Every year, budget season rolls around, and every year the picture is bleak—especially in Meadville. This year is no different.
Given the reality of stagnant revenues (the money coming in) and steadily increasing costs of basic services (the money going out to pay for police, fire, streets, stormwater repairs, etc.), city council will be, as usual, confronted with three unsavory choices as they hash out a budget over the next month—some combination of (1) cutting services, (2) raising taxes to bring revenue in line with the costs of having a functioning city, or (3) taking on more debt.
The first and third tracks have been the consensus options in recent years. In order to avoid tax increases, previous councils have opted to shave expenses (including employee benefits), shrink city staff (e.g., cutting 1.5 positions from Public Works last year and three firefighter positions in 2016) while borrowing internally (from reserve funds) and externally (via bond issues) to pay for capital projects (e.g., police cars, street paving).
The result? City reserves are nearly depleted (we’ve spent all our savings) and debt service (the expense required to cover the cost of loans) now makes up nearly 15 percent of the General Fund; that is, roughly $1.5 million out of a $10 million expense budget is devoted to paying off debts from previous borrowing.
That’s not good.
And it’s only gonna get worse unless city officials AND local residents start to take our financial problems seriously.
So far, we haven’t taken them seriously enough.
The recent presentation delivered to council by the Pennsylvania Economy League (PEL) made that reality clear. Meadville is facing deep structural issues, the root causes of which go beyond the city’s purview.
Some issues have to do with our relationship to state government, which effectively limits what we can do to address our recurring budget problems. Others are sourced closer to home; they include the fact that Meadville has a lot of free-riders (and, no, it’s what you think) which ends up exacerbating our budget struggles.
I’ll detail both below, but the bottom line is that local governments in PA are continually cash-strapped, and this is not because they’re spending too much; on the contrary, they’re barely keeping things afloat. Why? Because they have limited ways of raising revenue outside of property taxes, which hit middle- and lower-income people the hardest.
The problem of property tax
The most glaring problem we face as a city has to do with the property tax.
Property taxes are the main way that cities and municipalities in Pennsylvania pay for things like police and fire services, paved streets, functioning sewers, upkeep for parks, recreational resources like the Meadville Area Recreation Complex (MARC), and more.
The problem is that property taxes are a regressive form of taxation—it’s a type of tax that hits low- and middle-income people the hardest.
But it’s all we got. State laws limit how we can raise revenue.
Where the state has many ways of raising revenue—e.g., income tax, sales tax, cigarettes, fuel, inheritance tax, corporate income tax, state licenses—local governments in Pennsylvania basically have one: the property tax.
And the property tax is probably the stupidest way to fund municipal services. Why? Because it doesn’t tax people based on their ability to pay; it taxes the home in which they live.
The result is a highly unfair way of funding local government, where working people and people on fixed income end up paying a higher tax rate than wealthier people.
In fact, Pennsylvania’s tax system is so bad that it regularly makes the list of the “Terrible 10” worst tax states in the nation. According to the Institute for Taxation and Economic Policy, low-income and middle-income families pay more than DOUBLE their share of income in state and local taxes than the wealthiest families in Pennsylvania. This effectively belies the myth of the “makers” and “takers.” The system we have in place actually takes a much greater share of income from low- and middle-income families than from wealthy families.
And property taxes contribute to the problem. That’s because, for most families, their home is where their wealth is, so they’re being taxed on most of their wealth. By contrast, rich people’s wealth typically resides in business stocks, equity, bonds, patents, copyrights, and so on. So when a rich homeowner is taxed via the property tax, it’s only a fraction of their total wealth.
The same principle applies to different income levels: poor homeowners and renters pay more of their incomes in property taxes than do any other income group, while the richest taxpayers pay the least. According to ITEP, average low-income families pay 2.5 times more their share of incomes in property tax than the top 1 percent.
This is a highly regressive system which other states avoid with a progressive income tax, where people with higher incomes are taxed at a higher rate so that the cost of public services doesn’t fall as heavily on those with lower incomes. Pennsylvania is one of only nine states that does NOT have a progressive income tax. Instead, we have a flat tax, which taxes everyone, regardless of whether you make $20,000 a year or $200,000 a year, at the same rate.
The “uniformity clause” also applies to property taxes; in Pennsylvania, all types of property (e.g., homes, malls, factories, multinational retailers, golf courses) are taxed at the same rate.
So even if cities like Meadville wanted to, say, tax a multi-billion corporation like Tops (which brought in $2.6 billion in revenue in 2018) at a higher property tax rate than an elderly person who survives on a fixed income of $25,000 a year, we couldn’t do it; state law prohibits it. So, essentially, we’re stuck with a system in which you pay more in state and local taxes because rich corporations and individuals pay less.
This is a statewide problem that’s experienced locally—our dependence on the property tax leaves us (and many other municipalities) perpetually at the edge of a fiscal cliff as we struggle to pay for the basic things we need to have a functioning city. And because we don’t have any other substantial way of raising revenue, property tax rates increase to keep up with the cost of having basic police and fire protection, code enforcement, parks, sewers, paved streets, etc.
The result so far has been a vicious cycle, where declining revenues (from flat income tax rates and regressive property taxes) lead to budget cuts and lost jobs…which pulls money out of the local economy, which decreases the quality of life for residents, which potentially causes them to flee, further shrinking the tax base.
Thus, what we need are tax reforms at the STATE level to help solve our local financial problems. The two are connected. Unless individuals and institutions who can best afford to pay taxes are forced to pay their fair share, we’re stuck with a system of funding local and state government that relies on working people and elderly people to carry the load.
So if you don’t like paying higher property taxes, tell your state representatives Brad Roae, Parke Wentling, Kathy Rapp and state senator Michele Brooks—these are the people who maintain one of the worst state tax systems in the country. Their inaction for years, if not decades, has resulted in the current catastrophe we’re in.
The problem of tax assessment
Despite the fact that state government limits what we can do to raise revenue locally, there are changes we could make to lessen the severity of our financial problems.
As PEL senior research fellow Gerald Cross told council during the PEL presentation, “Your hands are tied by the growth of your tax base.” And our tax base has not been growing, partly because, as Cross put it, we have a tax base “frozen in 1965.”
That year, state lawmakers passed the Tax Enabling Act, which, again, set limits for how cities like Meadville can raise revenue, including the property tax. Since then, circumstances have changed but tax laws have not.
“People are taxed locally but the issues are global,” Cross explained. Our tax system is based on assumptions and structures put in place a half-century ago, when the local economy was doing much better and the state legislature assumed that all the wealthy people lived in the city.
Since then, however, much of the wealth has left the city for the surrounding townships, which has left Meadville reeling from declining tax revenues.
If we want to fix this problem, state law limits what we can do, but there are options.
When it comes to property tax, the state doesn’t allow municipalities to estimate property values based on market values. So, in effect, as the price of real estate goes up, tax revenues do not. And according to PEL, market values for properties in Meadville have increased 36 percent since 2001, whereas assessed value has declined by 2 percent. Consequently, as Cross said, “You don’t have the benefit of ‘free’ tax increases when wealth increases,” so we’re stuck with a flat tax base.
Tax reassessment could help fix the problem by capturing market value growth. But unfortunately, that’s beyond the city’s control as well. Reassessment happens at the county level, which requires county commissioners to pull the trigger. However, for the last fifty years, they’ve been reluctant to do so, and their inaction has set a state record (in a bad way): Crawford County has gone longer than every other county in Pennsylvania since its last full-scale assessment of property values in 1969. And the effect has been costly.
According to a 2010 study by the Center for Rural Pennsylvania, counties that do reassessment every 5 years (the recommended timetable) have higher median home values and higher county tax revenues. So essentially, each year that passes without a reassessment, we lose revenue, and this means property tax rates go up to offset the difference.
Remember, Crawford County hasn’t done a reassessment in FIFTY YEARS!
As Cross said, reassessment “costs money and political careers.” So until we get a group of commissioners who are willing to put the needs of the county above their political careers, we’re stuck with an assessment system based in 1969—the same year Neil Armstrong landed on the moon!
Back then, Meadville had a population of 17,000 and Talon Zipper was a bustling employer. Since then, much of the tax base—the people with wealth—have left the city for surrounding boroughs and townships, leaving behind “legacy costs” (roads, buildings, sewers) that still have to be maintained.
Meanwhile, those surrounding boroughs and townships have been benefiting from services that the city of Meadville—i.e., city taxpayers—provide.
As Cross pointed out, most boroughs and townships lack full-time police and fire departments, for example, so they sometimes rely on Meadville’s police and fire services for supplementary help. This means that city taxpayers are footing the bill for essential services that benefit our neighbors, even though our neighbors aren’t paying for them.
Combined with the outdated assessment system noted above, this unfair division of local government—where the city provides surrounding areas with valuable services even though they have all the wealth—helps to explain why Meadville’s tax millage rate is so high. Where city residents pay a property tax rate of 21.92 mills, residents in West Mead Township pay 4.25 mills and in Vernon Township 2 mills.
In essence, city residents are subsidizing lower tax rates for their neighbors.
The problem of free-riding
Economists have a word for this: it’s called free-riding. And it’s exemplified by the fact that Meadville’s neighbors are getting something (from the city) for nothing. Free-riding is what allows the townships to keep their taxes low at the expense of the city.
But it takes other forms as well.
In Meadville (and elsewhere in PA), the free-rider problem is also reflected by the fact that nonprofit institutions are afforded tax-exempt status, which means they don’t pay property taxes, which in turn places additional burdens on the remaining taxpayers.
In Meadville, 45 percent of properties are tax exempt. What’s more, this includes some of our wealthier institutions: Allegheny College, Meadville Medical Center, and Wesbury Retirement Community—all of them are exempt from property taxes, even though they enjoy the same city services as the rest of us who do pay.
That means 55 percent of taxpayers have to pick up the slack, covering 100 percent of the costs of keeping the city going.
Add to this: city taxpayers are funding basic governmental functions (police, fire, public roads, snow removal) that benefit the 60 percent of county residents and business owners who work in the city but don’t live here (the people who live just outside of town and thus avoid paying the city’s property tax rate), and you’ve got yourself a free-rider bonanza!
And because our wealthier institutions are free-riding too, the city’s property tax rates keep going up.
One way to lessen this problem would be if those institutions started making serious contributions to the city’s Payment in Lieu of Taxes (PILOT) program.
As Deputy Mayor Larry McKnight pointed out a year ago (shortly after being elected to office), the city’s budget problems could be significantly mitigated if tax-exempt properties started paying their fair share through the PILOT.
That’s because the city of Meadville currently misses out on roughly $2.7 million in lost property tax revenues each year from tax-exempt entities.
Of course, some of them do contribute to the PILOT, but their payments fall well short of what they would otherwise pay in property taxes.
For example, Allegheny College held roughly $34 million in tax-exempt property in 2019, which effectively spared it from a $765,000 property tax bill. Instead, the college paid $75,000 to the PILOT, which is less than 10 percent of what it would’ve paid in property tax.
Similarly, Meadville Medical Center owns $12 million in tax-exempt property, which excuses it from a $267,000 property tax bill. Like the college, it pays $75,000 to the PILOT, which is 28 percent of its full property tax bill.
Wesbury owns $8.3 million in tax-exempt property, which would otherwise be a $183,211 property tax bill, but it contributes nothing to the PILOT program. Zero.
As McKnight said a year ago, when the city was facing a $656,000 budget deficit: “If these three entities alone contributed 30 percent of their property value to the PILOT, it would generate $364,731 for the city. At a time when the city faces a severe budget shortfall, we need our nonprofits to pay their fair share.”
Alas, another $650,000 deficit is upon us. And now more than ever, we need our wealthier institutions to pay their fair share.
But something tells me they won’t.
So what can be done?
Now more than ever we need PUBLIC pressure to make changes.
At the state level, we need thousands of people to push for tax reforms because the broader responsibility for our current system falls to state legislators. Crucially, those making the push should include our local officials (mayors, city councilmembers, township supervisors, county commissioners); they should be leading the charge and pressuring our state politicians to make changes to this unworkable system—not least because they are the ones who most directly deal with the fallout.
Forget going through budget items “line by line.” Local leaders need to build coalitions across the region to force changes at the state level. No discussion of property taxes or budget cuts should happen outside of this context.
On the other hand, when the rest of us simply click a button on election day, then sit back and go to sleep, the legislature will sit back and give tax breaks to wealthy people and force city and county governments to raise property taxes. So if you don’t like paying higher property taxes, you need to tell your state representatives and state senators. Because unless we see tax reforms at the state level, we’re going to face the same problems over and over again; we’re going to see higher taxes for people who can’t afford them or no funding for the kinds of things we need.
Beyond that, we need our local governments to work together to find ways of addressing the tax issue in a fairer way: not least by trying to create alternative ways to fund the police, the fire department, to keep our sewers intact, and streets paved and plowed.
Of course, when that happens, you inevitably get a lot of pushback from the people who can afford to pay more—people who have the financial means to leave the city for lakeside homes, business owners who set up shop just outside of town in order to escape city tax rates, and tax-exempt institutions with more operating revenue than the city itself.
As soon as you suggest they should pay more in taxes, they’ll do what they usually do: threaten to take their business elsewhere, or to pass the costs on to somebody else—whether it be their customers, clients, employees, or tenants. They’ll fight, in other words, to maintain their position as free-riders, even if it means the city and the people living in it will suffer.
Incidentally, these are often the same people and institutions who talk about being part of “the community.” But of course, when it comes to paying a little more to fund city services so that people who are struggling on fixed incomes can get some relief, they’re opposed to it. They fail to put their money where their mouth is.
It’s the same dynamic that plays out at the state and national levels. Rich people, affluent institutions, and large corporations have been getting tax breaks for decades. Which means working people have to pick up the tab. There’s a direct correlation. And worse, most politicians are scared to challenge them.
So, we end up with the situation we have now, where poor and working people bear a larger burden of keeping public services up and running.
If we truly want to fix our budget problems—if we want to avoid the same no-win scenario of cutting basic services or raising property taxes—we need to get serious about fixing our state and local revenue systems.
The only way to do that is to work together in an organized way.