A Property Tax Rebate Program: Relief for Working Families, Underfunded School Districts, and Pennsylvania’s Environment

Eileen McNulty
Stephen Herzenberg
Publication Date: 
March 1, 2001

In the last decade, gaps in income and property wealth among Pennsylvania’s 501 school districts have yawned wider.

With school financing depending heavily on local property taxes, affluent districts can fund schools generously. Districts with less property wealth however, struggle with high tax rates that still fail to raise adequate revenue for quality schools. This combination often prompts more residents to leave lower-income districts for greener pastures, further undercutting the local tax base and contributing to low-density, land-destroying growth patterns.

This briefing paper examines a flexible tax proposal that could help address the three critical problems linked with school funding via local property taxes – burdensome tax rates on hard-working families, inadequate funding for schools in non-affluent districts, and sprawling development that destroys Pennsylvania’s scarce lands. Under this tax proposal, the state would rebate to households local property taxes that exceed more than a specified share of income (e.g., 1.5 to 3.5 percent).

A property tax rebate could be a stand-alone program that targets tax relief at the most hard-pressed families with burdensome property taxes. A property tax rebate program could also be used as a complement to an overall shift in educational funding to state taxes from local taxes. It could ensure that such an overall shift would not raise total taxes on low and middle-income families.

In this paper, we project the impact of a stand-alone property tax rebate program using a Pennsylvania tax model maintained by the Institute for Taxation and Economic Policy (ITEP) in Washington D.C. To our knowledge, ITEP has the only Pennsylvania model that permits estimation of the distributional benefits and revenue impact of alternative tax proposals.

The ITEP model indicates that a property tax rebate capped at $500 and accessible to taxpayers with incomes up to $50,000 would:

  • Provide an estimated average tax cut of $416 to 1.62 million Pennsylvania households;
  • Deliver $9 out of every $10 in benefits to middle- and low-income households; and
  • Yield total tax relief of $690 million.

Other scenarios modeled show that a rebate program could be designed to benefit more or fewer households and to yield larger or smaller average rebates. For Example:

  • Raising the rebate cap to $1,000 would increase total tax relief to $1.2 billion;
  • Providing rebates for property taxes above 1.5 percent of income (as opposed to above 3.5 percent) yield total rebates of $970 million;
  • Raising the income eligibility threshold to $100,000 would yield total rebates of $930 million.

In sum, a property tax rebate would or could:

  • Provide much needed property tax relief to the families that most need it;
  • Ease the tension within school districts between adequately funding schools and imposing taxes that families cannot afford;
  • Not eliminate the local property tax on business, thereby maintaining an important source of local revenue;
  • Be designed to cost much less than an across-the-board shift from local property taxes to state income or sales taxes;
  • Be used, as in Michigan, in combination with an across-the-board shift of educational funding from local property taxes to state income or sales taxes;
  • A rebate program is one of the few ways to make the overall Pennsylvania state and local tax burden more progressive in a state with a constitutional "uniformity clause" that blocks progressive taxation.
  • A rebate program would also be a popular reform. Polls indicate that even affluent suburban districts favor increased funding for lower-income school districts.

This document is an on-line summary of a Keystone Research Center report. The entire report is available for download as a PDF file at the KRC Web site www.keystoneresearch.org © 2001 Keystone Research Center