Property Tax Post: States Eliminate Property Tax and Shift Tax Burden to Sales and Income—Is It Bad Tax Policy?

Pennsylvania legislators are voting this week on Pennsylvania’s Property Tax Independence Act, (Senate Bill 76), which eliminates local property taxes used as a source of revenue for schools and increases the state sales and use tax and personal income tax to supplement the lost revenue. This bill was originally introduced in 2013 and failed in the House 138 to 59, as reported by Bloomberg BNA in the Daily Tax Report .  According to the Pennsylvania, Budget and Policy Center, sales tax will increase on a range of products and services including for the first time, sales tax on food.  The elimination of the school property tax will result in a 20.8 percent sales tax hike, increasing the sales tax from 6 to 7.25 percent and the personal income tax will rise from 3.07 percent to 4.34 percent.

The arguments for and against the bill are plausible on both sides. Bill advocate Senator Lisa Boscola (D-Northampton), recently told the Philadelphia Inquirer, “[W]hen you go to a sales tax [funding stream], you get more people paying into the system.”  She and other supporters seem to agree that this bill is an equitable solution to property tax reform.  Representative Tom Quigley, in his co-sponsorship memo stated, “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….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.”

In opposition to the bill, Senator Tom McGarrigle R-26, pulled his support last Friday as quoted in the Delaware County Local Times, “[t]he bill shifts the tax burden without creating any new revenue…,” and the bill would be “shifting $14 billion to a personal income tax and sales tax.” Not even Pennsylvania’s School Board Association is completely convinced this plan will work, noting on their website that “large corporations and businesses will benefit from the tax elimination leaving individual taxpayers to absorb the burden of the tax windfall.”

Florida is also exploring eliminating property taxes and increasing sales tax that will require more than a 6 percent increase. Florida lawmakers have expressed concern that the shifting the tax burden from property owners to shoppers will hurt individuals with a low or fixed income. On October 7, 2015, Rep. Randolph Bracy D-Orlando told CBSMiami, “[P]oor folks spend eight times more of their income on sales tax than the wealthy or folks who are not in poverty.” To counter that argument, Rep. Matt Caldwell R-North Fort Myers asserted, “[p]oor people could avoid taxes since the state full exempts most foods, rent, and medicines from sales tax.”  After all, Florida is a vacation haven.  Would it not be better to capitalize on sales tax paid from tourism and pass the savings on to the residents? Lower property taxes could mean reduced rents and an increase in homeownership.

Policy makers have several things to consider when shifting the tax burden to sales tax or income tax:  the regressive nature of sales tax, the state’s move toward service base models, and the fact that property tax on real estate is one of the leading sources of revenue for state and local governments. For more information on Pennsylvania’s Senate Bill 76 stay tuned to find out how the Senate will vote.

Continue the discussion on LinkedIn: Is swapping property tax for sales and income tax bad tax policy?

For more information about state tax issues, sign up for a  free trial on Bloomberg BNA’s Premier State Tax Library.

By Cynthia N. Wells