On Joint Resolution 1, the Constitutional Amendment on Property Taxes

Posted in:

We are getting a lot of questions about what the constitutional amendment on the ballot this year means and where the Pennsylvania Budget and Policy Center stands on it.

We haven’t rushed to judgment on it for a couple of reasons. First, we are not convinced that this amendment will, by itself, have much impact on policy in the state. And second, given that any amendment to the Constitution is important, we wanted to make sure we understood all the implications of it before reaching a conclusion.

We have reached a conclusion — that the amendment won’t make much difference. And that’s why we aren’t going to offer any recommendation about how to vote.

So let’s begin by explaining what the amendment does and, as importantly, does not do.

The background: our uniformity clause

The key piece of background information one must know to understand this amendment is that the state has a uniformity clause that mandates than any class of income or wealth taxed by the Commonwealth must be taxed at the same rate. That is why, for example, we don’t have a graduated income tax in the state, with people at higher incomes paying taxes at a higher rate. It is also why municipalities in Pennsylvania must tax residential and commercial real estate at the same rate, while cities in other states, such as New York City, tax commercial property at much higher rates.

The uniformity clauses is the big reason that Pennsylvania has one of the most inequitable state and local tax systems in the country with the bottom 20% of families in terms of income paying 12% of their income in state and local taxes while the top 1% pays 4.3%. (Our Fair Share Tax proposal is a way to make our tax system more equitable without violating the uniformity clause.)

There are certain exemptions to the uniformity clause in the Constitution. Properties owned by charitable organizations may be exempted from property taxation and property used for agricultural may be treated differently than other property. (There is also a "poverty" provision that allows for a personal income tax forgiveness program for those with low incomes.)

The background: the homestead program

The General Assembly and voters approved a constitutional amendment in 1997 that authorized the state to create programs that would reduce property taxes for owner-occupied homes — “homesteads” — or farmsteads with two limitations. First, the value of the homestead exemption could be no greater than one-half of the median value of assessed properties in a local jurisdiction. And, second, local jurisdictions could not increase the millage rate — that is the property tax rate — to replace revenues lost through the homestead exemption.

The Constitutional amendment of 1997 by itself changed nothing, for the General Assembly had to act under the amendment to (1) allow local jurisdictions to replace revenues lost to the homestead exemption with some other local revenues or (2) to provide state funds to enable local jurisdictions to replace those lost revenues.

A number of legislatives acts — Act 50 of 1998, Act 72 of 2004, and Act 1 of 2006 — gave local school districts the authority to either raise revenues through an earned income tax or provided state funds, derived from gaming, to offset revenues lost to the homestead exemption. Because Act 50 and Act 72 limited the ability of school districts to increase taxes without voter approval, few districts took advantage of them.

Act 1 of 2006 requires all school districts to participate in the homestead property tax relief program with replacement revenues from casino gambling and an optional local earned income tax. It also established the Act 1 index, which caps the amount a school district can raise taxes without either voter approval or by qualifying for one of the referendum exceptions allowed under the law. Under Act 25 of 2011, taxes can be raised above the Act 1 index without a referendum only if the tax increase is needed to meet the cost of pensions, special education, electoral debt, or grandfathered debt from school construction projects.

What the constitutional amendment does and might do

The proposed constitutional amendment in Joint Resolution 1 would allow the General Assembly to pass a law that could entirely eliminate property taxes on all homesteads and farmsteads. However, this theoretical possibility can become a reality only if there is another source of revenue that could replace those taxes. Again, the law could either allow local jurisdiction to raise other taxes to replace property tax revenues lost due to the homestead exemption. Or it could provide state funds to replace those revenues.

One’s judgment about whether to vote for the Constitutional amendment really depends on what one thinks the General Assembly might do if it is approved.

One consequence of the amendment could be increased support in the General Assembly for HB / SB 76, the plan to replace all property taxes for the schools (except those that are used to pay school construction bonds or loans) with increases in the personal income or sales tax. Since this proposal is, for reasons we explain here, a simply terrible idea, that would give us a reason to oppose the amendment.

Why would the enactment of the constitutional amendment make HB / SB 76 more likely? One reason is that some supporters of HB / SB 76 are trying to frame the amendment debate around their dubious ideas and are going to claim that victory for the amendment means that people embrace HB / SB 76. Strangely enough, though, other supporters of HB / SB 76 have been saying that the Constitutional amendment is a way for state legislators to show the voters that they support property tax reduction without actually doing anything about it.

The other way in which enactment of the amendment might lead in the wrong direction is that it might make SB / HB 76 more politically palatable because a smaller increase in income and sales taxes would be necessary if only residential property taxes instead of residential and commercial property taxes are eliminated. However that approach might also reduce support for HB / SB 76 among those who think that all property taxes should be eliminated and among businesses who would receive no benefit from the plan.

There are also reasons to think the amendment might lead to good policies being adopted by the General Assembly.

The constitutional amendment would allow for public policies that would target property taxes to those Pennsylvanians who are truly burdened by them. Our research shows that property taxes in much of the state are not higher than those in other similar states, but that there are some portions of the state where those taxes are unduly burdensome. Much of this problem could and would be fixed by increasing the far-too-low share of state funding for K-12 education provided by the state. But it might also be useful to couple a general program with targeted property tax relief through a property tax circuit breaker or the homestead provision. A fair program of that kind might require property tax reductions greater than the median value of homes in some local jurisdiction. (At this point, we can’t say whether that would be the case or not.)

In addition, since we believe that the uniformity clauses is so pernicious, we are inclined to think that limiting it, even in small way, is a good precedent.

Frankly, we are not sure how to balance these various considerations in deciding whether to recommend voting for or against the constitutional amendment. 

The key point to remember, however, is that the constitutional amendment does nothing by itself. Even if it passes – and proposed amendments almost always do pass – that does not mean we are closer to passing a terrible property tax reform measure. We have to be ready to fight against HB / SB 76 and, perhaps more importantly, to work together to provide adequate and equitable funds for our schools over the long term.

Comments

0 comments posted

Post new comment

Comment Policy:

Thank you for joining the conversation. Comments are limited to 1,500 characters and are subject to approval and moderation. We reserve the right to remove comments that:

  • are injurious, defamatory, profane, off-topic or inappropriate;
  • contain personal attacks or racist, sexist, homophobic, or other slurs;
  • solicit and/or advertise for personal blogs and websites or to sell products or services;
  • may infringe the copyright or intellectual property rights of others or other applicable laws or regulations; or
  • are otherwise inconsistent with the goals of this blog.

Posted comments do not necessarily represent the views of the Keystone Research Center or Pennsylvania Budget and Policy Center and do not constitute official endorsement by either organization. Please note that comments will be approved during the Keystone Research Center's business hours.

If you have questions, please contact [email protected]

The content of this field is kept private and will not be shown publicly.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd> <p> <img>
  • Lines and paragraphs break automatically.
Refresh Type the characters you see in this picture. Type the characters you see in the picture; if you can't read them, submit the form and a new image will be generated. Not case sensitive.  Switch to audio verification.