HARRISBURG — Property owners in Pennsylvania avoided paying an additional estimated $222 million in school taxes over a nine-year period after state law was amended to further restrict districts from pursuing exceptions to the Taxpayer Relief Act, according to an analysis by the Independent Fiscal Office (IFO).
Residential properties would have been taxed an additional combined $149 million from 2012-13 through 2020-21 while commercial properties and other classifications would have been taxed an additional $73 million, the IFO analysis shows.
The total estimated amount of ineligible exceptions over the study period pales in comparison to a single year of property tax revenue collected by schools.
In 2020-21 alone, the IFO estimates the combined property tax levies across all Pennsylvania public schools to have exceeded $15.3 billion. The upper estimate of $28 million in additional taxes that were avoided amounted to just 0.02%.
Still, state Rep. Seth Grove, who helped adopt the amendment and requested the estimate, said the avoided tax increases are a result of effective legislation.
Megan Augustine, press secretary for the state Democrat House Appropriations Committee, called the impact negligible at best.
Independent tax experts said it’s all a matter of perspective.
Exceptions eliminated
The Taxpayer Relief Act of 2006 prevents school districts from raising property taxes beyond a calculated index specific to each individual district. The index is based on average statewide wage increases and the employment cost index for elementary and secondary schools.
With the restriction, school boards are left to cut spending, seek approval for an elevated tax rate through a voter referendum on Election Day or apply to the Pennsylvania Department of Education (PDE) for certain exceptions to the law.
Led by Republican lawmakers during the Gov. Tom Corbett administration, Act 25 of 2011 amended the Taxpayer Relief Act by eliminating seven original exceptions including school construction and disaster declarations.
The available remaining exceptions are special education, pension costs and certain debt service such as refinancing old construction debt or paying principal and interest on the voter-approved debt.
2 approved referendums
The prospects of an approved voter referendum are low.
Andrew Christ, director of education policy with the Pennsylvania School Boards Association (PSBA), recalled just two instances of an approved voter referendum since the Taxpayer Relief Act was established. He estimated about 16 districts got a question on the ballot.
“We live with it. It’s stressful because our expenditure items are mainly huge mandates from the state. If we actually had full funding from the state that would certainly reduce property tax stress,” said John Callahan, chief advocacy officer with PSBA.
Applications for exceptions are due in early winter, months before the state budget is approved, leaving school officials to estimate what they might receive in education funding from state and federal governments.
And, districts have no choice but to make contributions toward pensions plus charter school tuition and special education services. According to PSBA, pension liabilities for local schools grew 533% between 2010-11 and 2019-20. During that same time, charter school costs rose 128%.
Statewide, PSBA estimated special education costs in 2021-22 at nearly $5.75 billion, with state and federal funds offsetting the cost by a combined $1.46 billion. Compare that to 2007-08 when those costs across Pennsylvania totaled $2.72 billion with the state and federal spending covering $1.12 billion, according to PSBA.
Proposed tax changes
State Rep. Frank Ryan, R-Lebanon, this week introduced new legislation to eliminate school property taxes, as he’s done several times during his tenure. He sees the current rate of increases, even with the Taxpayer Relief Act in place, as unsustainable.
Revenue from property taxes would be replaced with sales and income taxes: the Personal Income Tax rising by 1.85% to a new rate of 4.92%, and the state Sales and Use Tax rising by 2% to a new rate of 8%.
Clothing and food would be subject to the sales tax under Ryan’s proposal, except WIC/SNAP purchases. The Personal Income Tax would apply to retirement income, excepting Social Security, military pensions and member contributions to retirement plans. Contributions to pension plans would become tax-deductible on state income tax returns for current employees.
Fewer exceptions, requests
The latest report from PDE shows 30 districts received exception approvals in 2021-22 for a combined $10.7 million — by far the lowest amounts since the tax relief act was amended. Two were for pensions, 27 for special education and 1 for other debt.
The exceptions for 15 of the districts weren’t enough to cover their proposed tax hikes, meaning they’d have to cut costs or seek a voter referendum. The data doesn’t show how many of the districts ultimately used the exceptions but the historic rate is about 35%.
“We took away their taxing authority. What was the repercussion of that? I don’t hear anybody complaining about those exceptions,” Grove said before pointing out that of the most recent exceptions, just two were for pensions. “If schools are in dire need of funds you’d think they’d file every exception they have. We still haven’t seen that.”
The growth of property taxes may have slowed due to Act 25 of 2011, Augustine said, but only barely. Pennsylvania ranks near the bottom in the state’s share of education spending, she said. Real property tax reform would be shifting the cost to the state and away from local taxes, she said.
“The underlying disease is underinvestment in education funding at the state level,” Augustine said. “Many communities cannot raise enough funding locally, no matter how much they tax themselves. That is why we continue to see the gross inequities in our education funding system.”
A matter of perspective
Optimal tax policies raise government revenue and create the least amount of economic harm, according to Tim Vermeer, senior state tax policy analyst with Tax Foundation in Washington, D.C.
The limits do make it more difficult for school boards to generate new revenue, and PDE is hand-tied with respect to having fewer exceptions to consider for approval. That empowers voters to scrutinize and decide whether to approve a tax increase beyond the set limit.
“From a taxpayer’s perspective, assuming services have not suffered, there seems to be little downside to the legislation,” Vermeer said.
Whether Act 25 resulted in savings depends on the viewpoint. Vermeer said assuming that exception requests would grow at a sustained rate and property values remain proportionally unchanged, all taxpayers would have benefitted. However, he said taxpayers didn’t save anything since the IFO study is based on assumptions and not executed tax hikes.
Richard C. Auxier, senior policy associate in the Urban-Brookings Tax Policy Center in Washington, D.C., said property tax relief tends to benefit people with more valuable properties. Costs to operate schools continue to grow as populations and needs shift, he said, and asking voters to approve a rate hike compounds the challenge to meet those needs.
But, he said those who advocate for lower taxes would say that’s exactly the point — reducing the chance of a rate hike and keeping taxpayer costs low.
“Sometimes these things don’t lower the tax burden, they just push it in other directions,” Auxier said.
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