Articles

(June 2003) Property taxes are the primary revenue source for local governments in Pennsylvania. They’re a constant and reliable source of revenue - but many say they’re inequitable and cost too much to administer. In short, Pennsylvania property taxes are widely viewed as unfair. Why? And is that perception itself fair? IssuesPA examined how property taxes measure up to generally-accepted principles of taxation.

Are they fair?

Fairness has two dimensions. First, there should be a relationship between property tax burden and the overall government benefits received by taxpayers paying them. Broadly speaking, the vast majority of Pennsylvania citizens pay property taxes either directly (property owners) or indirectly (renters) and they receive local government services at some level in return. So there’s a relationship between tax burden and service. Finding a relationship that’s proportionate between what’s paid and the level of services received, however, can be quite difficult.

Consider local education, generally the largest chunk of a taxpayer’s property taxes. The cost of educating a student from a family paying high property taxes in a school district is about the same as the cost of educating a student from a family with a low tax bill in the same district. Still, everyone benefits from an educated public, even those without children in school. Why? An educated public supports the economic progress of the community and contributes to its overall quality of life.

Second, consider fairness in taxation based on one’s ability to pay. At one time, the value of a person’s property was a fair measure of wealth. That relationship still holds true in many cases. If income is the best measure of wealth, those with higher incomes generally have higher-valued properties, particularly within the same taxing jurisdiction. Of course, there are exceptions and these have major political and social ramifications. For example, a portion of the elderly population is "asset rich" due to increasing property values from long-term ownership, but these same individuals don’t have the income to be considered wealthy - or pay their taxes. For them, property values aren’t a measure of their ability to pay.

Are they efficient?

An efficient tax system supplies a reliable source of income, promotes economic growth, doesn’t distort market forces, and is understandable and accountable to taxpayers. By these measures, Pennsylvania’s property taxes get mixed reviews.

Property taxes provide a large and steady source of income for local governments. Their yield isn’t susceptible to economic downturns, at least in the short term. Property taxes don’t play a big role in business location decisions in Pennsylvania because business enjoys several exemptions from the tax that aren’t found in many other states. For example, there’s no property tax on inventories and equipment. But Pennsylvania’s property taxes can play a role in personal economic decisions. For example, the differences in tax burden between one taxing jurisdiction and another can impact house buying decisions.

In theory, property taxes should be understandable. Taxpayers pay property taxes based on a percentage of the value of their land and buildings. In practice, however, different assessment ratios, different "millage" rates, and what too often is only a minimal relationship between the assessed and market values of property create enormous, seemingly insurmountable complications.

Are they administered effectively?

Many problems with property taxes begin with how they’re administered. By their nature, assessed values are the results of subjective judgment and those values change constantly as the real estate market changes. To administer fair property taxes, assessment updates - reassessments - must happen regularly, and the rates adjusted accordingly. This requires costly and constant attention. But in some counties, countywide reassessment hasn’t happened for decades. The result? One, tremendous variations in assessed values between similar properties, in some cases properties that are just across the street from each other. Two, taxpayer suspicion, litigation, and a growing unwillingness to pay.

Collecting property taxes is another thorny issue. Pennsylvania still uses a decentralized system of elected local tax collectors, leading to higher-than-necessary costs in many locations.

So what’s next?

On balance, even if every issue about property taxes were resolved satisfactorily, many still would question why Pennsylvania continues to rely so heavily on property taxes, and would demand change. Pennsylvanians love to hate property taxes.

(For an expanded explanation of the desirable characteristics of a tax system, check out the April 22nd IssuesPA story, Knowing a Good Tax System When You See It.)