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Been There & Done That

April 25, 2007

by Dr. G. Terry Madonna and Dr. Michael Young

On May 15, Pennsylvania primary voters in most school districts will cast ballots to determine if they will exchange local property tax reductions for either a local earned income tax or a local personal income tax. We don’t know in advance how many voters will trade in lower property taxes for higher local income taxes, but we do know in advance that whatever the voters do, it won’t matter. It won’t matter for the same reason that it doesn’t matter in a shell game which shell players look under. The game is fixed.

We know it’s fixed because we have played this game before. With respect to the long running property tax shell game, Pennsylvanians have been there and done that. Nevertheless, on May 15th, voters are being asked to go there and do it again.

Some brief background will be helpful. Three times over the last decade, challenged to find a solution for the state’s festering property tax problem, the legislature has successively adopted legislation beginning with Act 50 in 1998, followed by Act 72 in 2004, and now Act 1 (2006). All three pieces of legislation have been premised on a single flawed premise, that local governments using local resources can solve the problem of school funding, that somehow if we just let school districts switch one kind of tax for another and cap property taxes, the school funding crisis will go away.

But it hasn’t gone away, not in 1998, not in 2004, and not this time. It is still very much with us and it will remain with us until we confront the real problem.

Let’s be clear just what that problem is.

What we casually call the property tax problem is actually a bundle of interrelated problems that involve intergovernmental tax bases, inequities, and inadequacies in the property tax and problems funding public education.

The school funding problem is central here. Lawmakers have been funding local public education with a tax, the property tax, better suited to the America of the 19th century than to the 21st--a tax simply not capable of adequately or fairing funding the public schools.

Using the property tax to fund schools has produced an atmosphere of perpetual crisis in local public financing. Under existing law, relying on the property tax to fund local education means there will never be enough money raised to pay for education (tax inadequacy), and the burden of paying for schools will unfairly fall on those least able to pay (tax inequity). It also means we will always have a "property tax problem," that property taxes will continue to go up, and school districts will continue to struggle to control spending.

Spending control figures prominently in the problem. Local school districts possess little or no ability to control many school expenditures. Much of the "uncontrollable spending" is based on unfunded state mandates, such as special education, healthcare, teacher pensions, judicial orders, and shifting enrollments. The state, in effect, requires that local districts perform certain functions, even if state government won’t provide sufficient resources for the function to be performed.

The magnitude of "uncontrollable spending" because of state mandates and related causes is starkly illustrated by a single statistic: the number of school districts this year that received exceptions to Act One’s provision that tax increases be limited to the rate of inflation. Fully, 210 districts or 45 percent of the total number received exceptions, most for expenditures such as special education, healthcare, or pension costs over which local districts have little or no discretion.

For these districts this year, and for all districts in any given year, hypothetical limits on property tax increases are little more than a cruel joke.

Does this imply that there is no solution to the property tax problem? Not at all! In fact the solutions are clear and obvious: we can cut spending and/or increase revenues. There is no advanced math necessary here.

Consider the first option, spending cuts. Any meaningful spending cuts would need to take place precisely in those areas of school spending carved out in Act One’s exceptions. These include many of the major drivers of increased spending: special education, teacher pensions, school construction costs, healthcare, No Child Left Behind requirements, and other mandated items.

Spending cuts like these would indeed take pressure off the local property tax base. But it is Pollyannaish to believe this will happen. In fact, there is no popular support for large cuts in education spending, leaving policymakers with the second option--increasing revenues to pay for education.

The choices here are straightforward. There are only two broad based taxes with the capacity to raise enough revenue: the state sales tax and state income tax. There are no other ways that state or local governments can raise the money to pay for schools. The political leadership of the state continues to deny this fundamental truth and beguiles us into believing that local taxes can do the job, if we only get the right local taxes. But the truth is local tax bases simply won’t stretch far enough to raise sufficient revenues to meet the needs of the schools. You can’t get there from here.

And so, Pennsylvania voters continue to be ensnared in a long running shell game in which political leaders cynically provide us with choices that make no difference, while they perversely refuse to own up to the real problem or provide any real solution to the school funding problem.

Once again on May 15th, voters will go to the polls to pretend that they are making real decisions that will have real consequences. They won’t. Nor will the charade conclude until the policymakers conclude they can’t spoof the voters any longer. Sadly, there is no sign of that so far.

Politically Uncorrected™ is published twice monthly. Dr. G. Terry Madonna is a Professor of Public Affairs at Franklin & Marshall College, and Dr. Michael Young is a former Professor of Politics and Public Affairs at Penn State University and Managing Partner at Michael Young Strategic Research. The opinions expressed in this article are solely those of the authors and do not necessarily reflect the opinions of any institution or organization with which they are affiliated. This article may be used in whole or part only with appropriate attribution. Copyright © 2007 Terry Madonna and Michael Young.