Jul 28, 2014
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Why a Tea Party-Backed School Tax Plan Makes Sense

Columnist Jon Geeting says HB1776 good for taxpayers, and for education equality.

Why a Tea Party-Backed School Tax Plan Makes Sense

In my  I suggested some ideas for closing the Easton Area School District's budget gap that would go easy on most taxpayers, and the local economy.

Ronnie DelBacco has been thinking about these issues too, and he  in support of a bill in Harrisburg, the Property Tax Independence Act (HB1776), that would end the real estate tax altogether and fund school districts through an increase in the state sales tax. It would also eliminate sundry other minor local taxes, but the revenue loss would be offset through a small increase in the state personal income tax.

While HB1776 (get it?) is primarily being pushed by Tea Party-affiliated Republicans, there are good reasons that Democrats and others concerned about inequality should consider taking this deal.

The main concern Democrats and liberals are likely to have is that the sales tax is regressive. Wouldn't funding schools through sales taxes hurt the poor more than the wealthy? After all, if Donald Trump and I both buy a movie ticket, we both pay the same tax, and it takes a much bigger bite out of my total income than his. Why should we both pay the same tax when he makes so much more money?

It's true that the current sales tax in PA is very regressive for precisely this reason, but it doesn't have to be.

Currently, the state exempts dozens of different kinds of goods and services from the sales tax. Some of these are necessities like food and clothing, but other exemptions are  clear handouts to politically-favored industries. Some of my favorite pointless tax exemptions are out-of-state horse purchases, trout, candy and gum, and helicopters.

Because the special interests and their politician friends have turned the tax code into Swiss cheese, the sales tax rate is higher than it has to be. If the state legislature eliminated these exemptions, the sales tax rate could be lowered. Ed Rendell wanted to lower the sales tax to 4% by ending some of these politically-protected tax exemptions, but he was opposed by business interests, including the  Lehigh Valley Chamber of Commerce, because it increased revenue.

There is an easy solution to this political problem, which would also make the sales tax much more progressive.

Instead of taxing sales at the point of sale, the state would tax  your consumption - the difference between your income and your savings. On their state tax forms, taxpayers would report their total income and their total savings. The difference, their consumption, would be taxable at the sales tax rate.

To make it progressive, I would exempt the first $25,000 of consumption, and tax consumption over $100,000 at progressively higher rates.

Getting rid of the sundry exemptions for specific industries would allow the state to keep the consumption tax rate very low, while preserving HB1776's goal of a broad tax base. It would also encourage high earners to save and invest, instead of splurging on pure luxury consumption and status competition. With a progressive consumption tax, taxpayers would benefit from useless status competition between the top earners.

But even as written, HB1776 would be a progressive change compared to the status quo.

Here is a description of  another tax reform in the bill:

The Property Tax Independence Act completely eliminates the local school district Earned Income Tax (generally 0.5%) and nuisance taxes such as the amusement tax, business gross receipts tax, business privilege tax, earned income tax, mechanical devices tax, mercantile tax, occupational privilege tax, and occupation tax and swaps these taxes for an increase of 0.92% in the state personal income tax, from 3.07% to 3.99%. Although those taxpayers with much non-earned income may see a slight increase in their total income taxes, for most taxpayers this will be a direct swap that is tax neutral.

Because low income families pay the EIT from the first dollar earned but receive forgiveness from the state personal income tax if they earn less than $35,000 annually, this tax swap will more than offset any additional sales tax that they may incur.

This would be a progressive change in the tax burden. Many of these kinds of small taxes on businesses are not actually paid by the business, but instead get passed along to consumers as higher prices. The rise in prices hurts poor people more than wealthy people. By eliminating these taxes and raising the revenue from the personal income tax instead, the bill would shift more of the tax burden onto people who earn over $35,000.

One awesome consequence of moving education funding entirely to the state level is that it would strip away most of the rationale for having 500 different school districts. Right now, these school districts act as fiscal authorities, collecting taxes from within a specific geographic area, and then spending it on educating the .

Public education gives kids from poor families a much bigger leg up in life than kids from wealthier families. Even if schools were funded by regressive taxes, the net impact of public education would still be progressive because poor families have a greater need for it, and less ability to pay. Many people would be ok if public education ended tomorrow, because they would just pay to send their kids to private school. Poorer families couldn't afford to do that.

Ultimately, providing high quality public services is more important than whether those services are funded with progressive taxes. Democrats shouldn't get tripped up by superficial objections to sales taxes, and pass up a major opportunity to make large equity gains in public education.

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