.

Why a Tea Party-Backed School Tax Plan Makes Sense

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

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.

Ronnie DelBacco February 08, 2012 at 01:11 PM
Jon, Thanks for the expanded explanations and support of HB1776, or similar legislation. I knew sooner or later we would agree on something. "Why not let the wealthy have their buying competitions for high dollar luxury items?" Afterall, it is those luxury industries where a lot of lower income folks work. If those industries lose business because their customers stop spending, it affects jobs for the little guy. I'll use my job as an example. I manage an audio video warehouse for a company whose customers are the high end financial earners and spenders. When they don't have us install their custom home theaters, lighting, security, and sound in their homes we lose business. This recession HAS hit them too and they DID slow their spending on our services. In response, our company has had to change many aspects of compensation to us (the employees) to stay afloat. We have lost all sick days, personal days, pay freeze for the past two years, 30% increase in our contribution to our healthcare, layoffs, and to top it off, no Christmas breakfast or bonuses. That money comes right out of our family budget. The reality is that we have to cut out extras and live with less every time the wealthy cut back. So again, I say let the wealthy compete with each other buying high dollar items because when they don't, it does affect those of us who work in the industries that support their indulgences. Their taxes on those items will only add to the coffers for educational spending
Jon Geeting February 08, 2012 at 07:34 PM
My point is just that taxing status competition between high earners at a higher rate is preferable because it would mean you could lower the sales tax on items that low-earners buy. If people are already willing to pay for the best home audio equipment on the market, is a higher sales tax really going to stop them from buying it? I doubt it. Because it's about showing off that you have the best stuff. Somebody who's got a ton of disposable income, and is engaging in those kinds of status competitions, doesn't feel constrained by money.
High-On-Lehigh February 09, 2012 at 01:48 AM
Your plan states "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." I don't get it- Looks like Apples and Oranges to me. Total income is presumably for One year. Total savings I think of as a lifetime accumulation, essentially Net worth. (And if you are talking about Total Saving for Just One Year, how the heck can a person keep track of that????????) (So in the end, I'm just saying, even if it's a good concept, I don't think there is a workable plan here.)
High-On-Lehigh February 09, 2012 at 01:57 AM
I do love one aspect of the concept of replacing sales tax with a consumption tax (if a practical mechanism for calculating consumption could be designed): A consumption tax would seem to address the strangely 'intractable' problem that, until now, it has been essentially impossible to devise a way to collect state sales tax from companies that are out of state, which is a H-U-G-E drag on state revenues now that internet sales are skyrocketing and sucking so much revenue away from local brick and mortar stores.
Jon Geeting February 09, 2012 at 12:12 PM
I meant for the year - annual income minus annual savings, just like people report with 401(k) and other retirement savings vehicles. It's definitely workable. And I agree, that would completely get around the whole internet sales tax thing. As if Amazon can't just collect it anyway, but whatever.
High-On-Lehigh February 10, 2012 at 03:39 AM
I still don't get how I would go about calculating my "annual savings", since money is fungible. I can "save" all of my income in one account- while in the meantime spending previous savings from other accounts. Who is going to do the accounting? Seems a little nightmarish/ a big headache / unenforceable / big-brother-like / easily gamed. As for Amazon- I agree, even though there are 50 states and hundreds of municipalities where Amazon ships, it's a big stretch for me to accept that a multibillion dollar company based on cutting edge computer savvy can't write a program in a nanosecond to do that little accounting trick and implement if for under 0.1% of its revenue. And as for lesser internet entities: I'm sure Amazon would rent or sell them the program for a reasonable price. (I think the problem is that it wouldn't garner the approval of Grover Norquist, since such a plan would not further his primary goal of shrinking government and drowning it in a bathtub.)
Jon Geeting February 10, 2012 at 02:50 PM
I guess I just don't understand why it would be any different from what people already do when they report their IRA savings to the IRS. People don't seem to have a problem doing this, and with a progressive consumption tax, they would have an incentive to get it right in order to avoid being taxed on their entire income. I also don't understand why this would be "big-brother-like" since the IRS already knows what your income is, as it is reported by your employer.
I Am Knowledge February 13, 2012 at 06:16 PM
Low income people already get enough breaks... like 46% of households NOT paying any Federal Income tax. Low income people need to contribute too, we don't have to keep struggling to find ways to give them an even bigger free ride. Yes... switch to sales tax... and everybody pays it. Regressive? Not when you consider the pay NO FEDERAL taxes, or even get money back through income tax credits. If somebody pays NOTHING, they just take it all for granted, and teach their kids, by example and word, to do the same.
I Am Knowledge February 13, 2012 at 06:24 PM
So I earn my money, I pay FICA, I pay state tax, I pay local tax, I pay Federal tax, and now, when I want to buy a good stereo system that I desire, I have to pay a higher tax rate because it is a good system? Only liberals can think like this, and think it's fair. And reduce the taxes on things low wager earners buy? Lottery tickets and cigarettes? Oh, so anybody who buys something of high quality is buying it so they can show off? They are all just in a status competition? You sound just like a typical low paid jealous liberal, huh? You're just as bad as a racist with your generalizations. But you get a pass among your liberal friends because class warefare is a virtue.

Boards

More »
Got a question? Something on your mind? Talk to your community, directly.
Note Article
Just a short thought to get the word out quickly about anything in your neighborhood.
Share something with your neighbors.What's on your mind?What's on your mind?Make an announcement, speak your mind, or sell somethingPost something
See more »