David Sosar
King’s College
Frank D’Angelo
Bloomsburg University
In the past ten years, the Commonwealth of Pennsylvania has attempted three property tax reforms. The first two acts never approached the type and amount of tax reform Pennsylvania governors and state legislators hoped they would provide. The first act, proposed in the Ridge Administration, named The Pennsylvania Homestead and Farmstead Exclusion Act, attempted in 1998 to reduce municipal and school district property taxes and allowed these same entities to increase local earned income tax (EIT) rates. The proposal was to more fairly raise the needed revenues for local government budgets from those working who could afford such taxes. The program ended in failure with six municipalities and school districts across the entire state opting to utilize the program (Pennsylvania School Board Association [PSBA], 2007).
The second attempt at property tax reform in Pennsylvania occurred under the Rendell Administration in 2003. Act 72: The Homeowners Tax Relief Act, tied property tax relief to many of the same requirements in the Homestead and Farmstead Exclusion Act, but included additional money relief in the form of state funds obtained from the proposed increase in gaming revenue and casinos to be introduced into Pennsylvania in a year or two. With a little more than one hundred school districts out of five hundred and one opting to become involved in the program, the governor and state legislator quickly moved to find still a third remedy to local tax reform for Pennsylvania residents (Franklin & Marshall, 2007).
The third of the proposed property tax relief and reform legislation is the latest in line of recommendations offered by the Pennsylvania state government. Special Session Act 1, spearheaded by Governor Ed Rendell and passed by the state legislator, revised Act 72 and required participation of all school districts in the state to participate in the program. Many versions of this legislation have been proposed that this paper will help to explain, but in essence, the state made mandatory what it could not get school districts to accept previously under their own will.
The purpose of this paper is to briefly review the first two-failed Pennsylvania tax reform
laws and compare the latest law to these. The hypothesis presented is that while the present law, Act 1, may provide some possible tax relief to Pennsylvania in the short run, as an effective policy proposal it will not provide the tax reform the state has promised and provide effective relief to taxpayers in the long run.
To accomplish such a task, this paper will offer a brief overview of the two failed tax reform laws, an overview of the existing law, Special Session Act 1, and a review of deficiencies in the law that suggests its ultimate failure in providing adequate tax relief.
In 1998, the Commonwealth of Pennsylvania passed what was considered at the time a significant change in the taxing structure in the state, affecting local property taxes and their supposed reduction. Act 50, or the Pennsylvania Homestead and Farmstead Exclusions Act, was the title of the state law passed by Pennsylvania passed at that time. The Act stated,
Under Act 50 of 1998, a taxing jurisdiction (school district, county, or municipality) can implement homestead and farmstead exclusions without any change to the existing local tax structure, as long as the jurisdiction can pay for them without increasing real property taxes. The law also provides a mechanism for school districts to change their local tax structure by relying more upon an earned income tax, and in exchange reducing the real property tax and eliminating several nuisance taxes (the per capita, occupation, and occupational privilege taxes). School districts making this change are required to use the homestead and farmstead exclusions to make these real property tax reductions (Suley, 2000).
The intent of Act 50: Pennsylvania Homestead and Farmstead Exclusion Act was to assist local governments deal with greater flexibility in taxing means, remedy some of the problems concerning real property taxes, and to offer local tax payers a voice in the means of paying for local services (Pennsylvania State University [PSU], 2007).
Act 50 permits school districts to levy a new earned income and net profits tax at the rate of 1.0 percent, 1.25 percent, or 1.50 percent. This tax would replace most non-property taxes, including the earned income/net profit tax (from Act 511, the Local Tax Enabling Act of 1965, as amended) that is levied at the rate of 0.5 percent in most school districts. In theory, by levying this tax at a rate higher than previously allowed, additional revenue would be available - even after replacing the tax dollars lost by eliminating various non-property taxes - so that less reliance on property tax dollars would be needed. The net effect would be a decrease in the property tax. Act 50 requires that the reduction in the property tax be achieved first by excluding a portion of the assessed value of residential homestead and farmstead properties and, then, if sufficient funds remain available, by reducing the millage rate on all properties (Pennsylvania School Board Association [PSBA}, 2004).
In general the purpose of the act was to help create the property tax reform that many Pennsylvanians across the state believed was necessary in recent years. Property taxes have been, over time, considered one of the most regressive taxes utilized by local governments across the state to raise revenue funds for the respective governments. Throughout Pennsylvania, local community governments including most counties, municipalities, and school districts have relied heavily on their use to raise local revenues. Exceptions to these governments have been cities such as Philadelphia, home rule charter municipalities and counties as well as all school districts except for Philadelphia, Pittsburgh, and Scranton which utilize differing revenue taxes (The Taxpayer Relief Act Special Session Act 1 of 2006, 2006). In these localities, wage tax reductions were to be restructured instead.
Most school districts rejected Act 50 because of the back end referendum that was required if a school district wanted to increase spending in an annual budget more than the state inflation index known as the Employment Cost Index (ECI). Criticism concerning the number of varying tax collecting agencies and the numerous differences in tax rates confused the issues and made it less than acceptable to local districts (PSBA, 2004).
With so few school districts and municipalities approving of Act 50, the state of Pennsylvania under the Rendell administration in 2003 attempted a move toward property tax reform once again through the passage of Act 72, the Homeowners Tax Relief Act to address balancing the burden of financing schools.
Act 72 differs from the previous version of statewide property tax relief, including Act 50 of 1998, in a number of important ways. Most importantly, it uses state revenues, in the form of proceeds from a 34% tax on profits from expanded gaming, as well as local revenues, in the form of a mandatory 0.1% earned income tax, to reduce school property taxes.
The act also allows school districts to increase their 0.1% earned income tax and use the revenues from a tax increase to further reduce property taxes. A school district’s voters through what is called a “front-end” referendum must first approve any increases in this tax. These questions will be proposed to voters at the fall election, almost always at a municipal election, in other words, in an odd-numbered year (PSBA, 2004).
Pennsylvania Act 72 however, did not achieve the anticipated property tax relief projected by Governor Rendell nor the state legislature. Many criticized the obligatory backend referendum to increase school district budgets more than the Employer Cost Index would allow in any given year or the confusion entailed by the collecting of earned income taxes (EIT) by local tax collectors of various municipalities within a single school district. Additional criticism arose concerning the means of additional tax relief to local participating districts coming from a projected one billion dollar pool of money established through gaming profits within the state. Various groups such as the Pennsylvania Taxpayers Association projected that the casinos within the state would not generate enough money to provide for the promised tax relief (Pennsylvania Taxpayers Cyber Coalition [PTCC], 2007). By the time the deadline for accepting Act 72 as a local tax reform measure, only one hundred and eleven school districts opted in to the program. The remaining 390 school districts rejected the law (PSBA, 2005).
With two attempts having failed, Governor Rendell and the state legislature refined Act 72 in 2006 and once again introduced it as Act 1: The Taxpayer Relief Act. Under this revised act, Pennsylvania made the legislation mandatory to Pennsylvania School Districts and included four main components for them to enact (a) a tax shift from real property tax to either an increase in local earned income tax (EIT) or personal income tax (PIT), (b) gaming revenue utilized by the state to subsidize tax relief, (c) an expansion of the property tax/rent rebate program to assist low income and senior citizens within the state, and (d) a backend referendum to limit school district budgetary increases within the state ECI. (If a district exceeds this index, the increase must be approved by referendum put before the voters of the district (PTCC, 2007). The governor and state legislature believed that this legislation would provide the important tax reform and relief they had long promised. In fact sheets provided by the Pennsylvania General Assembly several factors are pointed out as important positive steps in developing fair and equitable tax relief while maintaining adequate revenue for local districts to fund their yearly budgets (a) SS Act 1 guarantees that homeowners in every school district can benefit from state-funded property tax relief (Exception: In Philadelphia, the funding will be used to reduce the wage tax); (b) it protects taxpayers in every school district from extraordinary tax increases in the future by implementing voter controls through a fair referendum requirement that gives voters control over the most severe tax increases while protecting school districts’ ability to raise the funds they need; (c) it provides extra property tax relief to senior citizens – who are the hardest hit by rising property taxes – through a major expansion of the state Property Tax and Rent Rebate Program; (d) Act 1 gives local communities new options to choose the right mix of local taxes to fund their schools; and (e) it requires all school districts, except for Philadelphia and Pittsburgh, to adopt a resolution by June 30, 2007, authorizing the collection and payment of school district property taxes in installments for homeowners (PTCC, 2007).
Many have reviewed the legislation with mixed emotions and quite often with less than positive remarks. While there is a degree of tax relief provided to senior citizens and low-income citizens within the act, critics respond with the need for the state to work on true tax reform and see Act 1 as simply a band-aid fix for the problem (PTCC, 2007). According to the Pennsylvania General Assembly, Act 1 Issues investigated within the act that have created the controversy include several that need to be examined within this paper: district tax study commissions, the use of EIT or PIT by local school districts, gaming money used as tax relief, and the use of back end referendum if large budgetary increases are needed. Pennsylvania Act 1 mandated for each of the five hundred and one school districts to empanel a local tax study commission to investigate how the district should best adjust its earned income tax rate and/or change to a personal income tax rate. Each commission was to investigate the feasibility of various sources of revenue and determine the most suitable means to provide needed revenue for the district while providing for tax relief at the same time. Local residents within each school district during this May’s primary in Pennsylvania will vote ballot questions on the findings of these study commissions on. Critics of the Act 1 legislation have urged voters across the state to vote no on the various referendum questions pertaining to the tax study commissions in their school districts (Phyrillas, 2007). With lay individuals not schooled in all aspects of tax policies investigating sophisticated taxing structures that may shift the tax burden within a school district to different groups, the strong possibility of problems arise with unforeseen consequences and tax burdens being placed on unsuspecting individuals. Problems with the differences between earned income tax and personal tax provide one issue that could confuse many a commissioner.
Tax study commissions would be expected to investigate accepting an increase in the rate of earned income tax or the use of a less used personal income tax in order to achieve local tax reform. Earned income tax would increase the tax payment by those individuals who live within the school district boundaries. In previous times, the EIT was shared evenly between the local school district and the municipal government within the living area. Increases within the EIT under this plan would not be shared, but directed toward the needs of the respective school district alone. Earned income tax rated would affect those working at the present time, but allow for rebates and exclusions to senior citizens and low-income workers within the district. The Personal Income Tax possesses a slightly different focus that may often lead to study commissions refusing to utilize it. Personal Income Tax not only taxes income, it also taxes wealth. It therefore could have a negative effect on senior citizens who have spent years attempting to develop a savings to be applied to their older years but now subject to taxation. The chart below provides of the EIT compared to the PIT in a simple form. The EIT is a tax on compensation and net profits, including (a) salaries; (b) wages; (c) commissions, bonuses, stock options and incentive payments; (d) tips; and (e) net profits from the operation of a business, profession or farm. The PIT taxes compensation, net profits and other kinds of income (a) compensation and net profits (everything that is taxed in EIT); (b) interest; (c) dividends; (d) net gains or income from royalties, patents and copyrights; (e) income derived through estates for trusts; and (f) gambling and lottery winnings (PGA, 2006). As one can see from the differences provided, senior citizens might have much more to fear and pay in taxes if the PIT were to be chosen by a tax study commission.
Many critics believe that the amount of money new gaming laws in Pennsylvania may not be enough to provide for adequate tax relief. Taxpayer groups have joined together to protest the sums of money that must be outlaid before any gaming funds would be available for tax relief. No money can be distributed for property tax relief until at least $400 Million is banked for property tax relief. But even before accumulating the first $400 Million, the following items need to be funded (a) $200 Million is being borrowed from the lottery fund and must be repaid when gaming revenue begins to flow, and (b) after paying back the Lottery, the next $100 million goes to further payments to residents of Philadelphia, Scranton, and Pittsburgh. So now we are $300 million in the hole – but it’s not over. After the $300 million, the following must be funded FIRST (a) the horse racing industry gets a cut for jockey pensions, increased purses and more; (b) host communities will receive funds to help pay for increased cost associated with having slots parlors in the community; (c) volunteer fire companies will receive increased funding due to slots parlors in the community; (d) funding will be set aside for a compulsive gambling treatment fund; (e) the departments of Revenue, Community and Economic Development, the new Gaming Board, and other administrative bodies will be provided additional funding for increased administration costs; (f) property tax per acre on state game land and parks was tripled – Recent legislation agreed to use gaming funds to pay for the increase to avoid increasing hunting and fishing fees (recently passed law); (g) after all of this, the Property Tax Rent Rebate program for seniors needs to be funded (between $150 Million and $200 Million); and then if anything is left, it accumulates for property tax relief for the rest of Pennsylvania’s taxpayers (PTCC, 2007). Still other critics of Act 1 suggest that the tax relief being provided by Pennsylvania will be provided on the backs of the poorer and middle class gamblers. Tax breaks would only be based on the amount of money these groups were willing to lose.
Still yet another criticism of the act is the use of a “back-end referendum” allowing school district residents to vote on any budgetary referendum proposed by a school board that would exceed the ECI or more commonly known as the Employment Cost Index that usually varies within the different school districts from 3.9% to 6.5% (PTCC, 2007). Because of the growing demands on education today and the increased demand of local school districts to pay the greatest majority of school costs on their own, such referendum votes for some may be needed quite often. With the need to improve schools, build new ones, purchase new materials, and provide so many more services for students today than ever before, the possibility of making such requests of the school district voters are quite real. Rejections of such referendum as voters become angrier about school taxes rising could become real possibilities regardless of the need for such increased funds.
Many criticize the state of Pennsylvania for not doing more themselves. At a time of local taxpayer revolts and yet rising costs of education, Pennsylvania at present time is on funding school districts budgets to the measure of approximately 39%. Since the Thornburg administration of the 1970s, Pennsylvania has witness a declining rate of state funding concerning school costs. Yet, mandates, school programs, and the No Child Left Behind legislation puts tremendous pressure on school districts to succeed with students as not see recently.
With the pitfall and complications that Act 1 faces, it may very well fail to provide the promised tax reform and relief Pennsylvanians desire. If Pennsylvania, like so many other states, wish to emphasize education and promote it as its leaders claim, true tax reform and involvement by the state government will be necessary. More direct funding for programs must be considered by the governor and state legislature whose power of revenue rising far exceeds that of local municipalities and school districts. It has often been suggested further that if the state truly wished to offer school districts and local municipalities workable tax reform, they would pass legislation “home rule” powers to establish and set the type of taxing measures with that entity felt would suit its local citizens best.
True tax reform or tax relief may take more study and effort than simply assuming gambling profits will solve the problems of Pennsylvania local government at this time.
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View full sizeGov. Tom Corbett, left, delivers his budget address for the fiscal year 2011-2012 to a joint session of the Pennsylvania House and Senate in Harrisburg, Pa., Tuesday, March 8, 2011. Seated center is Speaker of the Pennsylvania House of Representatives, Rep. Sam Smith, R-Jefferson, and Pennsylvania Lt. Gov. Jim Cawley.
