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Moral Hazard in Pennsylvania Property Tax Proposals

3 min readBy: Jared Walczak

1969: the year Nixon took office, the year of the first manned Moon landing, and the year that Butler County, Pennsylvania completed its last property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. assessment.

Now, there’s really no reason to single out Butler County other than the fact that I once lived there—the reality is, going decades without a reassessment isn’t all that unusual in Pennsylvania, just one of several quirks in the Commonwealth’s tax structure discussed at a Pennsylvania Senate Finance Committee hearing earlier this week.

Governor Tom Wolf (D) has proposed a net $4.7 billion tax package which, on the new revenues side, hikes the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , raises the rate and expands the base of the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , moves to combined reporting for the corporate net income tax, and imposes a new severance tax, partially offset by a reduction in the corporate net income tax rate (currently the second highest in the nation) and transfers intended to reduce local property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. liability.

For years, some Republican legislators have championed legislation (HB 76 / SB 76) to eliminate school district property taxes (one of three property tax levies, the others imposed by counties and municipalities) while holding school district revenues harmless through individual income tax increases. And recently, a bipartisan coalition in the House advanced separate legislation to increase income and sales taxes to provide a measure of property tax relief.

There has long been an appetite in Pennsylvania for some measure of property tax relief. Outright abolition of property taxes has currency in some circles, and at very least, property tax relief is a byword among legislators of both parties. Interestingly, Pennsylvania’s overall property tax burden is right at the median point, but that burden is far from neutrally applied. Due to the infrequency of reassessments and drastically different rates across the Commonwealth—particularly in school district property taxes—some Pennsylvanians experience exceedingly high property tax burdens, creating a political impetus for reform.

Unfortunately, as I explained in my testimony, efforts at the state level to reduce local property tax burdens introduce elements of moral hazard and may fail to bring about their intended effect:

Property tax relief is a worthy goal, but one that is often difficult to implement at the state level. It would be more accurate to say that the Governor has proposed increasing the state’s share of public education funding to reduce the pressure on localities to raise revenues through local property taxes, with different impacts across the Commonwealth. In Philadelphia, for instance, most of the reduction would actually come through the city’s wage tax, not property taxes as such.

Although school districts would be prohibited from increasing their property tax millage rate if their unassigned fund balance is greater than four percent of total expenditures, the unfortunate reality is that there is nothing to ensure that the non-homestead exemption share of property tax relief actually materializes, as local taxing authorities necessarily remain free to set their own millage rates, and are not obligated to reduce them in proportion to their lesser school funding obligations, nor to keep them at whatever rates they set.

All of that is to say that state-level property tax relief can introduce an element of moral hazard: some localities may consider themselves freed up to raise property taxes further due to the existence of an offset, resulting in higher taxes across the board. Since this plan is predicated on tax shifting, it can also raise equity issues: should income and other state-level tax dollars be used to provide rebates to property owners, who are paying, at least in part, for services associated with property ownership?

Far more than income taxes, property taxes also conform reasonably well to the benefits test, as they help to pay for services tied to property ownership—local road maintenance, law enforcement and emergency services, and the like—and the value of the property is a reasonable, if imperfect, proxy for the value of those services. Many economists also favor property taxes over many alternative forms of taxation, like income and sales taxes, because have a relatively limited impact on economic growth and development.

My full testimony is available here. More on Pennsylvania here.