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Understanding the Regressive Nature Of The Property Tax

Posted by Jim Rodkey on September 1, 2018 at 9:55 AM

Median household income is established by compiling all household income and dividing that into two groups. Very few people are actually at the median household income. It presents a number where half of the population is below the median household income and half of the population is above it. For the United States, the median household income was $59,039 in 2016 according to the U.S. Census Bureau.

The median household income varies from state to state. The median household income in Pennsylvania is $56,907 according to census numbers, $2,132 lower than the national median household income. That will also vary from county to county. I’ll be using my own county to demonstrate the differences.

Lebanon County’s median household income is $56,191, $716 lower than the state average. Within the county the disparity grows even more. The median household income in the city of Lebanon, within that county, is much lower at $35,737, $20,454 less than the median household income in the county.

I’m pointing this out to demonstrate that, in study’s using state-wide or national averages, these study’s often do not honestly reflect the actual impact. Half of the population in the city of Lebanon is far below the national median household income. Any tax increase is going to hit these people much harder than a tax increase elsewhere.

When it comes to the property tax, millage rates will vary from school district to school district. Lebanon city, where the median household income is much lower pays a much higher millage rate. The millage rate is levied on every $1,000 of property worth. With lower median household incomes, homes in the city are usually lower-cost homes. Because they are lower priced homes, their total property tax may be less than the neighboring households, but they are paying more per thousand dollars of property worth on their homes.

The millage rate in the city is 27.9135. That’s 6.9054 mills higher than anywhere else in the county. For every $1,000 of assessed property worth, Lebanon city residents $6.9064 more than anywhere else in the county. A little less than $7 dollars might not seem like much but it’s not just $7 dollars because there are no homes in the city limits selling for just $1,000.

Can you imagine paying varying rates of Personal Income tax based, not on your income, but simply because of where you live? Can you imagine an outside body hired by the government to determine what your wages should be for the job you do and then taxing your income by this bodies assessment even if that assessment does not match your actual income?

What about paying a sales tax where an outside body of government determines the value of the item being purchased regardless of actual cost and then having varying sales taxes applied based on your zip code, not on the actual value?

While that would most likely anger everyone, that is exactly how the property tax works.

The Census Bureau tells us that the average home price in the city is $89,300. The property taxes on a home valued at that average would be $2,492.68. The property taxes on the same priced home in the Eastern Lebanon County School District in Myerstown or Richland (the next highest millage rates in the county) would be $1,876.02 or $616.66 less than the same priced home in the city school district.

Our homes, however do not generate the income necessary to pay the property tax. That must be paid through median household income. For Lebanon City residents, where the median household income is much lower, they are paying a much higher percentage of their income to the property tax.

The median household income of Myerstown is $48,047. A property tax of $1,876.04 amounts to 4% of the median household income in Myerstown. For the Lebanon City resident at the median household income, they are paying about 6.9% of their household income towards the property tax.

Now remember that we are talking about the median household income. Half of the population is earning less than that while the other half is earning more. The disparity in percentage of income doesn’t simply exist from school district to school district, it varies within the school district itself since actual household income varies from household to household.

Looking at averages gives us a glimpse of what is happening but the reality is that lower-earning working families are paying a higher percentage of their income towards the property tax. That’s called regressive taxation and the property tax reeks of this in so many ways that, once you know the truth, you have to ask yourself why we haven’t done something about this sooner.

Now, some people are going to say that the property values in Myerstown are higher, and that’s true. The average home price in Myerstown is $146,000. The total property taxes on a home at that average value would be $3,067.17 or 6.3%of the median household income, still a lower percentage than a average priced home at the median household income in Lebanon City, even though the home value is much higher than the average home value in Lebanon City school district.

The property tax is based on the millage rate which is applied to an assessed value of a property. As reported in an August 10, 2018 article in the Inquirer, a Philadelphia based newspaper, we are told that errors are inevitable in mass appraisals involving hundreds of thousands of properties.

That report goes on to explain that these errors account for more than 160,000 properties in Philadelphia, or 35% of the properties, being over-assessed. The majority of the overassessed homes, according to this report, are lower-income homes. (http://www2.philly.com/philly/news/philadelphia-property-assessments-appeal-tax-market-value-20180810.html)

A previous article in the same paper talked about more than 210,000 overassessed properties in 4 neighboring counties. Contrasting populations and overassessed “errors” we find that nearly the same percentage of errors are taking place even when there are fewer properties to asses.

In many cases, lower-income families are not only paying a higher millage rate, their homes are overassessed and the excuse for these incorrect assessments, which are supposed to make property taxes more fair, is that such errors are likely to occur. So we know this is a flawed system; we all know that it is adversely impacting lower-income families; and with all that information, defenders of the property tax still insist that the property tax is a fair system of taxation in spite of overwhelming evidence to the contrary.

Many of them tell us the problem would go away if we reduced the property tax by shifting to more state funding or created special exemption for groups of people. How do you tell people that you are trying to make property tax more fair by telling them you want to give special vote-buying exceptions to one group by passing that revenue burden on to others. That’s what every exemption program does. No matter how beneficial it may be to some, providing one group a reduction or even exemption by making other people pay for it isn’t fairness in taxation.

Reduction and exemptions to one group are a recognition of the problem but a failure in having the political will to do what should be done; Eliminate the property tax and replace it with a system of taxation that is fair and works for everyone.

Certainly reducing the property tax burden would certainly ease the burden but that doesn’t fix the rampant inequality in taxation that we see all over this commonwealth especially with regards to lower-income working families.

The reduction argument is based on the premise that the property tax is a hated tax because it’s so high. The truth is that the property tax is a hated tax because it’s arbitrarily unfair no matter how its spun. Besides, we know that reduction schemes are only a temporary numbing that will soon disappear as property taxes continue to rise above the rates of inflation. If the reduction is accomplished by shifting to other taxes, we would now be paying higher taxes and our property taxes would be the same problem they always were.

The simple fact is that the assessed value of a properties worth will rarely ever reflect that actual fair market value of a home. The housing industry is a fluctuating market. A home’s value in the fair market is a price agreed upon by a willing buyer and a willing seller, not some arbitrarily determined value set by an assessment company hired at the taxpayer’s expense with little to no input from the actual property owner.

Because the assessment process generates errors, costly appeals follow. Because those appeals can be costly, lower-income families are not as likely to challenge their assessments. The appeal means getting appraisals, incurring other legal expenses and time off from work. The appeal also adds to the expense of county government making the burden of taxation at the county level more expensive.

It’s not only property owners that do appeals. School districts hire law firms to seek out properties to appeal. A report from the Pittsburgh Tribune on August 30, explains that a school district hires a law firm and pays them 30% of increased assessment as a result of a successful appeal of an individual’s property tax. We’re often told that these types of spot reassessments target business but this is clearly not the case, as revealed in the article.

The article explains that one school district filed 44 appeals and of those 44 appeals, 26 were on residential properties. That’s more than half of the school districts appeals being based on residential property, not business. (https://triblive.com/local/westmoreland/14029321-74/hempfield-schools-homeowners-square-off-over-property-tax-assessments)

It should also be noted that the school district paying these law firms 30% is coming out of the pockets of the taxpayers, not the school district. The only money the school district has is money they’ve taken from us. To know that our taxes are being spent to prosecute us to get more money out of us is just one more of the flaws of using our homes to fund government.

There is one more aspect that, however minor, is also something that makes the property even more unfair for lower-income families. Most school districts offer a discount of you pay your property taxes in one lump payment.

This is why the most recent report from the Independent Fiscal Office shows the majority (63.6%) of the revenue collected from the property tax comes in during the first quartile. In my school district early payment is a 10% reduction but I also know that, for those lower-earning families, paying the property taxes in one lump sum is something they simply can’t afford to do.

The property tax is an archaic tax riddled with flaws that pushes a greater burden on the half of the population earning below the median household income. It is painfully regressive in ways that are beyond repair. Every attempt to fix the problem has, in reality, only made the tax more unfair and more regressive. The only solution is to completely eliminate this feudal tax and replace it entirely with a system that is fair.

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