2009-2010 Timeline for Act i for budget process
The Pennsylvania Legislature signed Act 1 into law on June 27, 2006. The Act was developed as a follow-up to Act 72, which gave districts the option of participating. Act 1 has no such option. All school districts across Pennsylvania must comply with the regulations contained within this piece of legislation. Since the law passed, school districts across the state have changed procedures and made appropriate additions to comply with the law.
Q: What is Act 1?
A: The Taxpayer Relief Act, Act 1 of 2006, was approved by Pennsylvania lawmakers in June 27, 2006. The act brings about property tax relief by a combination of shifting the reliance upon property taxes to a combined property tax and income based tax system and potential gaming revenue. Act 1 also requires a voter referendum if school districts propose raising millage beyond a set index each year.
Q: What kind of property tax relief is available under Act 1?
A: There are four levels of property tax relief available:
- A portion of the state gaming revenue will be given to residents who qualify for property tax/rent rebate refunds.
- If the state certifies that it has sufficient gaming revenue available, it will make payments to school districts to offset lower local revenue from reduced property taxes.
- A reduction in local school property taxes will be offered in the form of reduced real estate tax assessments on school district property taxes. In the Allegheny Valley School District, this reduction would be possible by instituting a local Personal Income Tax (PIT), if approved by the voters in the spring 2007 primary election. This reduction is not automatic. To qualify, a property owner must have completed and filed with the Allegheny County Office of Property Assessment, a homestead/farmstead exclusion application. The deadline to submit the application was March 1, 2007.
- The Property Tax/Rent Rebate program benefits eligible Pennsylvanians age 65 and older; widows and widowers age 50 and older; and people with disabilities age 18 and older. The new law, Act 1 of 2006, increases the income limit from $15,000 to $35,000 for homeowners and boosts the maximum rebate for both homeowners and renters from $500 to $650 beginning next year.
Q: What is the Tax Study Commission?
A: A special committee, as required by Act 1, was established in September 2006 by the Allegheny Valley Board of School Directors to determine what tax question to place on the ballot, an increase in the EIT or establishing a new Personal Income Tax (PIT). The five-member Allegheny Valley School District Tax Study Commission, comprised of district residents, presented the School Board with its report in December 2006. As stated in the law, the commission studied the school district’s tax structure and presented its report at a public School Board meeting concerning the referendum question to be placed on the May 15, 2007, primary election ballot. The binding referendum question seeks voter input on how the school district’s tax structure could be changed and includes the proposed income tax rate, in compliance with Act 1 of 2006.
Q: What did the tax study commission conclude?
A: The Allegheny Valley School District Tax Study Commission concluded that: “The Commission ...believes that it is our duty to recommend what is in the best interest for this community. Therefore, the Tax Study Commission respectfully submits its recommendation not to increase either the earned income or personal income tax because shifting to this tax would negatively affect the vast majority of our residents.”
Q: What question that will appear on the ballot in the May 2007 election?
A: “Do you favor Allegheny Valley School District converting the school district’s current earned income tax to a personal income tax at 2.95%? The revenue generated from the personal income tax will be used to reduce school district taxes on qualified residential properties by an estimated $825and to replace the revenue from the school district’s current earned income tax. The current school district earned income tax rate is .5%.” (NOTE: The estimated amount for the first year will be $580; the estimated amount for the second year will be $825.)
Q: What if the majority of the voters vote “yes”?
A: If the majority vote is “yes,” effective July 1, 2007, the residents of the Allegheny Valley School District will pay an 2.95 percent in personal income taxes, the .5% EIT that residents currently pay to the school district will be eliminated. (However, taxpayers will still need to pay the EIT to their municipality.) Additionally, school district property taxes will be reduced by approximately $580 for the 2007-2008 school year for those who applied for and were granted a homestead/farmstead exclusion.
Q: What if the majority of voters vote “no”?
A: If the majority vote is “no,” the residents of the Allegheny Valley School District would continue to pay their current school district property taxes and the EIT rate payable to the school district would remain at 0.5 percent.
Q: Will I realize a tax savings as a result of Act 1?
A: Some residents will realize an overall combined tax savings and some residents will actually pay more taxes to the school district. The chart below illustrates how households with various income levels will be affected by the PIT and the reduction/increase in total school taxes in the first two years of implementation, if voters approve the ballot question.
Q: What about referendum?
A: Also included in Act 1 is the provision that restricts school districts from raising millage beyond a set index each year. Potentially, when funding is needed beyond the index for the operation of the schools, new programs, or building construction, the school district will be required to place the issue on the ballot so that voters can approve or reject such a tax increase.
Q: What’s the difference between the front-end and back-end referendums?
A: The “front-end” referendum asks voters if they want to increase the district’s earned income tax, or move to a personal income tax, and use the additional revenues to further reduce its property tax. This “tax shifting” element has been a part of every major tax reform proposal in recent years, including Act 50 and Act 72. The back-end referendum provisions apply to all school districts that make themselves eligible to receive state property tax allocations. Very simply, it requires voter approval for any proposed school tax rate increases that exceed an inflationary index. This index is simply an average of two percentages. These percentages measure the increase in the Statewide Average Weekly Wage and the Employment Cost Index (ECI) for elementary and secondary schools. The ECI simply measures the increases in costs of maintaining school employees nationwide. It is likely that index the will fall in the 2.5% to 4% range.
Q: Did the public have the opportunity to comment on the impact of Act 1 on the Allegheny Valley School District?
A: Both the Tax Study Commission and the Allegheny Valley School Board held public hearings related to Act 1 and the Commission’s recommendation. One was held in November 2006 and one in February 2007.
Q: Why is it important for residents to be informed about Act 1?
A: When residents go to the polls on May 15, they must decide what is best for property values in Allegheny Valley.
Q: What if I have questions about Act 1?
A: Any questions concerning Act 1 can be directed to John Zenone, District Business Manager, at 724/274-5300. Additional information on the legislation can be found on the following web sites:
Pennsylvania Association of School Business Officials
Pennsylvania School Boards Association
Pennsylvania Department of Education
PA PowerPort (PA State site)
Allegheny Valley School District
Q: If taxes are shifted by means of EIT or PIT, could property taxes still be raised in future years subject to the index?
A: Yes, property taxes could rise equal to the percentage increase of the index and any exceptions that are approved.
Q: How long is the choice afforded by the front-end referendum in effect?
A: The voter decision made at the May 15, 2007 Primary Election will remain in effect for a minimum of two years. At that time, the district can place another referendum question on the ballot in the fall election of any odd-numbered year seeking a revision to or a conversion from the current tax.
Q: If a referendum question is rejected in the May 2007 primary, when is the next time a referendum question may be asked to increase the current EIT or to convert to a PIT?
A: A district may place a referendum question on the ballot in the fall election of any odd-numbered year.
Q: When will I see relief?
A: Revenue to offset your local property taxes comes from two sources. The first is gaming monies. By April 20 of each year, the Commonwealth’s Budget Secretary must determine if school districts will rceive property tax reduction allocations from gaming to offset their property taxes. Under the law, no gaming monies may be distributed until threshold levels are met in the Property Tax Relief Reserve Fund and the Property Tax Relief Fund. It is likely that allocations to school districts for property tax relief will not occur until 2009 or 2010 at the earliest. The amount of the allocation to school districts is based on a formula that ranks a district based on: the relative wealth of the district, the average number of students in a district, the district’s market value/income aid ratio, its equalized millage and its school tax ratio. Wealthier school districts will recognize a smaller allocation than poorer school districts.
The second revenue source for property tax relief is a locally-approved shift to an increased income tax. In May 2007, school districts across Pennsylvania are required to place on the primary ballot a question asking voters if they will approve an increase in their local income tax - either personal or earned - in order to reduce their school property taxes. If the ballot question passes, you will see an adjustment to your 2007-2008 school tax bill. Your school district will itemize the homestead and farmstead exclusion, the original amount of tax liability, and the net amount of tax due after the exclusion is applied.
Q: Explain the difference between EIT versus PIT.
A: The earned income base is made up of taxable compensation combined with net profits. Taxable compensation is income from wages, salaries, tips or any other payment received for services rendered, yet it is reduced by business expenses (thus differentiating this category from gross compensation). Net profits is income, after expenses, from a business, profession, or farm. It includes profits from unincorporated businesses but excludes subchapter S profits allocated to a shareholder (beyond the salary of the shareholder) as long as the salary reflects fair compensation for services rendered. If a larger employer in a school district were to close, this would have a significant negative impact on total earned income revenue. The current personal income base incorporates 8 classes of income that are taxable. These include: compensation, interest; dividends; net profits from operation of a business, profession or farm; net gains or income from disposition of tangible or intangible property; net gains or income from rents, royalties, patents, and copyrights; net gains or income derived through estates or trusts; and gambling or lottery winnings with the exception of PA State Lottery winnings won on or after July 21, 1983. This is a larger and broader base than the earned income tax base. Large downward fluctuations in the stock market would have a negative impact on PIT revenue. Local PIT will match the State PIT. (Source: PASBO & PSBA web sites.)