Tax exemption payback could stabilize Pennsylvania communities, some lawmakers say

State lawmakers’ proposals aim to help communities regain some tax revenue that’s  missed because nonprofits aren’t required to pay property tax. 

State Rep. Rob Freeman, D-Easton, wants to use liquor tax proceeds to make up for local government revenue lost to property tax exemption. 

Freeman first pitched this to an enthusiastic House Local Government Committee in 2007, but the recession hit before it got any traction.

Eight years later, the state still needs the money, given the looming deficit of between $1 billion and $2.3 billion (depending whom you ask).

So why now?

“With the debate going on about Senate Bill 4, it seems timely to talk about,” Freeman says. “And once we get into a position where we can divert this kind of revenue, to put into those communities, you’re not battling between cities and tax exempts, you’re providing a real solution to fiscal stability.”

Freeman’s referring to a bill that would let voters decide whether to amend Pennsylvania’s constitution to give state lawmakers ultimate authority over which types of organizations should be considered charities.

Charities don’t pay real estate taxes, so the proposal worries leaders in communities where many properties already are untaxed. They fear more exemptions, and a heavier burden on taxpayers to support roads, police officers and other public services. Freeman says these taxing imbalances can be addressed without battling over constitutional authority and charitable status.

Addressing imbalance

Libraries, museums, performing arts spaces, hospitals and their satellites, community service-oriented organizations such as the YMCA. Public media stations – including this one.  All are considered charities.

The word evokes positive connotations, mainly.  But there are downsides in communities with a high concentration of these institutions.

“When you start out with an atrophied tax base, it’s very tough to generate revenue to maintain a stable municipality,” Freeman says. Freeman’s district includes Easton, where 27 percent of properties are off the rolls.

In Erie, it’s more than half.  Same in Chester and Johnstown, both with more than two decades in then Commonwealth’s Act 47 municipal distress program.

Those are cities, but the problem isn’t limited to urban areas.

Take the historic borough of Gettysburg, for example.

“You’ve got the county courthouse, you’ve got the battlefield, you’ve got the cemetery, the college and the hospital,” Freeman says. None of which pay taxes, leaving eighty percent of properties exempt.  And it falls to taxpaying property owners to make up for that.

Freeman’s bill would give money to municipalities to make up revenue lost on land owned not only by the Commonwealth, but all levels of government. And private nonprofits. 

His suggested revenue source: the Johnstown flood tax.   

“There’s a little poetic justice in that, too. The Johnstown flood tax was originally created to help victims of the Johnstown flood in 1936 in providing funding to rebuild their communities,” Freeman says.

Levied at 18 percent on all alcohol bought in Pennsylvania, the tax generates about $250 million annually. And it generates and controversy as well, for its continuation decades after the city rebuilt itself and ceased getting money.  (And developed fiscal troubles unresolved after 28 years of state intervention).

Freeman is realistic, noting this won’t work until the state’s finances stabilize.

 This is how it would work: 

Only municipalities where at least 15 percent of the tax base is exempt would qualify for receiving funds.
Their reimbursement amount is based on their percentage of untaxable property, adjusted for: 

Population 

Any cash offsets already received. Examples of payments in lieu of taxes (or PILOT’s) already include money from the federal Department of the Interior for preserved forests; the state government’s $5 million per year to the city of Harrisburg for the Capitol complex’s demands on roads, the fire department and other pulblic resources; tax-exempt Lancaster General Hospital multimillion-dollar payment to the city government and public school district.

No single municipality could receive more than 10 percent of the total disbursement

Back when he introduced the idea, Freeman and his staff took up the extraordinarily tedious task of compiling exemption rates and estimated awards based on his suggested formula. The amounts started at $1,641 for the 136-person borough of Cassandra, Cambria County, where 16 percent of property isn’t taxed. Pittsburgh would get the most: more than $24 million to compensate for the 36 percent of properties that are untaxable in the Commonwealth’s second-largest city (pop. 335,000 or so).

Other ideas

Freeman has the support of his fellow Democrat Kevin Schreiber. But the York City-based legislator is pushing a different fix that does not involve state government.

Schreiber got the idea from a 1996 report commissioned from urban planner David Rusk by York County’s business community – including now Gov. Tom Wolf.

“A lot of it was dealing with municipal reform, regionalization – a lot of the things we’ve talked about in Pennsylvania for years, and haven’t been able to do,” Schreiber says.

Among other things, the Rusk Report suggested adding 1 percent to the county property tax rate, and giving the cash to municipalities according to their exempt landholdings. Like Freeman’s bill, this initiative would face political hurdles: it’s an election year for county commissioners.

Marquette University law professor Matthew Parlow  focuses in land use and local government, and has studied regionalization.”Even tax redistribution, if it leaves a politician open to a claim that they raised taxes, even if  they overall tax burden, they’re unwilling to do it, even if it makes good policy sense,” Parlow said.

Former state Senate Local Government Committee Chairman State John Eichelberger, R-Blair, wondered whether the proposals conflict with the state constitution’s uniformity clause,  which requires consistency within a taxing district.

No, according to Duquesne University law professor Nicholas Cafardi. The government can redistribute its revenue at its discretion, said Cafardi, reached on his cell phone recently. But, he said, Schreiber and Freeman’s proposals “don’t address the core issue”: That is, which types of institutions should pay taxes.

State lawmakers are putting together a panel to study the matter, and guide the General Assembly in the event voters agree to give the legislature authority over which organizations should get charity status. 

Schreiber and Freeman are among those who fear lobbyists’ influence will hold too much sway over these decisions. They say their proposals insulate taxpayers from inequities that might result – and already do, a function of determinations being in the hands of more than five dozen separate county-level tax assesment appeals boards statewide.  

The need for solutions, meanwhile, is urgent in cities with significant swaths of untaxable land.