Tag Archives: Property Tax

A way to reduce primary residence taxes. Homestead exception.

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Originally Posted March 6, 2014

Last weekend I wrote about factors that forced Lower Macungie to address a budget shortfall this past December. This week I want to focus on one practical mechanism I proposed as a candidate and formally in January that could help address this issue moving forward.

First, it’s important to acknowledge a structural barrier that limits how a township like Lower Macungie can respond to the impacts of sprawling commercial and industrial growth. That challenge will only intensify over time.

Different land uses create different impacts and long term liabilities. However, Pennsylvania’s Uniformity Clause prohibits local governments from taxing residential and commercial property differently unless a specific statutory exception applies. As a result, municipalities cannot directly account for new impacts created by certain types of development through the tax code. This constraint is especially problematic in a township with a large and growing inventory of distribution warehouses that generate substantial infrastructure, public safety, and quality of life demands and may ultimately drive the need for additional police or fire facilities.

This is where smart growth principles come into play.
Greenfield development should pay its own way. Local governments must be vigilant against direct or indirect taxpayer subsidies for land use patterns that fail to generate sufficient revenue to cover their long term liabilities. Too often, municipalities negotiate one time developer improvements or fees without fully accounting for ongoing maintenance and replacement costs over multiple infrastructure life cycles. That approach is both shortsighted and fiscally unsustainable.

Property taxes are also fundamentally regressive.
Regressive taxes are harmful because they place a heavier financial burden on those with the least ability to pay, making it harder for working families and fixed income residents to remain financially stable. Property taxes are inherently regressive. They aren’t based on income, consumption or ability to pay. The property tax often consumes a larger share of household resources for seniors, fixed income residents, and working families. As they continue to rise they can contribute to housing affordability. This is compounded in our area because property values which drive assessments are rising faster than wages or retirement income. When this happens the tax burden grows even when a household’s financial situation does not.

A solution?
A local homestead exclusion is one of the few tools available to municipalities to address this imbalance. In simple terms, it works by lowering the portion of a home’s assessed value that is used to calculate local property taxes. When the taxable value goes down, the tax bill goes down. Because the reduction applies to a fixed amount of assessed value, the benefit is proportionately more meaningful to homeowners with lower or moderate property values and to those on fixed incomes. This helps stabilize housing costs while avoiding shifting the burden of supporting high impact land uses like warehouses onto residents and ensuring homeowner relief is targeted rather than universal.

A local homestead exclusion is a specific exception to Pennsylvania’s Uniformity Clause. It allows a township to provide relief to homeowners. It results in a lower local property tax bill for qualifying homeowners.

This relief applies only to owner occupied primary residences. It does NOT apply to commercial properties, 2nd homes, or investment properties. These properties continue to be taxed at their full assessed value. This ensures that tax relief is focused on people who live in the community full time while maintaining the full contribution from land uses that create the greatest long term impacts and costs.

There are 7 municipalities in Montgomery County who utilize this program on the local level. One example is Upper Gwynedd. An exclusion allows for real property tax relief of up to one half of the median assessed value of homesteads in the taxing jurisdiction. For example:

  • Under LMT’s current .33 mil property tax if you own a home at the township average of around 250,000 dollars your tax liability is 82.50. (Remember, this is the local Lower Mac property tax NOT school or County)
  • Under a homestead exclusion program that grants a 50% assessment reduction on a primary residence the assessed value (for purposes of tax calculation only) is cut in half to 125,000. Therefore the tax bill is also reduced by half to 41.25.
  • Meantime Commercial properties such as a distribution warehouses valued at 24,000,000 pays the full assessed value at .33 mil which would be 7,900.00 dollars.

Its reality that certain types of land uses like strip malls and distribution warehouses hurt quality of life and command the most resources. This is exacerbated when they are located on sprawling former agriculture fringe parcels such as the Jaindl Spring Creek Property which will unfortunately require bran new roads, infrastructure and improvements. Even portions initially funded by the school district and developer will have to be maintained in perpetuity by the township representing an ongoing liability. To me it’s a matter of fairness. Land uses that cause impacts are the ones that should pay for the impacts.

I have asked the Board of Commissioners to consider a homestead exclusion program as one way to reduce the tax burden for primary residences and farmland within the township. This would also allow us to right size taxes on commercial and industrial entities to make sure they are “paying there own way” so that residents aren’t forced to indirectly subsidize them.

The Quiet Boom and Bust of PA Townships

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The following appeared in an op-ed this AM in The Morning Call. I wanted to re-post as it succinctly sums up the reality Lower Macungie recently began to face with a tax increase in response to a budget deficit. I’m hoping we continue serious discussions about how got to this point and what we can do to keep taxes sustainably low over the long run proactively. The alternative is reacting to shortfalls and never addressing underlying issues.

To do this it’s important we understand how we got to where we are. This post is a preface to a post I’m doing later on in the week where I’ll outline some items I think are a part of the solution. This post deals with how we got to where we are. 

By Gerald E. Cross – Pennsylvania Economy League.

Since the 1970s, Pennsylvania’s cities have grabbed headlines as they sank into a financial morass while the state’s townships quietly prospered.

But recent data indicates that the once booming townships – where almost half of state residents live – are also seeing troubling signs including rising service costs and tax revenue that is either declining or flattening.

The challenge for townships may soon be the same issue facing distressed cities: how to provide quality services at a price that taxpayers can afford. By recognizing that challenge now, townships can begin to implement measures to avoid severe financial problems in the future.

Pennsylvania Economy League research clearly shows the explosion of tax revenue collected by townships beginning in the 1970s as residents fled the cities and took their wealth to townships.

For well over 30 years, Pennsylvania’s third-class cities experienced an exodus that dropped population by almost 20 percent. In contrast, population grew by almost 50 percent in second class townships, where residents moved to take advantage of new housing developments.

As people left the cities, income from taxes began to decline. Meanwhile, townships were increasingly able to capture additional revenue as both population and the earnings of that population expanded.

Real estate tax collection and real estate transfer taxes in townships jumped from the development boom. Officials in these communities had the advantage of revenue increases that were the result of natural growth rather than a politically sensitive property tax hike.

In addition, escalating earned income tax revenue contributed an increasingly larger amount to township budgets so there was less need to rely on property taxes, in contrast to cities, where property taxes are the dominate source of tax dollars.

Cities not only lost earned income taxes from those who left – many of whom were higher income residents – they also saw declining revenues as the remaining population aged, retired and no longer had to pay earned income taxes.

Meanwhile, as populations moved from urban areas, the taxable property values in cities did not increase at the same rate as the townships, and in some cases decreased. Cities were also hurt by the lack of readily developable land that limited easy expansion of the property tax base. The result was a decline in property tax dollars. Revenue sources are not the only difference between cities and townships. Cities spend the bulk of their money on public safety costs including police and fire protection. In some cities, total tax revenue alone has failed to keep pace with the cost of police and fire expenses. 
Townships spend more of their money on roads and public works. Still, township spending on general administration and police has increased, indicating possible problems down the road if revenues stagnate.

The trend can already be seen. Earned income tax in townships peaked just prior to the 2008 economic crash and is now either declining or leveling off. Real estate transfer revenue crested in 2005 and 2006. Townships that heavily relied on those tax sources to increase services and avoid a property tax hike may now have to look to other revenues.

To meet the challenge of sustaining public services, townships should explore more regional options to both provide and pay for them. By recognizing the fiscal trends, townships can work now to implement corrective actions in an attempt to avoid the dire financial predicament currently faced by Pennsylvania’s cities.

 

The above scenario has played out in Lower Macungie. The past 20 years we’ve artificially kept taxes low through hyper growth. This year for the first time we faced our new reality of a capital budget deficit and spent reserves. The simple truth is we’re slowly but surely running out of space to plow and we no longer can rely on the windfall one time revenue of growth.

For decades we lived in a fantasy land of a bloated rainy day fund and one time windfalls. Fast forward to today: The one time revenues we’ve relied upon are dried up. We’ve peaked on the EIT front. Real estate transfer will see a small increase as the economy picks up but never will we again see the windfalls of the 90’s. We’ve got the 10,000 lb gorilla of police coverage. Whether 5 or 10 years from now someday we’ll have to address it. Our “rainy day fund” is now drawn down to near minimum acceptable levels. Developers who installed up front infrastructure have long since left town and it’s up to us to fund continuing maintenance and future improvements.

 

Add to this market factors. We simply aren’t currently positioned to compete for young professionals since they want compact walkable communities. The senior market is shrinking and we have a bloated inventory with more on the way.

 

We’re clearly at a crossroads and faced with a choice. Choice 1 is: Bury our heads in the sand. Shoehorn the last open space parcels in the township and continue to chase ratables, developer contributions and one time windfalls. Which in this new housing market equals low quality apartment complexes. But in the end it’s simply delaying and compounding the inevitable while simultaneously selling our quality of life down the flooding creek.
Choice 2 is:  Continue the tough conversations now and get creative. Think outside the box and figure out how we move this township forward delivering the services residents demand with a stable and predictable LOW tax rate.
This is now beyond quality of life concerns. This is about financial solvency moving forward. This is a preface to a blog I’ll write later on this week. I have proposed one possible solution that I’ll outline Thursday. Remember there is a no magic bullet but I think it can be a piece of the puzzle. Stay tuned.

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The other side of the Tax argument… Should residents pay for warehousing?

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Ongoing dialogue about the tax issue.

Last week, I posted about Home Rule Charter. It’s the lynchpin of Commissioner Conrads proposal to replace property tax with an increased earned income tax. The problem is almost no one understands what Home Rule Charter is. Including myself until I started researching it. I’m still learning. As I outlined last week it’s a complicated undertaking. There are positives and negatives. One negative being it is not easy to initiate. It takes both time and alot of money. I thought it was important to get people thinking about Home Rule.

Today, I wanted to spend some time talking about arguments I’ve heard in favor of property tax. It’s important to present both sides of the argument. To understand the argument, we need context.  4 years ago, the township refused to fight a quarry proposal and instead engaged in a Memorandum of Understanding that resulted in 700 acres of farmland (Over 1 square mile) rezoned to mostly industrial.

Industrial and Orlic = Distribution warehouses. In this case, large distribution warehouses. This is our new reality.

The pro property tax argument centers around our growing inventory of commercial and industrial development. Since we’ve gone down this road with no turning back some argue warehousing is a key to our fiscal equation. Much like Upper Macungie. This, in my opinion becomes the most compelling counter argument for a property tax.

To put it simply, the EIT plan let’s warehousing and large commercial shopping centers off the hook.

Remember, there is no single use in the entire township that generates more liabilities than distribution warehouses. Under Ryan Conrad’s proposed plan warehousing contributes very little to Lower Macungie’s tax base aside from LST and one time windfall.

You can further assume that a large number working at these large distribution warehouses are folks from outside the township. (evidenced by LANTA’s push to expand lines to them) Because of this we capture little EIT from employees locally.

I have a hard time trying to reconcile warehousing paying so little in local taxes with my belief that development should pay it’s own way over the long term. Residents should not carry the bag for industrial and commercial development.

Here are some numbers to think about. Under .33 mil property tax proposal.
A 200,000 residential home: = 66.00 in property tax
8,000,000 Shopping Center (Trexlertown mall) = 2,640.00
*24,000,0000 Industrial Warehouse: = 8250.00 in property tax.
*74,000,000 projected value of Hamilton Crossings: = 24,420.00 (/2 with TIF = 12,210.00)
*Assessed values based on County website
**Based on TIF narrative 

Here is my question to residents:
Now that Commissioners have doubled down on warehousing, isn’t it sort of crazy not to cash in?