Proposed legislation would end property tax funding for schools in Pa.

HARRISBURG, PA -- Senior citizens and other homeowners on fixed incomes are enthusiastic about a proposal that would drastically reduce the burden of residential and commercial property taxes by eliminating the big slice that funds public schools.

But there's a serious political risk in House Bill 1776, nicknamed the "Property Tax Independence Act," sponsored by Rep. Jim Cox, R-Berks.

Many of his colleagues worry about the higher state income tax and state sales tax that the bill calls for. It also would extend the sales tax to many goods and services that have always been exempt -- even including taxing certain food and clothing purchases and nonprescription drugs.

At the House Finance Committee last week, legislators from both parties, including Reps. Kathy Rapp, R-Forest, and Phyllis Mundy, D-Luzerne, expressed hesitation about how their constituents will react to the idea of a controversial shift in taxes. Previous proposals to radically change the state tax structure have failed.

Mr. Cox contended his bill is urgently needed. He said that even when longtime homeowners finally pay off a 20-year or 30-year mortgage, they're still faced with "renting" their house from the government because they have to fork over several thousand dollars each year for property taxes, which go to the school districts, counties and municipalities where they live.

"No tax should have the power to leave you homeless," Mr. Cox said. "We have to end the practice of kicking senior citizens and widows out of their homes because they cannot afford to pay their property taxes."

But to eliminate school property taxes around the state, the Legislature must come up with a huge amount -- an estimated $10 billion -- in replacement revenue. Mr. Cox has three ideas:

• Raising the state income tax rate, now at 3.07 percent, to about 4 percent. That would bring in an extra $3.5 billion, he estimated.

• Raising the sales tax rate, now 6 percent in most counties, to 7 percent (and to 8 percent in Allegheny County, which is already at 7 percent due to the Regional Asset District tax.) That will generate an additional $1.5 billion.

• Eliminating the sales-tax exemption on many goods and services that are now not taxed, producing $4.6 billion.

The rest of the needed $10 billion would come from an existing tax on slot machine revenues, created when casinos were legalized in 2004.

Under the proposed 7 percent sales tax rate, clothing and shoe purchases over $50 would be taxable, as would purchases of food and grocery items that aren't contained on the WIC list -- healthy, nutritional foods on a list called Women, Infants and Children, compiled by the federal government.

For example, Mr. Cox said, sugary cereals would be taxable, but healthier cereals that have no sugar coating would not be.

Items and services that would become taxable under the bill include dry cleaning, funeral expenses, amusement parks, flags, gum, newspapers, magazines and candy.

"I love M&Ms as much as the next guy," Mr. Cox said, "but I'd be willing to pay an extra 7 cents for a $1 bag of candy if it meant my [school] property tax bill would disappear."

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Property taxes have been a headache for legislators for several decades. "We have tried for years to address this burdensome issue," but without success, Ms. Mundy said.

She noted a 1988 statewide referendum where an effort to raise other taxes to generate funds to get rid of property taxes was defeated 3-1 by voters.

But that hasn't stopped lawmakers from trying. Besides Mr. Cox's bill, another measure, House Bill 2230 by Rep. Seth Grove, R-York, could come before the state House for consideration before the July 1 break for summer recess.

It would allow counties to increase their county sales tax by 1 percent and use all the additional money to reduce property taxes. But the higher sales tax would have to be approved by county residents in a referendum.

The property tax issue also arose in 2004. School tax relief was one of the two main arguments for passage of the state gaming law, which legalized slot machines in 2004. (Helping the horse-racing industry was the other).

Most legislators consider slots revenue as only a modest aid in easing the property tax burden. The average relief most homeowners get from slots is $200 a year, far less than most people's property tax total.

The school property tax issue has become especially critical for legislators from many areas of Eastern Pennsylvania, which are growing due to an influx of people from states with even higher taxes, such as New York and New Jersey.

In Monroe County, which borders New Jersey, officials said housing prices are rising and property taxes for many homeowners have jumped to as much as $10,000 or $12,000 per year.

They want the state to do something to keep people from losing their homes.

But legislators from Northern or Western Pennsylvania, which have had much slower population growth or even population declines, balk at raising the sales tax and extending it to exempt items.

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Businesses whose products would for the first time be taxed have, predictably, begun opposing the Cox bill. The Pennsylvania Newspaper Association made its opposition clear at last week's hearing.

The bill would impose the sales tax on newspaper sales, promotion and advertising, said Bernard Oravec, publisher of the Williamsport Sun-Gazette.

"Most states do not charge the sales tax when consumers buy a daily or weekly newspaper, nor do they tax newspapers on their circulation revenue," he said.

The newspaper association "believes that such taxes are bad for business and bad for democracy," he added.

The Pennsylvania School Boards Association said it would like to see a more diverse "mix of local taxes" given for funding schools, but added, "PSBA does not support any proposal to totally eliminate school property taxes."

Nothing will happen regarding the Cox bill before the House finance panel holds another hearing June 4.

It isn't known yet if the bill will come up for House floor action before the summer break starts July 1. Two major items will come up first for action in June -- adopting a new state budget for the fiscal year starting July 1, and, possibly, more debate on whether to privatize the sale of wine and liquor.