grant R. Gulibon and Thomas O. Armstrong, The Commonwealth Foundation, June 2003). 1) A TEL provision will constrain local government spending to no more than the increase in inflation and population growth. The expected Pennsylvania population growth (2003-04) is 0.3% and the expected Pennsylvania inflation rate (FY 2002-03 to FY 2003-04) is 1.6% for an average local government spending top limit of 1.9% for the next fiscal year. Each local government jurisdiction‟s limit will be different than the average local government spending top limit depending upon their expected increase in inflation and population growth. Each local government jurisdiction (individual counties, municipalities and school districts) will be constrained to not take a greater share of society‟s economic resources. Local government spending is to rise no greater than inflation so as to maintain the purchasing power for goods and services for the same population served. In addition, local government spending is to rise no greater than their population so as to adequately provide services to additional residents. 2) A TEL provision prohibits local jurisdictions from levying any tax not in existence upon the effective date of the TEL unless voter approved by

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referendum. Local governments will be prevented from seeking new ways to take taxpayers money, unless by consent, where moneys left in the market sector will potentially generate greater local economic activity and jobs. 3) A TEL provision requires a voter back-end referendum to increase any local taxes. Taxpayers will now have a say on whether to increase their existing local taxes.13 VII. BRIEF COMMENTS ON HOUSE BILL 113, PN 2822 This paper provides a few comments on the recently passed property tax bill, House Bill 113, PN 2822, that is now under consideration in the Senate. FRONT-END REFERENDUM: There are no provisions to reduce school district millage rates by a front-end referendum. If businesses are going bear some of the costs due to increasing income taxes and gambling revenues, then some or all of the revenues should be used to reduce school district millage rates, which includes commercial and industrial property millage rates. Provisions should be placed within the bill to allow voters to choose between using revenues to enact the homestead exclusion or reduce school district millage rates. Simplicity of a millage rate reduction relative to a homestead exclusion implementation coupled with residential and business tax relief as millage rates are reduced, will provide greater economic growth and job creation at the local level. BACK-END REFERENDUM: The bill does not attempt to constrain excessive school district spending increases while attempting to restrain high tax increases through a “lax” back-end referendum that contains many exceptions to the referendum provisions. A “restrictive” back-end referendum with no exceptions should exist for all school districts to allow voters to vote on any tax increase or new taxes to be created. No exceptions should be allowed. Furthermore, the back-end referendum should be expanded to counties and municipalities too. CONSTRAINTS ON SPENDING: Greater constraints on excessive school district, municipality and county spending should be permitted. An expenditure limitation should be instituted at the school district, municipality and county levels, where spending is limited to no more than the increase in local population growth and inflation. Another possibility is that voters should be permitted to vote on annual school districts budgets during each spring‟s primary election as allowed in other states. Municipalities and counties budgets should have the same voter approval budgets.

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Notice that the referendum provision, while somewhat lax, already exists for school districts that opt into Act 50 of 1998, where property tax rates cannot increase without a voter approved referendum if local tax revenues increase at a rate less than the statewide weekly wage rate.

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BUSINESS BURDEN INCREASES: The bill permits an increase in the local earned income tax and the state personal income tax at 500 school districts where part of the increase is paid by businesses resulting in less after-tax profits. In addition, House Bill 113 permits a major expansion of gambling activity. The result will be an increase in workforce costs and reduction of economic activity for some businesses surrounding gambling venues. The data is inconclusive of whether new net jobs will be created. For example, Gross found that 24 out of 57 counties throughout the United States experienced job losses as a direct result of casino development.14 The funds from higher income taxes and gambling are used to reduce school district residential property taxes by the homestead exclusion equal to 50% of the maximum amount authorized by the Pennsylvania Constitution. The burden on businesses will increase, causing potential harm to the Pennsylvania economy. To reduce this burden on businesses, two recommendations to the bill are proposed. First, local tax reform should be kept at the local level. School districts should not have the ability to impose a personal income tax. If the personal income tax imposition is stricken from the House Bill, then part of the personal income tax base paid by businesses (14%) will not be imposed on Pennsylvania businesses. Of course, this recognizes that maintaining the earned income tax provisions will result in a business tax increase of the net profits portion of the earned income tax (9%). Second, if there is an increase in income taxes and gambling revenues in Pennsylvania, then part of the revenues should go to reducing local business taxes. At least 9% of the increase in revenues allocated to school districts should be used to reduce business taxes by the amount of the revenues received. Local businesses should be, at least, no worse off than after the increase in income and gambling revenues. VOLUNTARY ROLL BACK OF SPENDING AND TAXATION: Incentives should exist to “roll-back” excessive school district spending and property taxes as well for the county and municipality on a voluntary method. One method is to enact the 50-50 property tax cut proposal. The 50-50 property tax cut proposal would create a partnership between the state and local governments where local governments will have an incentive to reduce property tax millage rates in a fiscally responsible manner and will have the disincentive to raise millage rates in the future.

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Gross, Ernest, “The Economic Impact of an Omaha, Nebraska Casino,” Creighton University, prepared for the Greater Omaha Chamber of Commerce, August 12, 2002, at www.omahachamber.net/gamblingstudy/.

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The 50-50 plan contains provisions under which counties, municipalities and school districts can reduce millage rates in a given fiscal or calendar year with the state providing funds for half of the forecasted local fiscal revenue reduction as long as the millage rate reduction remains in effect. A significant incentive exists for local jurisdictions to reduce millage rates, because the state is sharing in half the local fiscal revenue reduction. However, if the local governments that choose to participate in the 50-50 plan later decide to increase their millage rates, the state will withdraw its funding by half of the amount of a millage rate increase up to the amount of state funds deposited to local governments for previously reduced millage rates. A significant incentive exists for local jurisdictions to not increase millage rates previously reduced. The reason is the state will take away its subsidy to the local government from the previous millage reduction. The 50-50 partnership to reduce local property taxes is a voluntary arrangement between a local jurisdiction and the state. Local jurisdictions can decide to enter into the 50-50 property tax cutting relationship. VIII. CONCLUSION Sound economic policy requires improving the business climate including reducing Pennsylvania‟s relatively high commercial and industrial property taxes especially in urban areas. The property tax debate has generally been silent on this issue. It is time to put forth meaningful commercial and industrial property tax reduction proposals as part of overall business climate improvement policies. The result will mean greater economic performance for Pennsylvania.

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