The Best Solution for a Bad Situation: Combine the Sales Tax with LVT

Philadelphia's FY2010 budget must be adopted by the end of May, but options for how best to fund an anticipated deficit are disappearing while time is running out. The Administration originally proposed a 16 Mill increase in the property tax and a 1% increase in the sales tax to fill the budget gap, but concerns over the impact of the property tax hike have made City Council propose an alternative approach.

Council's proposal drops the property tax increase and instead extends the sales tax increase over the next 5 years with a loan this year on anticipated future revenues. Their argument is that this would protect homeowners from heavy property tax increase on unfair assessments and would spread the burden more broadly throughout the city.

However, this plan also has a downside. It's not certain that Harrisburg will authorize the sales tax increase, and even if it were allowed it would fall most heavily on the city's poorest taxpayers and further reduce Philadelphia's competitiveness for retail commerce activity. Although a sales tax is not as regressive as a wage tax increase would be, it will still hit many struggling homeowners hard. How can we provide some relief?

Balance the Sales Tax Burden with a Shift to Land Value Taxation

The increase in household tax burden from a higher sales tax can be offset significantly for most homeowners by adopting a revenue-neutral land value tax. Under a land value tax, a large majority of residential properties will see a reduction in their property tax, which will help to cancel out some of the additional cost of the sales tax.

The Henry George Foundation of America has already testified before City Council on this idea, and is pushing for implementation of this proposal in the weeks left before the final budget is passed. Below is the testimony given on May 6th, 2009. Additional research on the the combined impact of this proposal will be presented shortly.