Governor Rendell has convened a Special Session on Property Tax Relief hoping to focus the General Assembly on adopting further proposals to reform the property tax system. This follows the Legislature’s adoption of Act 72, Governor Rendell’s proposal to use gambling revenues to lower school property taxes. Over two-thirds of Pennsylvania’s school boards, however, rejected participating in Act 72, which has caused additional legislative proposals to amend Act 72 to require school districts to participate as well as other tax reform plans to be offered as alternatives to Act 72.

Of interest and concern to PACB and community bankers, are several very comprehensive tax reform plans being advanced in the House and Senate to replace in its entirety the school property tax with a broader-based sales tax (including food and clothing that will be very controversial). This broader sales tax would include taxation of professional services including banking. The Commonwealth Caucus, chaired by Rep. Sam Rohrer, has a plan that imposes the sales tax at 5%, includes taxation of professional services including banking, and doubles the state share of the Realty Transfer Tax (RTT). PACB’s Legislative Committee previously adopted a position of opposing the increase in the RTT and PACB is participating in a coalition led by the Pennsylvania Realtors to defeat the RTT increase.

Sen. Jeff Piccola, the Majority Whip and third ranking member of the Senate Republican Caucus, also has a broad-based plan that would lower the sales tax to 5.7% and include food and clothing and also tax professional services including banking. His plan does NOT increase the RTT.

PACB has been approached by a coalition being formed by the Pennsylvania Bar Association to oppose the expansion of the sales tax to include professional services. I have attached a separate confidential document drafted by organizers of the coalition that explains the rationale for the coalition’s position so that the committee is aware of the draft arguments against expanding the sales tax.

The PACB Legislative Committee should consider and discuss the expansion of the sales tax to include banking services and discuss what posture it wants to take on this issue including whether it wants to join the coalition led by the Pennsylvania Bar Association. Rep. Sam Rohrer, or his representative, has been invited to join your meeting to explain the Commonwealth Caucus plan and to answer any questions committee members have.

We expect the overall issue of property tax reform to be active and likely complex with various competing plans and permutations to be offered. We have learned that the Commonwealth Caucus has been promised consideration of its tax reform plan in November. This obviously does not assure final passage, however, either in its current form or variations of it.

To summarize, this issue remains controversial and complex. Pennsylvania is a diverse state and it has been difficult for the Legislature to craft a tax reform plan that will pass, be accepted by the voters, and achieve the goal of shifting or reducing reliance on the property tax. The committee should also be aware that hovering over this entire issue is the current climate of outrage and opposition to the legislative pay raise which likely will prompt legislators to at least discuss and consider issues that appeal to the electorate to help defray the attention and focus on the pay raise. Please let me know if you have any questions.