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PG Benchmarks
PG Benchmarks: Just the facts on taxes

The devil's in the details, and if you look carefully, Pittsburgh is a relatively high-tax city, but not the tax hell many think it is.

Sunday, November 24, 2002

By Dan Fitzpatrick, Post-Gazette Staff Writer

Few areas of the country are more skeptical about taxes than southwestern Pennsylvania.

(Illustration by Stacy Innerst, Post-Gazette)


Behind the numbers


Graphic:
Highest-tax cities

Graphic:
Per capita tax by type

Graphic:
Side-by-side: A comparison


It was here, after all, that grain farmers from Allegheny, Fayette, Washington and Westmoreland counties reacted violently in the 1790s when asked to pay a 25 percent tax on whiskey sold within the newly formed United States.

Their refusal to pay -- the first internal challenge to American power -- led to a series of threats, assaults and gunfights that culminated in the tarring and feathering of federal revenue officials and the July 17, 1794, burning of a Washington County house belonging to regional tax inspector John Neville.Two hundred and eight years after the end of the "Whiskey Rebellion," taxes are still a sore subject.

The loudest complaint now is that the city's taxes are too high, and that Mayor Tom Murphy's proposed new taxes on city employers and alcohol will only drive more people or companies out to the suburbs or out of the region altogether. One city resident recently put it this way: "With taxes so high, no one will want to or be able to afford to live in Allegheny County or Pittsburgh. We will slowly become a ghost town."

Pittsburgh's status as a high-tax city is reinforced again and again by national studies in BusinessWeek, Money magazine, Kiplinger's and books such as "America's Best Low-Retirement Towns," which ranks Pittsburgh as a "tax hell" in its 2002 edition.

But is this really true?

The Post-Gazette, with help from Carnegie Mellon University economics professor Dennis Epple and CMU graduate student Sam Youl Lee, set out to answer the question of Pittsburgh's tax standing in a way that eliminates the inconsistencies and flawed assumptions so typical of cross-country tax comparisons.

It turns out that, while Pittsburgh is not the tax "hell" many think it is; it is warmer than most.

The reality is that, in terms of being heavily taxed, Pittsburgh occupies a spot near the upper middle of the 15 PG Benchmarks cities, with a per capita tax payment of $3,344 and a tax-to-income ratio of 17.8 percent. St. Louis, Cleveland, Cincinnati and Minneapolis all carry higher burdens, though Cincinnati and Minneapolis are only higher by a hairbreadth. The lowest burdens are in Portland, Phoenix and San Diego.

Epple, on the editorial board of the American Economic Review, urged caution when interpreting the numbers, saying that they should be viewed not as the average person's burden but rather as the collective burden.

His data is based on the most recent census data available -- information from 1998-99 released last year. It does not evaluate any disparities between the taxes paid by people vs. the taxes paid by businesses.

What has happened since 1999, the year Allegheny County reassessed its property, could be significant. For instance, from 1999 to 2001, property tax revenues collected by Pittsburgh schools jumped 27 percent, from $121 million to $153.6 million. That increase alone amounts to an additional $96 per capita not included in the figures for this story.

The difficulty of trying to factor that into the numbers, is that other revenue-starved cities may have experienced tax changes since 1999. But Epple said, "I wouldn't be surprised if we moved up more than others . . . the additional aamount is not trivial, when you see how relatively close the city is to the ones currently ranked above it. At a minimum, it suggests our ranking, if anything, is going up."

In the final tally, though, Pittsburgh does better than its reputation would suggest.

Despite the decline of its industrial base and a loss of population that exceeds most big cities around the country, the city is still seventh in terms of taxes per capita and fifth, narrowly, in taxes as a percent of income. (The methodology used in the rankings is explained in a sidebar story.)

In the end, "we can confidently say that Pittsburgh ranks in the top half among these cities as a percentage of income, and probably in the top third," Epple said.

"Thus, it is among the high group in taxes as a percent of income, while closer to the middle in taxes per capita."

Highs and lows

Local finance experts found good and bad news in Epple's findings.

Dave Miller, former city budget director and now associate dean at the University of Pittsburgh's Graduate School of Public and International Affairs, said Epple's conclusions "temper" the picture about Pittsburgh's high-tax image nationally.

"Clearly, taxation is occurring at the same level as other cities around the country. It probably is an important finding. It now can direct discussion to how we use those dollars."

But Miller also pointed to Epple's school district numbers, which show Pittsburgh as having the second-highest tax per capita among the 15 cities, as one of the big problems. And that is before the school district's recent tax increase. When ranked separately, the city, county and state tax divisions are all near the middle or bottom of the pack, but the lofty school tax figure pushes Pittsburgh's overall burden to the top half and possibly top third of the 15 cities.

The reason for the big school tax burden is twofold: high local spending and low state support.

Epple noted that the Pittsburgh Public Schools spent $10,939 per student in 1999, ranking second behind Minneapolis, which spent $14,158 per student. "The education costs for the city are high," Miller said. "We also have one of the most fragmented educational systems in the U.S. This is clearly an area where everybody is paying a lot of money compared to the Benchmark cities and probably getting relatively little in return."

But some public policy analysts, including Miller, warned about pointing too many fingers at the school district. As school district budget director Peter Camarda said, the state of Pennsylvania has been less and less supportive of Pittsburgh's schools over the last few decades, dropping its contribution from 43 percent of the district's budget in 1973 to 36 percent in 2003. Also, the state pays only 30 percent of the district's special education costs, down from 70 percent a decade ago.

The local school district has to make up that gap somewhere, and it has turned to taxpayers for a larger local share.

Other than the schools, Pittsburgh looks pretty good compared with other cities, municipal finance experts said. Among those agreeing with Epple's conclusions is Mike Weir, a senior fellow at the Pennsylvania Economy League and a staff member of the mayoral panel that recently recommended the city create a payroll tax and alcohol tax to solve its budget problems.

Weir has been conducting his own study of the tax burdens in competing cities. Taking a hypothetical family of four and figuring out how much that family would pay in taxes in each of the 15 PG Benchmarks cities, Weir discovered that such a family would pay its sixth-highest bill in Pittsburgh -- in the upper half of the top but not at the top.

"We came up with the same conclusion" as Epple, he said.

Chris Briem, an economist at the University of Pittsburgh's Center for Social and Urban Research, also examined some of the same Census data used by Epple and said his findings "are consistent with my numbers."

Briem now believes it is possible that "our cost structure is not as bad as people think it is." Pittsburgh's treasurer, Rich Fees, agreed.

The tax situation in the city "really is not that bad," said Fees. The perception of Pittsburgh as high-tax town "tends to feed on itself and become a larger issue than it really is."

Misperceptions

Some of perceptions about Pittsburgh's standing as a high-tax city come from national studies that many local experts consider to be incomplete and misleading.

Money magazine in 1996 examined a typical family's total state and local tax bill in each of the 100 largest metro areas and found that Pittsburgh was the fourth most expensive metro area, with a typical family paying $13,926 in state and local taxes. Only Buffalo, Long Island and New York City were more expensive.

In Kiplinger's 2002 study of the most tax-friendly places for retirees, Pennsylvania was last on the list, with a total state and local tax burden of $7,531.

High property taxes, according to Kiplinger's, were the big problem.

But such approaches rarely take into account the big differences across the country as to how taxes are collected, and by whom. Pittsburghers, for example, are required to pay seven different direct and indirect taxes to the city, county, state and schools -- and some of those taxes are paid to more than one taxing body. Other areas of the country may rely on fewer taxing sources. "An evaluation of the tax burden across households is not complete without an accounting for the distribution of all taxes that are collected," Epple said. Nor do many national studies account for how much of the local property tax is paid by companies, often giving the impression that the average household is paying for all property taxes-- thereby inflating the per-family tax bill.

The blind use of the hypothetical family to measure tax burdens is another common mistake made by the authors of studies, especially when the authors fail to make adjustments according to the strength of the housing market in each city.

For instance, $100,000 can buy more home in Pittsburgh than in Seattle, making a comparison of like-valued homes less meaningful.

Most studies of city tax burdens are "fraught with error," Weir said.

Kiplinger's, Weir said, used Harrisburg as its test case for Pennsylvania, but it did not account for the fact that Harrisburg has a two-tiered property tax rate, with one rate for land and another for buildings.

"That is what we suffer from," Weir said. "People who don't understand what's going on." Bad information clouds the discussion about Pittsburgh's tax image, he said, "because we're told (about high taxes) continuously by people who are objecting to the tax burden." If you were to talk to people on the streets of Pittsburgh, most would describe taxes as too high, Weir acknowledged. But, "you probably would get the same answer if you asked people on the street in any city in America."

City versus suburbs

Some people, though, are not willing to relinquish the image of Pittsburgh as a high-tax city, especially when comparing it with the surrounding suburbs.

The real problem, Miller said, is not Pittsburgh compared with St. Louis or Cincinnati. It is Pittsburgh compared with Green Tree, Mt. Lebanon or Butler County.

Of the 128 taxing bodies in Allegheny County, only five have a higher earned income or "wage" tax rate than Pittsburgh. Of the 23 school districts in the county, 42 percent have lower wage rates than the city's school district, which charges 2 percent.

On the mercantile rate, 84 percent are lower than the city.

"When you lump all those things together, it is a telling story," Miller said.

Pittsburgh, compared with the suburbs, is "tax hell."

The assumption that city taxes are driving people to the suburbs has its origins in a study started by Pittsburgh Mayor Richard Caliguiri in the 1980s, when the city/school wage tax was 4 percent. Hundreds were interviewed by phone, and 42 percent of the respondents who had left the city mentioned taxes when asked what prompted their move.

To remedy that, the succeeding administration of Sophie Masloff cut the share of the city's wage tax by more than 1 percent before the end of the 1980s. She pushed a tax "swap" with property taxes for some balance, but not enough to make up for all of the lost revenue. Murphy and City Council kept the city's share of the wage tax at 1 percent in the 1990s, but the school board raised its share to 2 percent -- the highest in the county and at the limit as established by the state Legislature.

"I have lived in a lot of cities and Pittsburgh is definitely the most overtaxed city I have ever lived in," said Karen Kovatch, a 31-year-old marketing director at a Downtown technology firm who recently moved from Shadyside to a Cranberry area development that advertises "Low Butler Taxes" on its signs.

The 3 percent wage tax, Kovatch said, was a "big factor in my decision." By moving, Kovatch saved more than $2,000.

"In the city, when you look at all the taxes, it is just not a wise move, any way you look at it."

But there also is plenty of evidence that people are choosing the city over the suburbs, despite the wage tax.

At Washington's Landing, the new city housing community in the middle of the Allegheny River, 80 percent of the people living in the 88 townhomes are from outside the city. At Summerset at Frick Park, the new housing development set on a slag heap in Squirrel Hill, 700 people are on a waiting list for homes.

Bill Taxay, an attorney with Cohen & Grigsby, recently left the city for a home in Indiana Township, but said he understands why cities often have to tax more than suburbs. The greater density of living and variety of services, plus the museums and stadiums, all cost money. "I loved living in the city," he said. "The taxes were higher and that was an acceptable price to pay. I knew what I signed up for."

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