Pennsylvania State Representative John Lawrence (R) has circulated a memo (paywalled) stating his intention to “introduce legislation proposing an 80 cents per pack cigarette 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. to fund significant school 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. relief for low-income seniors.” The memo indicates that seniors with under $35,000 in annual income everywhere outside of Philadelphia (subject to a separate potential $2.00 cigarette tax hike we’ve written on elsewhere) could receive an 82 percent reduction in property taxes, amounting to potentially thousands of dollars per home-owning senior. Unfortunately, this proposal not only misunderstands how property tax relief works in practice, but violates the basic principles of sound tax policy.
Proposals to offer property tax relief are not new. New Jersey has offered large-scale property tax relief for decades, and yet it still has the highest property taxes in the nation. Many states have so-called “circuit-breaker” programs that cap property taxes at some percent of income for the elderly. Unfortunately, these policies don’t work very well in terms of achieving lower tax burdens for residents.
When state governments offer property tax relief, it amounts to a revenue transfer from the state government to local governments, but one that lowers taxpayers’ perceived property tax burden. When taxpayers feel like they have a lower property tax burden, it empowers local governments to ratchet up property taxes again with less resistance by concerned taxpayers. The result is that property tax relief increases state spending while, in the long run, it does not decrease local property taxes at all. Higher state spending will eventually require higher taxes.
In the long run, the only sure way to reduce the burden of local government is for local voters to push for lower spending and lower taxes. State property tax relief does not reduce the burden of local government any more than federal aid reduces the burden of state governments: it changes who you pay your tax to, but it doesn’t actually reduce how much you pay, and may actually increase it. Taxpayers should be aware that state-funded property tax relief simply increases the demand for state revenues, and gives localities more power to raise even more taxes.
The proposal in Pennsylvania takes one unsound tax policy, property tax relief payments, and adds another, high local cigarette taxes. Pennsylvania’s statewide cigarette tax is near the national average at $1.60. Thus, as might be expected, cigarette smuggling represents a relatively small part of Pennsylvania’s market, with net smuggling accounting for just 1.1 percent of the market. But with higher local cigarette taxes, Pennsylvania could expect increased smuggling, and thus associated increased problems arising from the tax and increased tax enforcement costs. With a $2.00 increase in Philadelphia and a $0.80 increase everywhere else, Pennsylvania’s taxes would be similar to those in Wisconsin, New Jersey, Maryland, and DC, where smuggling represents from 15 percent to 35 percent of the market.
Property taxes are an appropriate way to fund local government because they fulfill the benefit principle: the people paying the tax (residents and property owners in a local area) benefit from the spending the tax pays for (local government services). But cigarette taxes violate that principle. Cigarette smokers do not benefit from local government services any more or less than other residents, and many purchasers of cigarettes may not even live in the jurisdiction in which they buy cigarettes. Thus, substituting the narrow tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. of cigarettes for the broader property tax base will result in a small group of people shouldering a disproportionate share of tax burdens. Cigarette taxes also tend to be fairly regressive, thus Pennsylvania will substitute taxes on low-income elderly individuals for taxes on low-income smokers: low income Pennsylvanians on the whole are no better off.
If Pennsylvania’s policymakers want to help elderly people keep their homes instead of being driven out by tax bills, they have many options. They could implement policies to cap local property tax levies or they could focus on reducing the costs of public education. Alternatively, local voters could be encouraged to simply push for lower local taxes. If many Pennsylvanians think their property taxes are too high, they have the power to reduce those taxes without state action. But whatever course Pennsylvania takes, the current proposal would likely have the primary effects of boosting state spending and contributing to increased cigarette smuggling, not reducing total tax burdens.
Read more on property taxes here.
Read more on cigarette taxes here.
Read more on Pennsylvania here.
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