Tag Archives: Property Tax

A way to reduce primary residence taxes. Homestead exception.

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Last weekend I blogged about the reasons Lower Macungie was forced to address a budget shortfall this past December. This week I am going to write a little bit about one mechanism I proposed as a candidate and formally in January we can employ to address this issue moving forward.

First I wanted to talk a little about a barrier that prohibits a place like Lower Macungie to deal with the impacts of sprawling commercial and Industrial growth. An issue that will further compound moving forward.

Reality is different land uses have different impacts and liabilities associated. Unfortunately, in PA we have a uniformity clause. Some states do, some don’t. Those that do have varied interpretations. As a consequence of PA’s strict interpretation, residential and commercial property cannot be treated differently for purposes of taxing absent specific provisions providing for exceptions. This is problematic because it prohibits localities to assess taxes based on new impact created. This issue is amplified in a township with a large inventory of distribution warehouses that are already and will continue to create costly liabilities and may someday be the driving force leading us to a local police force or 3rd fire station.

How does this fit into the smart growth philosophy I  subscribe to?

I believe greenfield development should pay it’s own way. We must be vigilant against direct and indirect taxpayer subsidies for land use patterns that fail to generate the revenue needed to mitigate new liabilities. Downstream impacts should be also accounted for beyond the 1st lifecycle. Oftentimes as political “feathers in a cap” localities negotiate one time windfalls of up front improvements. Unfortunately, rarely is the math done to see if new revenues are enough to maintain new infrastructure over multiple life-cycles. This is shortsighted.

The solution? A local homestead/farmstead exemption. You may already be familiar with this via state and school district programs. Local government can also take advantage of this program.

A local homestead/farmstead exemption is one provisional exception to the uniformity rule. The program is a way to target property tax relief for primary residences and farmland.  By enacting a homestead exclusion program the township can allow reductions in the assessed value of a primary residences or farmland property. This reduces the local property tax burden on these types properties. The homestead exclusion provides a tax reduction to all eligible properties in the taxing jurisdiction. Most importantly this applies to all primary owner occupied residences including, condominiums, single family homes.

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, that is local LMT 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.

It’s 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?