State, federal tax shifts could pack nasty one-two punch


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By MARC LEVY

Movement in Pennsylvania to slash school property taxes and Congress' bid to cut federal taxes could pack a nasty one-two punch to some taxpayers.

Both seem sure to produce winners and losers, tax analysts say. Some income taxpayers in Pennsylvania could even lose twice, in a sort of double-whammy, if Pennsylvania shifts a bigger school funding burden to income taxes and Congress eliminates the federal deduction for state taxes.

Each effort took a big step last week.

Pennsylvania voters approved a referendum Tuesday to allow the Legislature to exclude up to the full value of residents' homes that they own from property taxes. It replaces what had been a 50 percent cap, the latest step in a yearslong quest by some to eliminate school property taxes paid by homeowners.

That has propelled a new discussion over finding roughly $7 billion necessary to make the dollar-for-dollar tax shift. Before the referendum, eliminating homeowners' school property taxes was a nearly $13 billion question since it would have to include business properties.

In the meantime, a U.S. House committee advanced legislation Thursday that, as part of its broad overhaul of federal tax laws, would eliminate the state income tax deduction that Pennsylvanians used to shield $11.3 billion from also being taxed by the federal government in 2015. The bill keeps a deduction for property taxes, but limits it to $10,000 a year. A competing Senate bill would eliminate the state and local tax deduction entirely.

Some taxpayers will win and some will lose in a swap of school property taxes for higher state income taxes, said Jay Brower Jr., a certified public accountant and a partner in Marks Paneth LLP in Jenkintown.

If Congress also kills the state tax deduction, “then there are more losers because, at least now, if you're deducting your state income taxes, you're getting a federal tax benefit," Brower said. “Now, if your local income tax is going up, and you're no longer getting that federal tax benefit for it, that makes the out-of-pocket money even worse for you."

In general, retirees would be big winners.

They could see their school property taxes disappear and, since Pennsylvania doesn't tax retirement income, such as pensions or Social Security, they might not pay more income taxes or feel the loss of the federal deduction.

Working-age renters could be big losers, since they would see no benefit from eliminating homeowner property taxes.

Other elements of the tax bills in Congress should shield some of Pennsylvania's income tax payers by, for instance, lowering tax brackets and increasing the standard deduction.

But eliminating the state and local tax deduction would affect taxpayers who still take an itemized deduction, said Tim Horstmann, a public finance and tax attorney at McNees Wallace and Nurick LLC in Harrisburg.

Higher income taxpayers might be most likely to lose out, he said. In any case, it would be fairer to offset school property tax cuts by raising sales taxes, since everybody pays it, Horstmann said. Relatively few take it as a federal deduction in Pennsylvania.

The Legislature's Independent Fiscal Office estimates that homeowners paid nearly $7 billion out of the total $12.6 billion in school property taxes schools received in 2015-16, and perhaps slightly more. The figure doesn't include people who haven't signed up to receive property tax rebates financed by revenue from slot-machine gambling in Pennsylvania's casinos.

Raising Pennsylvania's 3 7 percent income tax — among the lowest in the nation, according to Tax Foundation data — to 4.8 percent might generate the $7 billion or so and leave the rate in the bottom third of states. Raising the state's 6 percent sales tax — currently about the middle of the pack of states_ to 10 percent might also do the trick, although that would make it the nation's highest. Lawmakers could also seek some combination of the two.

Sponsors of legislation to eliminate school property taxes have discussed the potential that Congress will repeal the state income tax deductions.

“But no one that I've talked to thinks that it presents a huge obstacle," said Sen. David Argall, R-Schuylkill.

Still, Rep. David Maloney, R-Berks, said repealing the federal deductions might “deepen" the discussion over how to pay for the property tax elimination.



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