When the snow finally begins to melt this spring, the race for governor of Pennsylvania will begin to heat up. By last count, not less than four or five major Democratic candidates have lined up to face incumbent Republican Gov. Tom Corbett, who is seeking election to a second term. The May primary will also help shape the races for the state House and Senate, which will go a long way in determining the balance of political power in Pennsylvania.
Now that Harrisburg has adopted the state-supported fiscal recovery plan, local and state attention should turn to pro-growth policies that will encourage our capital city to realize its full potential. The city’s population peaked at nearly 100,000 people in the 1950s before bottoming out at less than 48,000 at the turn of the century. The slight but important increase in population of about 600 people over the last decade shows promise for further growth and prosperity if the right conditions can be put into place.
There are many local pro-growth policies that are effective, such as crime-prevention, urban transportation, improved sanitation and water, efficient and operating streetlights, and other civic infrastructure like parks and green space, which the city can and should work on and implement. However, other important economic policy issues can only be handled at the state level. One of those is education funding.
The topic of public education is sure to predominate the governor’s race, particularly the proper state support for local school districts and the ability of students and parents to access educational alternatives. There are few issues more powerful than how we educate our children and the level and fairness in state funding (perhaps a topic for a future column). However, a related issue, which typically receives less attention on either side, is the methodology for funding our school districts via real estate taxes and, importantly, the impact that those policies have on the local economies of those districts.
As a whole, Pennsylvania relies far more heavily on local real estate taxes to pay for public education than most other states in the country. A 2006 study showed that the commonwealth ranked fourth in the nation in that regard. Other states use a broader mix of income, sales and other taxes, along with real estate taxes, to make up total funding for education.
Take Harrisburg, for example. The total millage rate paid on real estate in Harrisburg is around 45 mills. That means, for every $1,000 in taxable real estate, the owner must pay about $45 in annual taxes. On a $100,000 home, that is $4,500 in annual taxes. Fully two-thirds ($3,000) of that bill is payable to the school district, with the county and city dividing the remaining one-third, or $1,500. (The figures are an estimated average as the city has a two-tier system, with a higher rate on land than on improvements, making each parcel somewhat different.)
This tax burden, which is far higher than in surrounding communities, is a powerful disincentive to anyone considering buying a home in the city, regardless of the quality of education provided or available alternatives. New homes that would be assessed at the full cost of building could face tax bills of $5,000, $7,000 or even higher annually. Knowing this, builders have simply not built new homes in Harrisburg at any scale—and none without outside subsidy—over the past several decades, thereby contributing to the decline in population. (The burden on renovated homes is a more complicated story, but the disincentive is also significant, if not as strong as against new home construction.) In contrast, surrounding communities with lower real estate tax burdens have grown their housing supply along with their populations.
The true problem, however, is that cities like Harrisburg have little to no choice or control over the matter. The poorer urban districts have been forced to crank up their millage rates to try to keep up with falling populations, making their real estate even less competitive with surrounding communities. Meanwhile, regional growth has pushed up real estate values in lower-tax suburban communities, making the properties more valuable with greater revenue overall and lower individual rates.
In other words, cities, like Harrisburg, have small tax bases with high tax rates, while suburban municipalities generally have large tax bases with low tax rates. As a result, the suburban tax structure enables and promotes growth, while the urban tax structure almost completely prohibits it. Once in place, these conditions are nearly impossible to break absent extraordinary measures like tax abatement, as successfully implemented in Philadelphia (which only abates taxes on improvements that otherwise would not happen), or other policies like Keystone Opportunity Zones (KOZs).
Beyond these local fixes, true reform at the state level would re-examine not only the funding formula that the state contributes to local districts, but alternatives to the excessive local real estate tax burdens. Some states, like Michigan, have tried to address these burdens by shifting taxes away from real estate to income, sales taxes and even cigarette taxes. Interestingly, the burden in Michigan prior to its reform in 1993-‘94 was 34 mills, which ended up causing a taxpayer revolt (it is now about half that). Harrisburg citizens face a 45-mill burden, but have no way to “revolt” without help from the state legislature and governor.
Whether you are a Harrisburg resident or a resident of the region who wishes Harrisburg well—and you’re concerned about fairness and the ability of our capital to fully recover—this is an issue that should be high on your agenda when thinking about voting this spring.
A real solution would be for this governor or the next to consider comprehensive reform of the funding source for our Pennsylvania schools, changing the mix of taxes away from real estate toward other sources, without raising overall tax revenues. Any candidate who brings this issue to fore deserves consideration and support.
J. Alex Hartzler is publisher of TheBurg.
