The budget talks are ongoing in Pennsylvania and one of the items is how to fund the schools. Some of it centers on how to implement a plan that collects only a partial amount of the entire amount gained through property taxes by schools. Although I am not privy to the discussions, I could imagine concerns that certain school districts will not get a rightful share and the money.

It would be interesting to see the concept of no property taxing for school districts. I envision there could be two possible scenarios. There could be an elimination of property tax on commercial properties and residential properties, or as just homeowner relief, which would center on the single family and townhouse type residences with continued taxes on commercial properties. If the accepted plan would eliminate school taxes for both residential and commercial, there would have to be some regulation concerning the pass through costs in the real estate leases. Commercial is pretty straight forward, with a triple net lease — a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance on the property. It would have to reflect likewise on the property taxes for renters living in income properties.

Renters’ payment of rent, to some extent reflects the real estate taxes that the owner must pay on the property. In order to generate a zero sum for the people living in rental units, the rent should go down in proportion to the tax elimination for the renter. It would be hard to accomplish, but if they can have rent control in New York City, I am sure that they could find a way to deal with the excess money as a pass through to the renters. 

That aspect of the tax elimination would be tricky, because if you raise other kinds of taxes, it would mean that the less wealthy would pay more. If housing were more affordable, it would offset any concerns about low-income people being impacted disproportionally. In fact, if you cut out the local school tax from a mortgage payment, it might even spur homeownership.

The biggest unknown when I think about this would be in the commercial real estate. It would mean that small business would get a huge break in the downtowns. Not having to include the school taxes on a triple net lease would make downtown locations more viable. The rent each month would not be as great, and maybe rather than spending fifteen dollars a square foot the rent could go down to twelve dollars.

Many small businesses are year to year in their viability, depending upon the national spending climate, news events and the vicissitudes of the investment community. A school tax is maybe 25 or 30 mills, which depending upon where you are could get pretty expensive. To a greater extent, even the chains in the mall will become somewhat more successful without the pass through costs. I would think that elimination of school taxes on small local investment as well as national investment (chain stores) would be welcome as the profit line in Pennsylvania stores would show a significant increase. 

I am looking at this from the investment side, but current homeowners would save one their monthly mortgage, and it would give them more disposal income to meet their needs. I know as a townhome owner in Downingtown, I would save about $300.00 a month. This would be money that the individual determines how to spend. I could go out to dinner every Friday, or at the end of the year take my wife to Aruba. I would tend to believe in a new family, that could mean dance lessons and/or costs associated with soccer or basketball. In most cases, money will be pumped back into the economy as purchase, which will endure a higher tax. 

I cannot see a downside of completely eliminating school property tax. Not getting into the inequities of existing school districts, it may be the time to consolidate school districts more along county lines to reduce the number of contracts the Commonwealth would have to administer. One could probably eliminate many school district solicitors’ positions… but I digress.

I cannot see how you could piecemeal this kind of tax change. This is because of the nature of politics. Other factors enter into the mix. It appears that would be hard enough to just make sure that the renters are not screwed in this process, let alone try to implement some halfway measure. Therefore, my quick uninformed analysis is in… do it all the way or do not do it at all. 

Barry Cassidy is a freelance grant and economic development consultant. He can be reached at barrycassidy@comcast.net.