Is Property Tax Reform on the Horizon in Pennsylvania?

State and Local Tax

By Allen Wassel

As property taxes continue to increase annually in order to cover school district budget shortfalls, Pennsylvania property owners continue to voice their displeasure, and it appears their concerns have not fallen on deaf ears. Legislators have set forth a proposal designed to shift the lion’s share of the burden away from property owners by eliminating the local school district’s portion of property taxes. The flip-side is that along with any tax decrease there must be a corresponding tax increase to make up for the lost revenue, so this proposal is not without opposition and/or skepticism.

House Bill 1776 / Senate Bill 1400 of 2012 (“the Bill”) is the proposal legislators hope will institute property tax reform in the Commonwealth of Pennsylvania. As previously mentioned, the goal of the Bill is to eliminate the property taxes collected by Pennsylvania’s various school districts. However, the property taxes collected by the counties and municipalities will remain. In order to replace the funding to the school districts, the Bill proposes changes to other tax systems such as the sales and use tax and the personal income tax. Sales and use tax would see an expansion of the tax base, as well as a 1% increase in the state rate, while the state personal income tax would also increase, from 3.07% to 4.01%. Another major change is that tax revenue would no longer be collected by the school districts. Instead, a new Education Stabilization Fund (“ESF”) would be created to collect the revenues generated by the tax increases and to distribute the funds to the school districts.

Proponents of the Bill see it as a way to ensure that all Pennsylvania residents contribute their fair share toward school district funding, as opposed to the current system which lies solely on the shoulders of property owners. Proponents also see utilization of the ESF as way to ensure equitable funding for all Pennsylvania schools and equalize disparities between wealthy and poorer school districts. Opponents, on the other hand, see the Bill as step backward into a regressive tax system which puts lower income individuals at an even further disadvantage by increasing their proportionate share of sales and income taxes. Opponents also feel the proposed minimal tax increases will be insufficient to cover the huge void created by eliminating the school property taxes.

The reality is that this type of major tax system overhaul will not happen overnight. It requires a considerable amount of additional review, analysis and revision before it will receive sufficient bipartisan support to be signed into law. In the meantime, our state and local tax experts will continue to monitor the progress of the Bill and issue updates when they become available. 

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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