May 09, 2014
For well over a decade, lawmakers throughout Pennsylvania have heard concerns in their community about the rising costs of school district property taxes. Affecting residents and businesses, the seemingly annual spike in these locally imposed taxes has begun to overburden many taxpayers.
The PA Chamber recognizes the need to address this growing problem and applauds lawmakers for working to take on the challenge. However, in any effort to develop potential solutions, the best interests of all taxpayers need to be considered. Plans that fail to maintain this balance only cast further burdens on some of the taxpayers they are intended to help.
Senate Bill 76 is among the property tax reform proposals that miss this mark. While well-intentioned, the measure known as the Property Tax Independence Act would dramatically shift the expense of funding Pennsylvania’s public schools to the business community – especially the state’s small businesses.
Senate Bill 76 aims to eliminate school district property taxes by increasing the state’s personal income tax and both increasing and expanding the sales tax. When put into practice, this plan would create an array of concerns for Pennsylvania employers; specifically, generating a significantly higher tax burden for businesses throughout the state.
The PA Chamber has marked a series of significant arguments pertaining to the tax implications of Senate Bill 76 and has presented the following points to lawmakers considering this legislation:
Senate Bill 76 would lead to a 40 percent PIT increase on many small businesses
- As proposed in Senate Bill 76, the state’s personal income tax would increase from its current rate of 3.07 percent to 4.34 percent – a spike of more than 40 percent. Since Pennsylvania small businesses pay the PIT rate, any adjustment to the current 3.07 percent levy would impact these businesses and negatively affect their bottom line. Our state’s business tax climate is often considered among the most costly in the nation. However, the PIT is one of the few bright spots, as it alone serves as a competitive rate with other states. Increasing this rate so substantially will impact this position and compound our already burdensome business tax concerns.
Businesses that lease their property, rather than own, will likely face a significant tax hike
- Proponents of Senate Bill 76 have argued that the increase in the PIT rate would be offset by an elimination of their property taxes. However, this point does not account for businesses that lease, rather than own, their property. For a business owner/operator who leases, there would be no certain relief because the owner of the property would yield any benefit of property tax relief afforded under this bill. Therefore, those who lease would pay a higher income tax rate and a higher sales tax rate that would also apply to new items and services with no guarantee that any offsetting relief would be available. Altogether, the new tax rates and the lack of any certain property tax relief play out to create a significant new tax burden for many small businesses.
An increased and expanded sales tax will affect competitiveness and bottom-line costs
- Increasing the state’s sales tax to 7 percent statewide – 8 percent in Allegheny County and 9 percent in Philadelphia – would increase the overall cost of any goods or services taxed under the current base. But, as Senate Bill 76 would do, expanding the base to an array of goods and services that are currently tax-exempt would completely change the landscape of business taxes in Pennsylvania. For example, services such as legal, advertising, consulting and marketing – to name a few – would now be subject to at least a 7 percent sales tax. This would drive up the costs of these services to the customers of businesses who offer them. Further, applying the new tax to goods like (some) food and (some) clothing would significantly impact retail businesses, especially those in communities that border Delaware which has no sales tax at all, or Maryland which has a 6 percent rate. Since the base is being expanded and the rate increased, some goods and services could go from being totally untaxed to carrying a levy between 7 and 9 percent.
Sales and PIT revenue streams are too volatile a substitute for property taxes
- Even while serving as the state’s two largest revenue generators, the sales and personal income taxes are also among the most volatile and fluctuate most with the economy. Forcing the entire public education funding system to rely solely on these two taxes raises the risk of major funding shortfalls during economic declines. From 2008 to 2010, during the heart of the recession, these two taxes lost approximately $1.4 billion in revenue and created a significant funding hole in the state budget. By increasing the state’s dependency on these taxes, Senate Bill 76 would only compound this problem in the event of future recessions. This would likely lead to lawmakers pressing the business community to make up the difference with even higher taxes, which would only hurt employers and job creation efforts.
Property taxes would still exist under Senate Bill 76
- While Senate Bill 76 would aim to eliminate school district property taxes, residents and businesses would be required to continue paying property taxes at the municipal and county levels. There is no arguing that the latter two property taxes pale in comparison to the cost of school district property taxes, but the fact remains that taxpayers would not see an elimination of property taxes. Moreover, the legislation has no controlling mechanism in place to prevent these other taxes from spiking, which could further compound the problems that would result from the new income and sales tax rates.
School districts will continue to levy a property tax to repay debt
- Debt service incurred by schools is currently paid through school district property taxes. While Senate Bill 76 intends to eliminate school district property taxes, the bill would not do so for school districts until all debt is cleared from their books. All but six of the state’s 500 school districts currently carry debt that is being repaid through property taxes. In some cases this debt could remain on the books for years, which would mean businesses would be forced to pay higher sales and income taxes and continue to pay some level of school district property taxes, as well as local and municipal property taxes. Even for business owners/operators who lease their property, this factor would still pose a problem because the property owner from whom they rent the space would still be required to pay several levels of property taxes; this would be reflected in lease payments that would be passed on to their business tenants.
Addressing the problem must begin at the source
- Lawmakers are right to focus their efforts on property tax reform, but doing so with success cannot occur until the state takes a harder look at the cost-drivers behind the problems. The PA Chamber supports steps to reduce school district expenditures by implementing vital reforms to the state’s pension systems; reforming antiquated prevailing wage laws; and examining the way school districts are funded to ensure it is equitable, fair and efficient. Until these cost-drivers are addressed, any effort to offset property taxes will be temporary at best.
The PA Chamber is committed to working with lawmakers to address the concerns with rising school district property taxes. However, Senate Bill 76 would simply create far too many problems for Pennsylvania employers and the state’s business climate as a whole.
“Pennsylvania needs to create an environment that welcomes business growth and development. Unfortunately, Senate Bill 76 presents a complex mix of ambiguity and new taxes on business that will hamper our state’s ability to create jobs and remain competitive,” said PA Chamber President and CEO Gene Barr. “The business community has too many concerns with the overall impact of Senate Bill 76 to support its passage, and we are pleased that lawmakers are recognizing these concerns as they review this legislation.”
Founded in 1916, the Pennsylvania Chamber of Business and Industry is the state's largest broad-based business association, with its membership comprising businesses of all sizes and across all industry sectors. The PA Chamber is The Statewide Voice of Business.