Unearned and uncollected
Libertarians can be funny sometimes. A piece from the Commonwealth Foundation, a Koch-funded think tank focusing on Pennsylvania policy, opens with a riff on the ancient buddhist koan "if a tree falls in a forest and no one hears it, does it make a sound?" In this post, they ask "if a tax is on the books and no one knows it, does it matter?"
The answer is maybe. It turns out that Philadelphia's hasn't been collecting a tax that could bring in money for its revenue-starved school district.
SIT down
The tax's formal name is the School Income Tax, or SIT. It's a tax on unearned income. Here's the regulation language itself:
A tax at the rate of two percent (2%) for all tax years beginning before 1976 and at the rate of four and five-sixteenths (4-5/16%) percent after 1976, and at the rate of four and ninety-six-one hundredths percent (4.96%) beginning in 1983 for general school purposes is imposed on residents of the School District of Philadelphia upon the net income received, credited or reinvested from the ownership, sale or other disposition of real property and tangible and intangible personal property.
The stuff in the crosshairs of this tax would be professional-managerial and ruling class stuff most likely, since it covers things like dividends from stocks, rental income, interest payments, income from the sale of property, royalties from patents or copyrights, prizes or awards (gambling eg), limited partnerships, and S corporations (with 100 or fewer shareholders). (Remember the intangible personal property part, bolded above, for later.)
The tax itself goes back to 1967. It was an amendment to the Little Sterling Act authorizing Philadelphia to collect it. The history of the Little Sterling Act goes back to the 1930s, when Pennsylvania authorized its two big cities Philly and Pittsburgh to tax themselves. (Pretty interesting to see the Chamber of Commerce being bastards almost 100 years ago.) It'd be interesting to see the history of collections on this tax. The district may have lost billions over the life of the policy.
(Not) in the news
Recently, the uncollected tax on unearned income has been sort of reported on, but sort of not. There was news in 2017 when Frank Breslin, the commissioner of the city's revenue department, was making noise about actually collecting this tax. This came on the heels of the mayor promising to fully fund the school district. Breslin said they didn't collect $2.5m in 2016. While that sounds like a small amount, a yearly tax like that can add up over time. Every little bit matters. CBS reported that the city found $4m for schools in 2017. The city started collecting it more using a data warehouse of federal income statements, apparently, which includes the data needed for collecting it.
News stories about this tax disappeared after Mayor Jim Kenney won his second term. We should push for this tax to be enforced! I heard a rumor that there's now another person hired in the Revenue Department to oversee this tax's collection, which is good, but more staff, more attention, and more data would be great. But I have some questions.
What about a wealth tax?
One question I have is about wealth. Tax the Rich Philly is a group in the city fighting for progressive approaches to revenue. One thing they're proposing is a new wealth tax, following progressive city councilwomen Gym and Brooks, who put forward Bill 200371 last year to introduce such a tax.
Legally speaking, does unearned income count as wealth? Is the school income tax an already-existing wealth tax? It might seem like it since the policy document cited above includes intangible personal property.
But Tax the Rich says no, pointing to the difference between taxing unearned income from intangible assets and taxing the book value of those assets. The difference here is sort of arcane but very important, since the local ruling class could use SIT to argue against a new tax on their wealth. Let's take a look.
Small Business says that book value is an asset's worth after accounting for its depreciation, or how it loses value over time. Talking about depreciation is specifically for tax purposes. The value of stuff changes over time and this change isn't necessarily obvious from its reported value. Businesses don't want to pay taxes on what they don't really have, so they calculate the depreciation and subtract it from the value of the asset. Then they report this value--that they actually have "on the books"--and get a tax benefit. Thus book value.
A business calculates depreciation so it doesn't have to pay tax on depreciated value. Does this distinction hold for individuals' intangible assets? Small Business has an interesting take:
You could certainly calculate the book value of a personal asset, like a car. However, this calculation would be somewhat pointless since only business assets offer tax benefits for depreciation. You can't use the depreciation of your personal car to reduce your annual taxable income—the government doesn't consider the two things related. Therefore, the calculation still works, but the resulting figure is meaningless.
The government generally doesn't consider the depreciation of personal assets when thinking about annual taxable income. But what if the city government were to come along one day and say, "Hey ruling class! We have a new tax on the book value of your intangible assets! Check it out!" Suddenly, people with intangible assets would have to calculate the book value of those assets and pay a tax on whatever's there after depreciation. That tax would be different than the tax they pay on the income they make from the assets. So Tax the Rich's argument holds up.
Base/superstructure of uncollected taxes
Going back to the libertarian joke, this situation is a good opportunity to get back to first principles. It's a reminder about the role of state power in enforcing the state apparatus, particularly in school finance law. A socialist sees this whole thing in a distinct way. A marxist theorist of education I've studied carefully, Louis Althusser, says that school law is where the superstructure is inscribed into the mode of production for the purposes of reproducing the relations of production. Translation: laws covering education use repressive force to scoop money out of capitalism to help keep capitalism going. Schools are part of that.
If there's a tax on the books but no one is collecting it, you have an apparatus that the ruling class isn't using to fund schools and keep capitalism going. This wrinkle is kind of interesting because you'd think that the ruling class in capitalism would have an interest in funding education since it reproduces their favored systems. But education--and everything in society--is always more complicated than a big theory.
We know that schools have been sites of power for working class groups like teacher unions and long-entrenched communities in urban neighborhoods. We also know that urban governance in the neoliberal period looked to break up these networks to make way for developers in the wake of deindustrialization and stagflation-caused death of Keynesian spending policies. Part of making way for development meant weakening unions, dislocating communities, and closing/changing schools. It also meant making cities friendly places for people with money.
Given that mindset, a tax on unearned income wouldn't necessarily be on the ruling class's policy radar. They're willing to take a hit (not taxing and funding schools) for what they see as the overall good of the city. We know this was a failed gamble from the beginning. Hopefully with the rise of social-democratic, progressive, and socialist politics--predominantly in cities--organizers like Tax the Rich can reverse this trend. Pushing on the School Income Tax and a wealth tax is a great example of how to do that.