The third plank in the GOP’s Contract with Lehigh County deals with the county option sales tax. Political pundits are starting to consider the proposal dead so it may be an unneeded plank but as the genesis of the tax is the Lehigh Valley, it is good to know where people stand. In addition, I learned something in more than 10 years of tax policy work in Washington (never use that L word--lobbying) that ideas for revenue raisers never die, they go on a list and keep coming back. The county option might indeed be dead but Pennsylvania adding a percent or two to the state rate? Who knows?
As a primer, the power to tax in the Commonwealth of Pennsylvania derives from the General Assembly. They decide what governments can impose what taxes.
Your real estate taxes on the county, local (unless you live in Lower Macungie) and school district level in Lehigh County are all “enabled” by the General Assembly. They are the “great enablers.”
Sales tax is levied by the state and by Philadelphia and Alleghany Counties because the state says they can.
You pay your 1% local earned income tax (or more in certain cities) because the state says the local government and/or schools can tax you and tells them how to define earned income tax.
The $10 occupational privilege tax that became a $52 emergency services/local services/whatever fee? State said they could do it.
When Governor Ed Rendell gave his annual budget speech earlier this year, one of the unexpected components was a call for the enactment of a local option county sales tax. It came out of the blue.
The idea is a further refinement on attempts to properly balance the way taxes are raised. Governments typically raise funds from some combination of taxes on income, taxes on property (usually real estate) and taxes on transactions (such as the sales tax) in addition to various fees they may collect for services.
These taxes hit different people in different ways and at different stages of life. We all pay sales tax, of course, on things we buy. Of course, at different stages of life we consume more, especially since Pennsylvania exempts most food and clothing.
Income tax at the state level hits all of us with incomes. The state income tax follows the federal definition of income, so if you have dividends and interest, you pay. But, when talking in local terms, the tax is on earned income (wages, income from self-employment). On a state level, retirees pay on dividends and interest, but not on retirement pay. On a local level, if you are an investor but not employed, you pay no earned income tax. From an income tax perspective, with pensions not taxed and with investment earnings exempt from local earned income tax, this is a great state to retire in.
Retirees, of course, get hit hard by one tax—the property tax. It is the one tax that is not at all related to your ability to pay. Think of it, if a 6% sales tax applied to everything you bought, you’d still buy things, you just might have to reduce your purchases a bit. If you have $100 to spend, you could still spend a little over $94 on goods and the rest on tax.
Income taxes are based upon your current income, a stream of cash flow. You may have to put 4% aside, but you have the income.
Property taxes are taxes on accumulated wealth. You may have a great deal of property but no current income. You may own property but not have the means to pay taxes. As a result, a lot of people dislike property taxes. Some even say they mean you never own property.
Property taxes are paid by anyone who owns or rents a home. Yes, renters pay property taxes. It is part of the rent that they pay. Look at a commercial lease some day. They often directly pass through property taxes. Residential landlords pass the taxes through as well, just not as a distinct line item.
In tax theory, property taxes are just another form of tax. Finding some good balance between income, consumption and wealth taxes is what tax theory is all about.
In the words of the French Finance minister Colbert “The art of taxation lies in so plucking the goose as to reap the greatest amount of feathers with the least amount of cackling.”
One very loud cackle has been heard from the anti-property tax people. They want to repeal property taxes as the way to pay for schools. The county option sales tax was put forth as a way to reduce municipal and county property taxes (which tend to be far lower than school taxes).
Lehigh County
Comments
Watch the diminishing returns when PA increases the sales tax. I already drove 120 miles round trip to the Wilmington area to avoid PA sales tax on my new flat screen tv (I saved $54). All Pennsylvanians, expecially those stuck in the interior part of the state will be the big losers when residents begin to make all major purchases out of state.
Don't forget to sell-assess your use tax. You owe Harrisburg that $54.00 John! I don't disagree. I still doubt the Revenue Department's ability to police this and I have great respect for the Revenue Secretary.
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