By Tess Mullen, Associate Consultant
When I worked in Congress prior to coming to Fels, I quickly learned that debates over taxes dominate the House and Senate floor on a near weekly basis. As such, I came to graduate school with a desire to dig into the details of how different tax policies actually play out in practice. As luck would have it, I was given an incredible opportunity to do just that through my job as an Associate Consultant at Fels Research & Consulting.
Over the past several months, I have worked with the Pew Charitable Trusts’ Philadelphia Research Initiative to examine how Philadelphia’s residential tax burden compares to its Pennsylvania’s and New Jersey’s suburbs’. Due in part to Philadelphia’s wage tax, historically Philadelphia residents have faced higher tax burdens than their suburban neighbors do. Given changes to tax rates in Philadelphia and its suburbs over the past decade, we wanted to see if that trend still held true.
To compare residential tax burdens in Philadelphia and the suburbs, we evaluated the impact that state and local income, property and sales taxes would have on one hypothetical home owning family depending on where they lived. To do this, we used a calculation model developed by Wharton Professor Robert P. Inman. This model has been used to evaluate residential tax burdens throughout the Greater Philadelphia region in a number of previous studies, including a study published by the Economy League of Greater Philadelphia in 2000, which served as a point of comparison for our findings. One of the perks of working on this project was getting to know, and learn from, Professor Inman. His clear and concise explanations of how local taxes impact residents both equipped me to help with this study and made me a more educated citizen and future homebuyer.
Indeed, the process of helping with this study was a crash course in Pennsylvania’s and New Jersey’s tax systems and how they work. In addition to gathering up-to-date data on tax rates in 238 municipalities throughout the region, I also learned how Pennsylvania’s and New Jersey’s property tax relief programs work and figured out how to incorporate them into Professor Inman’s model. Similarly, after several conversations with Pennsylvania’s State Tax Equalization Board, I came to understand the nuances involved in comparing different municipalities’ effective property tax rates (nuances which unfortunately are too complicated to be fully explored in one blog posting).
Based on our careful research and conversations with numerous experts, my colleagues at Pew were able to determine that since 2000, Philadelphia has indeed narrowed the gap. When calculated as a percentage of our hypothetical family’s annual income, the state and local tax burden our family faced in Philadelphia fell from 13.5 percent in 2000 to 12.9 percent in 2012. This decrease was fueled in part by reductions in Philadelphia wage tax and by the fact that Philadelphia, by and large, has not updated its property assessments as market values increased over the past decade.
By contrast, if our hypothetical family lived in the Pennsylvania or New Jersey suburbs, they would have seen their tax burden increase over the past decade. On average, the residential tax burden in Pennsylvania’s suburbs rose from 9.8 percent in 2000 to 12.2 percent in 2012, due to increases in local income and property taxes. Similarly, New Jersey families in the Greater Philadelphia region saw their average tax burden rise from 9.9 percent to 11.3 percent from 2000 to 2011.
What does all this mean? First and foremost, it means that while Philadelphia’s tax burden is still slightly higher than the suburban average, the gap has narrowed significantly. In 2000, Philadelphia had the third highest residential tax burden in the region. Now, there are 47 suburban communities where our hypothetical family would face a higher tax burden than they would in Philadelphia. Even more significantly, if our hypothetical family worked in Philadelphia and thus paid Philadelphia’s nonresident wage tax, on average they could lower their tax bill by moving from the suburbs to the city.
When comparing local municipalities’ tax rates, it is important to remember that families do not decide where to live based on taxes alone. The quality of local schools and other amenities factor heavily in families’ housing decisions. Yet as Philadelphia’s City Council continues to debate how to reform the city’s property tax system, this study serves as a reminder to keep an eye on how Philadelphia’s residential tax burden compares to its suburbs’. If changes to Philadelphia’s property tax systems result in far higher tax bills for local residents, it could become harder for the city to retain current residents, and attract new ones, in the future.
To read the full study, please click here (pdf file).