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What’s Fair About Taxes?

Posted: August 3, 2011

Of all the issues in local government, taxation is the most controversial – and often the least well understood.

Local governments rely on taxes for a significant part of their revenue.  As reported to the PA Department of Community and Economic Development, tax collections are roughly 50% of school district budgets, 40% of city, borough and township budgets, and 25% of county budgets across Pennsylvania.  Add to this the multi-layered system of local government in our state, and it’s easy to understand why taxes are a big concern.  If you’re a property owner, you pay real estate tax to your municipality, school district, and county.  If you’re employed, you pay earned income tax to your municipality and school district as well as the state and federal government.  And you probably pay a few other taxes as well, such as local services or occupational tax.

Many complaints about taxation are really complaints about how local governments spend our money.  Taxpayers who simply want to pay lower taxes speak in terms of smaller budgets, less spending on specific programs and services, or more carefully monitoring of government expenditures to eliminate what they perceive as waste and fraud.  For these citizens, the question is not what taxes we pay, but rather how much we pay, and the solution is to reduce local government spending. 

Tax fairness, on the other hand, is not about how much tax is assessed, but who pays it.  In all, there are nearly a dozen taxes authorized by Pennsylvania code.  The two largest sources of revenue are the real property and earned income taxes.  All local taxing authorities can levy a combination of these two taxes -- except counties.  This means that property owners shoulder nearly the entire burden of taxes for county government, while municipalities and school districts can shift some of the tax burden to citizens who work, regardless of whether they are property owners.  This distinction can be significant depending on how many residents are in the workforce.  For instance, a township that has a large retired population may not realize as much revenue from earned income tax as it would from a comparable levy of real property tax.  On the other hand, a ‘bedroom community’ township, where a large percentage of citizens are in the workforce, may prefer to rely more heavily on the earned income tax.

Both the real property tax and the earned income tax tend to be stable sources of revenue for taxing authorities.  While they can be affected by major regional trends such as widespread unemployment or housing foreclosures, the changes over time are relatively small.  Not all taxes are similar in reliability and stability.  An example is the realty transfer tax.  During the housing boom of a few years ago, municipalities and school districts in high-growth areas realized higher than normal revenue from the realty transfer taxes.  However, when the housing bubble burst, the tax revenues decreased dramatically.  Taxing authorities need to exercise caution in relying on tax sources that can change quickly.

So which taxes should counties, cities, townships, boroughs and school districts use?  There is no ‘right’ answer: it depends on how the community in question defines tax fairness, how it wishes to distribute the tax burden, and also on the composition of its tax base.  For more information about tax fairness, visit the Penn State Extension website, http://extension.psu.edu/community-economics/taxes .  

Judy Chambers is the Penn State Extension Educator for Economic and Community Development serving Adams County.  Penn State is committed to affirmative action, equal opportunity, and the diversity of its workforce.  Penn State Extension in Adams County is located at 670 Old Harrisburg Road, Suite 204, Gettysburg, PA  17325, phone 717-334-6271 or 1-888-472-0261, e-mail AdamsExt@psu.edu

 

 

Taxes available to Pennsylvania local taxing authorities

Tax

Counties

Cities

(except Philadelphia, Pittsburgh and Scranton)

Boroughs and Townships

School  Districts

Real property (real estate tax)

X

X

X

X

Earned Income

 

X

X

X

Per capita

X*

X

X

X

Occupation

X*

X

X

X

Realty transfer

 

 

X

X

Mechanical devices

 

X

X

X

Amusement

 

X

X

X

Business gross receipts

 

X

X

X

Local services

 

X

X

 

Residence, business license, deed transfer taxes

 

X

 

 

Hotel room rental (pillow tax)

x

 

 

 

X* = counties can levy either the per capita or occupation tax, but not both.

 

 

 

 

  • Real Property – based on the assessed value of real property, i.e. land, buildings and other improvements.  This tax can only be levied on property owners.
  • Earned Income – based on the wages, salaries, commissions, net profits or other compensation earned by a taxpayer.  This tax can be levied on all wage-earners.
  • Per Capita – a ‘head’ tax levied on every citizen of the taxing authority who is 18 years of age or older.  Sometimes a taxing authority will establish an age cap which eliminates the per capita tax for senior citizens.  This tax can be levied on all citizens.
  • Occupation – a tax paid by citizens based on the ‘value’ of their occupation as determined by the taxing authority.  All citizens with the same occupation pay the same tax, regardless of income.   This tax can be levied on all wage-earners.
  • Realty Transfer – this tax is based on a percentage of the selling  price of real property.  The taxing authority levies the transfer tax when a property is sold, but the question of who pays it is a matter of negotiation between the buyer and the seller.
  • Mechanical Devices – a tax originally instituted to tax jukeboxes and pinball machines, but which has been extended to other similar electronic and mechanical  equipment.  This tax is levied on the owner of the establishment where the equipment is located.
  • Amusement – a tax on the admission prices to places of amusement, entertainment or recreation.  This tax is levied on the business owner.
  • Business Gross Receipts –mercantile and business privilege taxes (which are essentially the same tax), levied on businesses within a jurisdiction.
  • Local services –  a tax designed to help municipalities and their emergency medical services providers to recover the cost of providing services.  Maximum tax is $52 and at least 25% of the revenues must be used to support emergency medical services. This tax is levied on all employees within the taxing authority as payroll withholding.
  • Hotel Room Rental – basically a sales tax on people who rent hotel rooms.  The revenues from this tax are restricted for use in tourism and related areas.  This tax is levied directly on the customer as part of his hotel bill.