5.12.2009

Which Tax Hike Hurts Least


So it looks like the people have won: Mayor Nutter will back down on his plan to temporarily raise property taxes for two years, opting instead to defer pension payments and extend his sales tax hike out five years instead of three. Council members, having heard it from their constituencies, pushed back on the mayor's plan, and the mayor has relented, and the people have won.

Or have they? I'm not going to comment on the specifics of the new way forward, simply to discuss the relative merits of, if you have to hike a tax temporarily, which is least painful for the most financially vulnerable among us. Consider the following two families: both are two-income households, but the Pooristans bring in $50K and the Richistans bring in ten times that.

* The richer you are, the more likely you are to itemize your deductions, and therefore take full advantage of the deduction on mortgage interest and on property taxes. In other words, current tax code provides an incentive for the rich to own more house, relative to their income, than the poor. So the Richistans, while they make ten times what the Pooristans make, probably own a house that is worth more than ten times the Pooristans' house. Which means that, between a property tax increase and wage tax increase, the Pooristans should prefer the property tax increase, since the Richistans would bear the heavier load in that case.

* Even accounting for exemptions on food and medicine, the Richistans probably spend the Richistans are probably more likely and able to make more of those purchases outside of Philadelphia, whether via the Internet or a suburban mall. This is particularly important because we're talking about a temporary tax hike, not necessarily a permanent one; the Richistans might not decide to move outside the city because of a temporary hike in property taxes, but they can easily decide to buy more of their big-ticket items outside the city to avoid the higher sales tax. Which means that, between a property tax increase and sales tax increase, the Pooristans should prefer the property tax increase, since the Richistans would bear the heavier load in that case.

In other words, if you want to choose between temporarily hiking property tax, wage tax, or sales tax, property tax is the choice that will involve the most heavy lifting by the Richistans rather than the Pooristans. Of course, one reason people despise the property tax is that the bill comes all at once, right after the holidays; whereas sales and wage taxes are levied in much smaller increments, to the point of being invisible. Only, over time, they are not, especially to the Pooristans of the city.

Of course, the previously translucent and now nakedly visible elephant in the room is the broken property assessment process, recently scooped by the Inquirer in a well-written three-part expose. If you believe that the poor are currently paying too much into the pot, relative to the rich, then levying a temporary hike off of an unfair base certainly does warrant caution. And that, in my mind, is a legitimate reason to push back on any plan to increase property taxes, arguing instead to fix the broken system first lest present inequities get amplified.

But I don't believe it is a correct statement to say that property tax hikes, instead of other tax hikes, are disproportionately borne by the poorest among us. In fact, in an earlier version of the story I linked to above, one commenter scolds Mayor Nutter for not standing up to "the monied interests" that City Council sided with, and not standing up for "the poorer half of town" who will now be hit harder by the sales tax increase relative to a property tax increase.

I'm not sure that's how it went down. But I do know that, when choosing between which tax to increase, each proposal is going to create its winners and its losers. And, relative to the other possible choices, the poorest among us would not be among the losers in a property tax increase scenario.

PS In this philosophical debate between property taxes and sales taxes, let me offer some counterpoint courtesy of some of my co-workers:

1) Including key exemptions available to Philadelphians, particularly on food and medicine, sales taxes may not be so regressive after all. After all, if you're really poor, you're spending on your money on housing, transportation, food, medicine, and little else; while if you're poor, you're spending your money on more of those things, but with money left over for entertainment and other luxuries.

2) Importantly, sales taxes are paid by non-residents, like suburban commuters, visitors, and tourists. So you can spread the pain over more people.

3) Next to the rest of the state and to Delaware, a higher sales tax looks ominous. But among big cities, even the higher and temporary rate is relatively low; Chicago tops the list at a whopping 10.25 percent, for example.

There's more to say on this debate, to say the least. Not to mention its practical manifestation in the current budget discussions. Stay tuned.
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