Funding Schools:
Property Taxes versus Income Taxes

Edward J. Dodson

[A letter to Anthony Wood, columnist for the Philadelphia Inquirer, 1 August 2004]

Gov. Rendell's drive to have gambling legalized in Pennsylvania may reduce the number of Pennsylvanians who travel to Atlantic City to part with their savings. So, if people are going to part with their funds anyway, they might as well do so while contributing to their own state's coffers. Beyond that, there are still very serious consequences of reducing taxes on real estate in favor of imposing increased taxes on incomes or on goods or services.

Philadelphia's City Controller, Jonathan Saidel presented the city with one of the most well-researched and well-reasoned analyses of how the city's revenue needs ought to be met. The non-partisan tax reform commission headed by Ed Schwartz came to almost the identical conclusions (with the caviat that the reforms be implemented more gradually than the Controller has recommended).

Whether or not the state's schools ought to be funded at the state level to ensure greater equality of funding per student is a political question. How the revenue is raised is a question with economic and, yes, moral implications. Some values are publicly-created and ought to be publicly-collected; other values are privately-created and ought to be untaxed (or at least minimally taxed). Saidel understands this better than most, which is why he has publicly advocated a restructuring of the property tax to gradually begin to exempt property improvements from the tax base and to increase the rate of taxation applied to assessed land values. Land values are directly related to public investments infrastructure and amenities. Building values are a function of what type of improvement the owner of a parcel of land constructs and maintains.

We need to start with this basic reform of the property tax. If there is a desire to protect lower-income homeowners who happen to live in neighborhoods with rapidly increasing land values, there is a good way to do so and still maintain a relatively high level of equality of treatment: allow homeowners to apply to have their annual tax payment capped based on household income. The unpaid portion would accrue as a lien against the property, to be paid to the community at time of transfer to heirs or sale. The property tax converted to a land tax can be made even more progressive by exempting the first portion of market value from taxation (e.g., the first $15,000 or $20,000 of land value).

The Federal income tax has so many exemptions and loopholes that it is no longer progressive. Perhaps the states ought to impose an income tax structure that would be simple for people to file under, would be progressive but would not be excessively confiscatory. The approach I favor is a graduated flat tax, structured roughly as follows: (a) all individual incomes below the state median would be exempt from the tax; (b) assuming a state median of $50,000, a rate of 5% would be imposed on incomes greater than $50,000 up to $100,000; (c) then, a rate of 10% on incomes greater than $100,000 up to $250,000; (d) 15% on incomes greater than $250,000 up to $500,000; (e) 20% on incomes greater than $500,000 up to $1 million; and (f) 25% on incomes greater than $1 million.

With the above changes we would have a structure for raising most public revenue that rewards job-creation and economic activity, while imposing heavier costs on those who hold land idle or underutilized. Lower income households would keep most of what they earn, while the highest income recipients would contribute based on "ability to pay" but not so excessively to drive them to other states or countries in order to escape their obligation to support public goods and services.