This letter was submitted to LebTown. Read LebTown’s submission policy here.
Recently a few letters were published attacking Representative Frank Ryan and his planned introduction of the School Property Tax Elimination Act better known as HB13, named after the original 13 colonies.
Read Earlier Letter: Taxing retirement income is still a bad plan
Read Earlier Letter: Reader response to Clements letter on taxing retirement income
We would like to summarize the bill and also address some of the concerns.
Representative Frank Ryan’s HB13 will eliminate school district property taxes by shifting school funding to income and sales taxes. HB13 would utilize the Sales and Use Tax (SUT) and Personal Income Tax (PIT). The SUT base would increase from 6 to 8%; Clothing and food would be subject to a 2% SUT, except for WIC and SNAP items. Personal Income Tax (PIT) would be raised from 3.07% to 4.92%. Currently, PIT is applicable only to those working, under HB13, the PIT would be expanded to include retirement income. These revenue sources will fully fund schools, ending the question, “where will the money come from?”
A common concern is SUT and PIT will need to be increased annually just as School District Property Taxes are now. This will not be the case. Pennsylvania has used SUT/PIT revenue to fund the majority of the state budget for decades. Historically, revenue from both SUT and PIT increase intrinsically due to annual wage gains and increased cost of products and services. These natural increases have funded our state budget for years with no tax increases needed. SUT hasn’t risen for 50+ years. PIT has only risen 0.77% in 50 years and the last increase was 2004. Of course, there is no guarantee PIT/SUT will remain the same indefinitely but clearly any increases will pale to the annual above inflation increases of School District Property Taxes, and raising either PIT or the SUT would require statewide legislative action, just as it currently would.
Since 2019, when the first draft of HB13 shocked many with its proposal to include retirement income in the state income tax, people have had time to digest how the bill works and how it impacts their bottom-line. Most people who study the bill in greater detail and understand what it accomplishes have turned into supporters. Some misinformed letters suggested the average homeowner would be worse off under Ryan’s plan. The reality is seniors as a whole will save roughly 50% in taxes and some significant windfalls for those relying on Social Security income alone. Many less than age 65 will also see substantial savings.
One of the concerns expressed is the revenue associated with the tax rate increases will be implemented and collected locally rather than state level. This is actually a positive aspect and is a direct response to criticism of previous elimination bills not providing enough local control. By implementing the tax increases at the local level, all revenue collected is sent to the local school districts. There is no redistribution of funding by money first going to Harrisburg then to school districts through the substantially flawed state funding formula. One hundred percent of the revenue raised is used locally, not one penny would be sent to a school district half-way across the state as is the case now.
Another concern raised is related to taxation of defined pension plans. Before we go there, it is important to note that the Retirement Income Tax (expanded PIT) would only tax certain types of retirement income at 4.92%. Income totally exempt from taxation would be Social Security or equivalents for those ineligible for Social Security such as Railroad Retirement and State Police retirement plans. Employee contributions to retirement plans would not be subject to the retirement tax if they were taxed going in.
To help avoid confusion, it is important to separate federal taxation from state taxation. Certain types of retirement investments such as 401Ks and IRAs are not taxed going in at federal level but are taxed going in at state level in Pennsylvania. All taxes discussed here would be state or local taxes.
Pennsylvania allows very few deductions, thus, most retirement investment contributions were taxed going in. Despite some accusations to the contrary, any retirement investment where the employee made contributions that were taxed going in, they would not be double taxed under HB13. Where retirement plan contributions are unable to be determined, the individual will receive a 15% reduction of taxable income.
Distributions from defined pension plans would be fully taxed because the employee’s typically do not make contributions to these plans. Some opponents of HB13 have opined that fully taxing defined pension plans is unjust, claiming holders of defined pension plans are being thrown under the bus.
It is important to understand that unlike other retirement investment instruments, defined pension plans are a benefit of employment where the employee never contributes a penny of their own money. There is no dependence on stock market performance as with other investment instruments. The pension payout benefit is typically a formula that takes average salary of final few years of service multiplied by years of service multiplied by multiplier, all which vary by company/organization. Stock market performance is irrelevant.
Example: $60,000 × 35 x .015 = $31,500.
A defined pension represents very little risk to employee and since the formula is known, the pension payout can be estimated years in advance for planning purposes. The biggest risk is failure of company but even then the PBGC (Pension Benefit Guaranty Corporation) guarantees a reduced payment fallback position.
To classify individuals fortunate enough to have worked for a company or organization that had a defined pension as part of their employment benefit package as being thrown under the bus is disingenuous. Most would stand in line to be thrown under that bus. The employee works his/her entire career never having to stress over reduced spendable pay due to contributions or portfolio performance (stock market performance). When he/she retires, a pot of money literally at the end of the rainbow is waiting. In some cases, the company’s pension plan allows for lump sum distributions totally freeing the employee from any ties to the company in the event the company would fall into bankruptcy.
It is also encouraging that Representative Ryan has publicly stated he will lose roughly $2,000 per year under his own plan. This alone speaks positively about Representative Ryan. His goal is not to fatten his wallet, rather it is to address School District funding in fair and equitable manner. Those attacking Representative Frank Ryan and HB13 did not disclose how they would fare under the bill.
For more information please look into the volunteer groups below that support fully funding schools through the School Property Tax Elimination Act along with a newly released website that includes a personal impact estimator.
Robert Kistler Bipartisans for School District Property Tax Shift
Ron Snell MARCH ON HARRISBURG!
Glenn Martin Property Tax Elimination in PA
Henry Rothrock & Robert Kistler PTCC – Pennsylvania Taxpayers Cyber Coalition
Ryan Pertusio NO Property TAX website