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House of Representatives
Session of 2013 - 2014 Regular Session

MEMORANDUM

Posted: January 11, 2013 11:49 AM
From: Representative Jim Cox
To: All House members
Subject: Property Tax Independence Act - Former HB 1776
 
In the near future, I will be re-introducing the Property Tax Independence Act, former House Bill 1776. Last session, 69 House members joined me in working to address one of the most vexing issues in our Commonwealth – the school property tax. While eight of those co-sponsors have gone on to careers outside the legislature, I know the issue remains a priority for many of us in the legislature.

This session, the Property Tax Independence Act will be introduced as House Bill 76 in the House and Senate Bill 76 in the Senate. This bicameral effort is designed to push the issue to the forefront of our legislative debate and will better enable us to work together for the passage of comprehensive property tax replacement legislation.

For more than thirty years the Pennsylvania General Assembly has grappled with the problem of relentlessly rising school property taxes and the damage caused by this inequitable levy.

Homeowners of all ages are facing extreme pressure because of school property taxes that relentlessly rise at a rate of more than three times that of inflation. Research by grassroots taxpayer groups has found that as many as ten thousand Pennsylvanians lose their homes to property tax sheriff’s sales each year and that total does not include those who sell their home, sometimes at a loss, to avoid losing any remaining equity in the home.

Unfortunately, the damage caused to homeowners is only the tip of the property tax iceberg. Eighty percent of non-government jobs in Pennsylvania are provided by small businesses. As the second largest fixed expense for these job creators, the property tax, through its uncertain nature, discourages small business expansion and hinders job growth.

Agriculture, Pennsylvania’s largest industry, is being decimated by the property tax as farms that have been in families for generations are being sold acre-by-acre by owners who sell portions of their land to make property tax payments. Farming – Pennsylvania’s heritage and its lifeblood – is being destroyed by the property tax.

The housing market is virtually at a standstill in Pennsylvania. Polls of real estate professionals have indicated that through the elimination of the school property tax – the greatest portion of the monthly escrow and an amount that in some areas can equal the mortgage payment – Pennsylvania’s real estate market would explode with new buyers. Thousands of young families who currently cannot afford their piece of the American Dream could almost immediately become homeowners through the elimination of the school property tax.

This proposal is not just another “property tax relief” measure. Rather, it is about REPLACING an inequitable and damaging system of taxation with one that is a reflection of our twenty-first century economic reality.

House Bill 76, The Property Tax Independence Act, will eliminate all school property taxes across the Commonwealth and will replace those taxes with funding from the Personal Income Tax and the Sales & Use Tax.

Perhaps the most important provision of The Property Tax Independence Act is that it is TAX REVENUE NEUTRAL. To provide absolute fairness, the legislation has been meticulously crafted to ensure that the tax swap provision of the plan does not raise more than is already collected by the school property tax mechanism.

The Property Tax Independence Act employs a modernized school funding plan with balanced revenue sources that were carefully considered for their effect on an individual’s ability to pay and for political viability.

The Property Tax Independence Act utilizes the current sales tax mechanism to fund schools, restoring the original intent of the 1953 “Education Sales Tax.”

The Property Tax Independence Act’s revenue replacement mechanism moderately broadens the base of the state sales tax to include more services and products at a new 7% rate. Pennsylvania currently has one of the narrowest sales tax bases in the nation and broadening of the base is a powerful key to adequate revenue generation. Life necessities and business-to-business transactions will continue to be exempt from the sales tax.

While the sales tax generates almost two-thirds of The Property Tax Independence Act’s revenue, the remainder of the funding necessary to replace the school property tax is generated by a modest increase in the state personal income tax from 3.07% to 4.34%. (NOTE: This rate is slightly higher than the rate originally proposed in HB 1776, in response to the financial analysis performed by the Independent Fiscal Office, discussed in more detail later in this memo.)

These two taxes provide a predictable and stable funding source that automatically increases revenue in sync with economic growth. This is in clear contrast to the school property tax which is not based on economic growth and is subject to much variation, forcing annual increases in the tax to increase revenue. And these sources are the most desirable because, unlike the property tax that has no relationship to family income, both the sales tax and the personal income tax are directly tied to a person’s ability to pay.

School property tax elimination will be accomplished via a two year phase-out of the tax. In the first fiscal year after enactment, school property taxes will be frozen at their current level; in the second year they will be completely eliminated except for a small portion that will be retained in each school district to retire the individual district’s outstanding long-term debt.

The Property Tax Independence Act works to fully fund all Pennsylvania schools at their current levels. All local school property taxes that are eliminated will be replaced dollar-for-dollar in each district with no arcane formulas that redistribute wealth.

In addition, The Property Tax Independence Act completely eliminates the taxing ability of local school boards. The only exception would be a possible local earned income tax or local personal income tax for major projects such as new school construction, and that will be subject to a no-exception taxpayer referendum.

It is important to note that The Property Tax Independence Act imposes NO new mandates of any kind on Pennsylvania school districts. The plan provides replacement funding only and the funding provided by the plan may be used in any manner the school district deems necessary. The Property Tax Independence Act does not interfere in any manner with local school district decisions.

On September 25, 2012, the Commonwealth’s Independent Fiscal Office (IFO) released a comprehensive “Analysis of HB 1776,” last session’s version of the Property Tax Independence Act. The analysis indicated that, with minor revenue adjustments, the plan truly is financially viable. Those adjustments have been made in the legislation that will be introduced as House Bill 76.

In its analysis, the IFO also drew the following conclusions:

  • By the fifth year after enactment the Property Tax Independence Act would save more than $1.1 billion annually over the equivalent time period’s increase in property taxes.

  • The elimination of school property taxes increases the disposable income of property taxpayers. The analysis assumes that 70% of the property tax cut goes to individuals. It further assumes that homeowners spend 90% of the increase in disposable income, greatly stimulating Pennsylvania’s economy.

  • The elimination of property taxes increases the pre-tax profit of business entities that remit property tax.

  • Working age homeowners realize a tax cut. The analysis finds that the increase in federal income tax (through lower itemized deductions), state income tax, and sales tax is more than offset by the elimination of property taxes.

  • Retired homeowners realize a significant reduction in taxes. The analysis finds that the property tax reduction easily offsets any increase from the higher sales tax.

  • Elimination of the school property tax would increase home values, on average, by greater than 10% statewide.

  • The elimination of property taxes would significantly reduce the property tax share and would clearly increase the attractiveness of the Commonwealth for business location and expansion.

  • Benefits would also accrue to home builders, home developers, and other land owners who convert current land holdings into new housing plots. Employment would increase in the construction sector as well.
Through its enactment this legislation can serve not only to remove an oppressive burden from Pennsylvania homeowners but can also have positive, far-reaching effects on Pennsylvania’s schools, business climate, job growth, and our Commonwealth’s economy in general.

Please join me as a co-sponsor of the Property Tax Independence Act.

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Introduced as HB76