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Swann plan requires work ...

| Sunday, May 28, 2006

While GOP gubernatorial candidate Lynn Swann's property tax-reform plan contains several positive points, it raises many questions and leaves key issues unaddressed.

First of all, the plan would provide immediate school tax relief by using 75 percent of the state's general fund surplus and some very speculative savings from consolidating school health plans. Obviously, sizable surpluses are not guaranteed; the money for relief is not guaranteed. The Swann plan would cover any shortfalls with general fund revenues.

In other words, by cutting expenditures in other budget categories. Good luck with that.

Swann says his plan does not rely on shifting taxes. But the reality is that if a state surplus is used to reduce property taxes, then there has been a shift to other state taxes that are too high. A better policy would be to return all state surpluses to taxpayers in the form of immediate income tax cuts before they are spent frivolously.

The second problem is Swann's property tax cap. The plan argues that referenda for tax increases don't work and that the proposals to date have too many loopholes. Therefore, property taxes for all taxing bodies will be capped at the rate of rise in the Education Cost Index, not to exceed 3 percent. Unfortunately, it is not clear whether the 3 percent limit is to be imposed on tax rate increases or revenue increases. It makes a lot of difference.

The candidate's dismissal of the use of referenda for tax rate increases is not well thought out. A better approach would be to require a referendum that permits no exceptions or loopholes for all increases. Residents and taxpayers ought to have the right to determine how much property tax they will pay. Occasions might arise when voters would actually approve a greater than 3 percent hike in the tax rate.

The third, and probably most important, problem with the Swann property tax-reform plan is the call for a state constitutional amendment to replace the current assessment process with a system based on the purchase price of real property. The assessment of each property would be set at the purchase price; the value would not change until ownership changes through a sale.

How will the purchase price be determined for homes that have not sold recently• Some sort of comparable sales method will have to be used. And as we know in Allegheny County, that has been a major source of the angst over assessments.

Surely, the new system does not contemplate reverting to the sale price from the last time the home or property was sold. That could be anywhere from one to 50 or more years ago. Property owners will never accept such an assessment scheme. Next-door neighbors who bought nearly identical homes but many years apart would receive vastly different tax bills.

In some communities, yearly sales as a percentage of the total number of properties are very low. Thus, even if sales prices were rising, the total assessed value in the community would increase very, very slowly.

Conversely, in communities with a high rate of sales as a percentage of all properties, total assessed values could well rise significantly each year, depending on the pace of home price appreciation. Communities with few sales would be forced to raise millage rates frequently; communities with many sales annually might generate adequate revenues without having to resort to millage hikes.

Then, too, recent homebuyers could end up paying much higher taxes than neighbors who have been in similar homes for many years. A likely unintended consequence will be that homes that have not sold in many years will be difficult to sell if they have substantially appreciated in value because of the much higher tax bill that will come with the new price. New home construction could be deterred as well because the purchase price would result in much larger tax bills than older but similarly valued homes.

The fourth major problem with the Swann plan is the requirement that each county establish a single, revenue-neutral tax rate and then distribute the revenues to all municipalities and school districts. Distribution would be pro-rated, based on the prior year's (the last year before implementation of the new system) collections. The maximum rate any county could set would be 20 mills or 2 percent.

Therein lies a potential huge problem for Allegheny County, where the typical community has a combined school, county and municipality rate of 25 mills to 30 mills, with some much higher. Unless the new total assessed value for all properties in the county is 30 percent higher than the current assessment, a 2 percent tax rate will not come close to raising as much revenue as the current system. Then what?

In sum, the Swann plan needs a lot more work before it can be viewed as a serious method of dealing with Pennsylvania's property tax morass.

Jake Haulk, a Ph.D. economist, is president of the Allegheny Institute for Public Policy.

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