*Pennsylvania Rep. Frank X. Ryan (R-Lebanon County) developed House Bill 13 “The School Property Tax Elimination Act.” Ryan, a CPA and PICPA member, addresses the changes this bill would bring to the Pennsylvania tax system, along with who pays and who benefits. Ryan is seeking comment to his proposed legislation by Aug. 13.

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By: Jim DeLuccia, PICPA Communications Manager

*An update on this topic appeared in "PICPA’s CPA Conversations Podcasts Celebrates 100,000 Downloads" on Dec. 23, 2019.

Podcast Transcript

A replacement of all school property tax in Pennsylvania is our topic today, and joining me to discuss his proposed legislation, called House Bill 13, is Representative Frank Ryan of Lebanon County. Representative Ryan is a CPA, PICPA member, and is also a retired colonel in the U.S. Marine Corps. 

Frank, thank you so much for joining me on the phone today, and thank you for your service to our country.

[Ryan] Jim, thanks so much and it's great to talk to so many of my fellow CPAs today. I miss the profession.

Great. Well, we're happy that you can join us. What is the purpose of House Bill 13?

[Ryan] Jim, what I'm trying to do here is, it's called the School Property Tax Elimination Act, is to replace the fixed expense of property taxes that we currently have in the United States, particularly in the Commonwealth of Pennsylvania, and replace that with a more variable form of taxation, so that citizens and businesses are better able to plan and make the expense variable rather than fixed. In the bill, my primary responsibilities, as well, is to try to balance out the needs of all the constituencies. The school districts, obviously, the children that are going to the schools. The property owners, renters. I had to take that into consideration, as well as business owners, who have either favorably or adversely effected by the current system of property taxes the way we do it in the Commonwealth of Pennsylvania.

That's the primary purpose of the bill. It's really designed to bring Pennsylvania into the 21st Century, about a better methodology for being able to have a much more predictable level of expenses and revenue for all the parties involved. Revenue for the school district and expenses for those people who are paying the bills.

How does your bill compare with House Bill/Senate Bill 76?

[Ryan] First of all, the two bills, House Bill 76 and Senate Bill 76, are slightly different from one another, but I'll give you the general perspective. I'm a co-sponsor on House Bill 76. While I like it, what I decided to do under my version is sit down with all of the people who are opposed to House Bill 76 when it came up for vote before about four years ago. I sat down with those groups, such as the CPA profession was opposed to it, the legal profession, the Chamber of Commerce. The PSEA, the public school teachers union. The public school business officials and others who were very much vehemently opposed to 76.

Where my bill is significantly different is that all the taxes that I am going to be replacing property taxes with, will be staying local. Instead of going to Harrisburg, they'll be staying within the local school district, so that it's a much more predictable source of income and we don't have to worry about Harrisburg tampering with it.

Having been in the legislature now for only about two and a half years, that's a valid concern that people have had before, is that when the money comes to Harrisburg, you're never quite sure what you're going to get back. As a CPA and a former chief financial officer of some fairly large companies, just those words alone scare the daylights out of me. We're different in that respect.

The second issue is my bill does take into account that renters do pay a property tax through their rent. Under my bill it requires that renters receive some benefit from the property taxes eliminated, as well. Additionally, what my bill does, it's different and this is actually a fairly unique concept, it's brand new, we're creating a concept called a local sales tax and a local personal income tax, which allows the money to stay within the school districts. Local personal income tax as an example, would get remitted to the school district directly, rather than having to go to the Commonwealth of Pennsylvania.

Additionally, my bill is different in a sense that I tax non-Social Security retirement income. That's the first time that that will be done. What happens is, Social Security income would not be taxed under my bill, but other retirement income would be. The reason we have to do it that way, is we have a uniformity clause, where we're not allowed to, under the Pennsylvania Commonwealth, to tax the same income differently for different age groups. We're proposing a 4.92% tax on retirement income, of which 3.07% would be going to the state and that takes care of the hold harmless on the school districts, and that's the only portion of any of the taxes that goes to the state. Then the 1.85% additional is the amount of money that would then go to the local school districts. That 4.92% is the current 3.07% rate that we all pay on our income and 1.85% would be, I'm calling, the local personal income tax.

This is really significant for a number of reasons. Under one of the information's that I found about why people objected to 76, it was almost a 100% gain for senior citizens, and we're already an extremely attractive state for seniors. And by the way, I'm 68 years old, so under my own bill I will pay more taxes.

What I encourage everybody to consider under this bill, as it compares to other types of legislation, we are but one life event away from losing our homes, no matter who you are. If you're married and you get divorced, you might not have enough money after the divorce to be able to pay your property taxes or keep your home, and if you are a senior citizen like myself, as an example, if I were to pass away first, my wife would still have my Social Security income, with the fact that her Social Security income would kind of go away, because she'd get to pick the higher of the two, she would most likely not be able to stay in the home. Now, I've provided for her with life insurance, so that's not an issue, but not that many people would be able to.

Under my bill, 65% of seniors would end up paying no taxes at all, because they're only getting Social Security income. That's between 60 to 70%. Then the remaining 30% to 35% of seniors would pay that limited income. Seniors on average, under my bill, save 75% on their overall taxes. Some people, like myself, will pay more. Other people won't.

One thing I think is also very, very important to realize, under House Bill 76, by getting rid of all property taxes for seniors and everyone else, the problem that occurs is we become a magnet then for seniors, and one of the biggest cost drivers in the Commonwealth for our budget is the cost of seniors. I'm on the Finance Committee and the State Government Committee, as well as the Aging Committee in Harrisburg, and a number of other committees, as well. But the ones that relate directly to this, we will tell you that between 13 to 18% of the Commonwealth's budget is designed to take care of seniors.

House Bill 13 accommodates that and provides some payment from seniors. Whereas House Bill 76 and Senate Bill 76 do not do that, which would, in my mind and the committee’s mind, cause a greater increase in the number of seniors coming into the state.

I think the final point that is really important to be aware of is the Independent Fiscal Office has indicated that we are becoming a much older state because of our favorable tax status. Number one, and number two, younger people are moving out of the Commonwealth as are businesses in droves. As a result of that, that's become very, very much problematic.

When do you plan to release this proposed bill to the House?

[Ryan] In the latter part of July, what we're doing is going around the state and letting people know that the draft is done. We're telling people what the parameters are, so I can get feedback. Then on Aug. 7 we're doing a town hall in York, Pennsylvania with Representative Mike Jones. On Aug. 13 we're doing a property tax summit on all the different property tax bills with the Senate, with Senator Kristin Phillips-Hill in her district. Then I'm formally dropping the language into the system for the bill on Aug. 15. Then we're doing the press conference and announcing the entire bill on Aug. 20.

The reason I've done it this way is for the past 15 to 16 months I've been getting feedback. I'm now on the 15th version of this bill. We tried to refine it and get as many people on board and supportive as we possibly can. Then what our intent would be then is to keep this period of time between now and Aug. 13 as open public comment period to see if the bill still viable, and any last minute tweaks we make and then introduce the bill on Aug. 15.

What people have to be aware of is the minute I drop the bill into the system, and a draft is available on my website at repfrankryan.com, as well as the one-page analysis of the School Property Tax Elimination Act. But the minute we drop it into the system, the only way we can change it is by the amendment process. When that happens, we run into significant amount of problems, as some amendments are adopted and others are not.

At this point in time I've accommodated probably over 200 changes to the bill from what my first concept was until now, from all the different feedbacks I got from various, different people. At this point, I think we've got as close to a finished product as possible, but anything that comes to me after Aug. 13 would have to be done as an amendment.

What's that website again that our members can access to take a look at this proposed legislation before the Aug. 13?

[Ryan] Absolutely. It's rep, R-E-P, frankryan.com and it's the Pennsylvania House of Representatives website. In the center of the website, the very top, it says, "Property Tax Elimination Act." If you click on that link it will show you the bill itself, the one-page flyer as well an article that I wrote explaining all the different issues about how the tax would work.

Frank, I know that you have mentioned a lot so far of the specific changes to the Pennsylvania tax system that you're proposing in this bill. Did you have anything else to add there?

[Ryan] I did. What happens is we're viewing this as step one in a eight or nine step process of fixing the Pennsylvania Tax Code. I'm on the Tax Reform Commission for these Finance Committee in the House of Representatives and we have another CPA, Representative Keith Greiner, who's heading that sub-committee up. We also have a CPA who's the head of the Finance Committee itself, which is Representative Mike Peifer, who's an absolute, both of them are absolute geniuses. We actually have four CPAs on the committee.

What we're trying to do is recognize that there's much of what we've got in the tax code in Pennsylvania that needs to be fixed. We need to simplify it. The sales tax is one of things that we're all sitting back trying to do. By fixing the school property tax first, it then puts us all on the level playing field of all the expenses and revenues are variable. It allows us then to start doing a piecemeal review of every single tax along the way.

As an example, my School Property Tax Elimination Act is 295 pages long, of which 100 pages relate to the sales tax portion of it only. That's how complicated our sales tax system is. So, we're viewing this as a means of making other substantive changes. I've got a House Bill 17 as an example, that's a statute of limitations for collections of taxes at 10 years. That bill is going to be voted on in September in the House and then go over to the Senate. We've been working on it for quite a while. The PICPA has been very, very supportive. So, we're viewing this as step one of a multi-step process to fix a great deal about the Commonwealth’ tax system.

I believe that you've outlined this earlier in our conversation here, but who would benefit if this bill becomes law?

[Ryan] The people that would benefit the most are, in my mind, are lower income Pennsylvanians will benefit the most. Both a renter and a person on fixed income who owns their home would benefit in this context, is that if you're on Social Security income only, you've got no property taxes anymore. You've got secondary and tertiary effects that benefit the Commonwealth and the citizen as well. In the sense that, we do have 18,000 people per year in Pennsylvania in a booming economy who are losing their homes because of a life event that makes it to where they can no longer afford to keep their home.

Renters benefit under my bill as well, because the landlord is required to pass through to the tenant under most circumstances, any reduced property taxes. If the property tax per unit is $100 per unit, they must drop the rent by 100. The next day they can raise it or lower it again, the free market system still applies, but for that one day, that's what happens. We do give an exemption if you are a smaller landlord and have not been passing on property tax increases in the past. We have a five-year lookback. That's particularly helpful.

The school districts benefit in the sense that if House Bill 76 had been passed eight years ago, school districts today would have had a billion dollars more than they would have had under property tax laws that we currently have in place.

Then I think the third issue that I think is particularly important about who benefits, property tax increases are expected to go up at such a rate now, that we believe that in the next 15 years your property taxes will double. Anybody who's on a fixed income will benefit from this.

I think a corollary question that is really important to ask is, "Who loses," because there are people who are paying more. We're not reducing taxes at all, we're shifting who pays it, and we're making it variable. Higher income individuals will be paying more than they did before. If you lived in a relatively modest home, where your property taxes were not particularly high, then you may end up paying more under this bill. You'll find that people who are finding themselves in a situation where they have extensive amount of retirement income will be paying more than they did under this.

One of the important things to be aware of is under my bill, any contributions you made into your 401(k) or IRA would not be taxable under our bill, because you've already paid state tax on that to begin with. You didn't pay federal, but you paid state tax. We do mitigate some of the impact of that.

Higher income individuals will pay more, but what I want to caution everyone about is that, as of right now 42 other states already tax retirement income. The vast majority of states, of those 42, I think it's 31 or 32, I don't remember the exact number, don't tax Social Security. We would be consistent there. What we would be doing is putting ourselves more on a level playing field with the other states. As example, our neighboring state of Maryland taxes retirement income. Now, they do make some deductions at lower levels of retirement income because their constitution permits that, whereas ours does not. But it could be as high at 7.5% tax in Maryland.

It depends upon the state that you're living in. This puts us more in parody with other areas in the process. That's the person who's likely to not benefit. We do have one thing that I think is very important on the sales tax. We have an expansion of the sales tax on food and clothing only for the local sales tax. There would now be a 2% local sales tax on the food and clothing only, and if you are on public assistance and use the ACCESS card, you would not have to pay that tax, but everybody else would.

Generally speaking, that's the only other thing in terms of who's going to paying and perhaps, I won't say the negative, but someone who might be paying than they might have been paying before.

What inspired you to propose this legislation?

[Ryan] I have spent an entire career in helping to keep organizations out of bankruptcy and I ran for office because I believed the Commonwealth of Pennsylvania, at the time I ran, I said, "We have two to four years to make significant decisions and after that two to four years, the political decisions would be so unpalatable, we couldn't make them, and in 12 years Pennsylvania would be insolvent."

Contrary to popular belief, a state can go bankrupt. Now, the Senate has to approve that and the House of Representatives, the President has to sign it, but Puerto Rico is an example of a commonwealth that filed bankruptcy on May 3, 2017. That was before the hurricane.

What inspired me is I created a concept called the Financial Rescue Caucus and it's designed to help the Commonwealth stay out of bankruptcy, and property taxes were the first step in this process of undoing the tangled web of overspending that we have in the Commonwealth. I've had a number of bills that have already become law. I've been fortunate that four bills of mine have become law already that are financial reforms. I've had another three bills that were my bills that went to the Senate and the senators then took part of the bill, and we're okay with that.

What the purpose of all of this was, is to say that we need to get this bill. As an example, the bonus depreciation bill last year was the bill that I wrote. Those things become very, very important.

Why should PICPA members and, Pennsylvania CPAs specifically, care about House Bill 13?

[Ryan] Jim, this is probably one of the most important groups I can talk to, because you're going to be dealing with it at the front end of it. With the enhanced revenue collection process that the Commonwealth had, the CPA profession, our profession was the ones that heard about the negative aspects of it right off the bat. This bill is revolutionary, what we're doing. We'll be the first state in the United States that's done something similar to this. Other states are looking at it and it's beneficial that the tax preparers, the auditors and others be aware of it.

There's one other very, very important issue that I think all CPAs should be aware of. Under the way Pennsylvania laws have been written, the unfunded liabilities of a school district can be assessed against the value of your home. Then that would be for people who are renters, as well. So, that the rents would then go up, as well. Simultaneously, what that basically means is, if the school district is... And we have a couple school districts like that now, who can't pay their bills. So, if they can't pay their bills, the Public School Employee Retirement System, PSERS, has got the ability to assess that unfunded pension liability against the remaining the 499 school districts.

I wrote a letter to the Securities and Exchange Commission and said, "Are publicly traded companies doing business in Pennsylvania properly stating their potential liabilities and footnote disclosures if they have a potential liability for these liabilities?" Let me give you an example. In about the half the counties in Pennsylvania, the unfunded liabilities per $100,000 of assessed value of property isn't in excess of $12,000 per $100,000. So, if you've got a $1 million dollar building, that means basically you owe $120,000 of potential contingent liabilities. None of that is recorded anywhere on the financials.

If we have a major recession like we had in '08 and '09, this issue will become the number one issue effecting virtually every business and homeowner in the Commonwealth of Pennsylvania.

Pennsylvania Representative Frank Ryan of Lebanon County. Frank thanks so much for taking the time out to speak to our group today. Just one more time, if you could remind the folks where they can access the proposed legislation before you actually enter it into the system.

[Ryan] Absolutely. Jim, it's again at rep, R-E-P, frankryan.com. My personal email is fryan@pahouse, H-O-U-S-E, gop.com. That's the State House of Representatives email account. It's fryan@pahousegop.com. Then I would also encourage you to go to YouTube and type in Frank Ryan or Rep Frank Ryan, Financial Rescue Caucus, and you'll see the background which led to this bill.