Pennsylvania school taxes

TESD: Low Millage Rate … Does that Make it a Bargain?

Keith Knauss, a school board member in the Unionville-Chaddsford School District, and a frequent contributor on Community Matters has written an interesting article comparing the tax rates between UCFSD and TESD.  As Keith points out, T/E residents are paying a substantially less millage rate for school taxes than UCFSD — 24.53 versus 18.65.

The academics between the two districts are very similar; always appearing together at the top of any state test results.  So does this mean that for this community, we are getting a bargain when it comes to value of the school district.  Our students come in at the highest testing levels but yet we are not paying at the same taxing rate as an equivalent district.

Thanks Keith for this article … your analysis forces us to see the situation in a different light. He concludes that the milleage rate does not indicate tax fairness nor it have anything to do with the school district management … and therefore meaningless as a predictor.

The Low Millage Rate Myth

Tax Capitalization, Tax Rates and School District Management

Common wisdom has it that a school district with a low millage rate is doing a better job of managing their finances than a district with a high millage rate.  In fact, sometimes the low millage rate myth is used by school directors to justify large tax increases – “We’ve kept tax rates well below other comparable districts for years so a large increase this year shouldn’t bother you.”  Sometimes the low millage rate myth is used by union leaders to justify large salary increases – “The district has one of the lowest tax rates in the state, so there is plenty of room to raise tax rates to pay for our salary demands.”  A corollary to this myth is that residents in a high millage rate district are unfairly burdened with higher taxes relative to residents in a low millage rate district.  Sometimes common wisdom is unwise.

Let’s compare two districts – Tredyffrin Easttown and Unionville Chadds Ford.  I’ve chosen UCF and TE because they are very similar demographically and very similar academically.  Both have excellent schools and similar academic results.  The only striking difference is the millage rate.  TE’s rate is 18.65; UCF’s is 24.53.  Is TE doing a better job?  Are TE residents getting an educational “bargain”?  Is there room to raise TE’s rates to pay for teacher increases?  Are UCF residents saddled with an unfair tax burden?

Let’s do a mental exercise.  Let’s suppose there is a street that runs along the border of UCF and TE.  A developer builds 20 new houses that are exactly the same. Ten are on the UCF side of the street; ten are on the TE side of the street. The builder prices them all exactly the same at $750K. The builder quickly sells five of the houses at the asking price of $750K and notices all five are on the same side of the street – the TE side. Why? It’s not the schools – they’re the same. It’s the taxes, of course. People are wise consumers and take into consideration not only the purchase price, but also the tax burden.  The owner of the house on the TE side pays $2,425 less each year in taxes.  (see calculation details below)

How much does the developer have to reduce the selling price on the UCF side to make the houses equally attractive? That requires the builder to capitalize the tax difference into the selling price. The present value of 25 years of $2,425 dollar payments is about $40,000. Thus, the developer has to reduce the selling price of the UCF homes by $40,000 to $710,000 so all the houses are equally attractive.

A year later, all 20 owners are at a block party. One of the TE residents says to a UCF resident, “Our school district is managed better because our millage rate is lower and we pay $2,425 less in RE taxes.” The UCF resident replies, “Not true; I’m getting the same great education for my kids and paying the exact same monthly amount to live here; you may pay $2,425 less in RE taxes, but I pay $2,425 less in mortgage (P&I) payments because of the lower purchase price”. Thus, taxes are capitalized into the selling price of homes and millage rates are a meaningless indicator of school district management and tax fairness.

Market Value:               $750,000
Assessed value:           $412,500 (based on the7/1/10CLR of 0.55)
TE School Tax:             $7,695
UCFSchoolTax:           $10,119

1. The builder has another way to make houses on both sides of the street equally attractive.  Instead of reducing the selling price by $40,000, the builder could keep the selling price the same at $750K, but add $40,000 worth of upgrades (kitchen, patio, landscaping, etc.)  to the UCF houses.  Thus, you’ll find that the buyer, for the same selling price, can get “more” house in a high tax rate district.  (yes, I know this seems counter intuitive)

2. For an interesting study of the effect of taxation and school quality on home prices see:
Homes, Taxes, and Schools: The Effects of School District Rankings and Property Tax Rates on Property Valuations in Richmond Heights,Missouri

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