Tussey Mountain School District

The Taxpayer Relief Act ; The Index and Referendum ; Tax Study Commission; Web Links

An overview of Act 1:

The Taxpayer Relief Act

Summary: As its title suggests, the main purpose of Act 1 is to provide tax relief, specifically property tax relief, to homeowners who qualify for homestead/farmstead exclusions. Act 1 borrows much of its content from Act 72; however, there are major differences. The biggest difference is that Act 72 was optional for school districts whereas Act 1 is mandatory. Both laws utilize a portion of anticipated gaming receipts as well as receipts from increased local income taxes for property tax reduction. The difference here is that while Act 72 required participating districts to enact a 0.1% increase in the earned income tax, Act 1 allows voters to approve an increase or a shift from earned income to personal income taxes.

Both laws require districts to place proposed tax increases that exceed an index on the ballot for voter approval. Additionally, both require districts to adopt their preliminary budgets 90 days before the election that immediately precedes the start of the district's fiscal year for most districts that is the primary election. Act 1, however, does allow districts to enact resolutions against raising taxes above the index. The enactment of such a resolution, along with other provisions, will allow districts to develop their budgets on a May/June timeline, as they have done traditionally.

Both laws allow districts to place, in any odd-numbered year, a referendum on the ballot asking voters to further increase an earned income tax or shift from an earned income tax to a personal income tax in order to enact further reductions in property taxes. Act 1, however, requires districts to appoint a Tax Study Commission before any such question is placed before the voters. Act 1 provides that no referendum question that includes a PIT can be placed before the voters until the PA Department of Revenue receives final approval of regulations governing the collection of this tax.

Act 1 also contains provisions not found in Act 72, most importantly an expansion of the eligibility for participation in the Senior Citizens Property Tax and Rent Rebate Assistance program, as well as increases in the dollar amount of program rebates as well as a mandate for all school districts to approve a resolution allowing for the installment payments of property taxes, beginning in fiscal year 2007-08. Act 1 also provides for a mechanism by which school boards can reject gaming funds; however, that decision would then be put to the voters for their approval.

Q: When does Act 1 take effect?
A: The act took effect June 27, the day it was signed by Governor Rendell. Practically speaking, many of the deadlines and decisions will have to be made this school year, beginning with the decision to appoint a Tax Study Commission in September, and continuing through to June, 2007. These decisions will, for the most part, take effect in the 2007-08 school year.

Q: What is Act 1's effect on school districts that opted into Act 72?
A: Act 1 repeals Act 72. The most immediate effect is that the 0.1% increase in the Earned Income and Net Profits Tax that participating districts had to enact in order to opt into Act 72 is repealed and cannot be levied or collected. All districts that participated in Act 72 are now bound by the provisions of Act 1, including all the timelines and requirements contained in that Act.

The Index and Referendum

Like its predecessor, Act 72, Act 1 requires school districts to place any proposed tax increase that exceeds an inflationary index on the primary election ballot for approval by voters. This index is defined in Section 302 of Act 1 as the average of the percentage increase in the statewide average weekly wage and the Employment Cost Index.

A school district's index serves as a ceiling for how much taxes can increase before the district must place an increase in taxes on the primary election ballot. To determine the ceiling, the index is applied to the rate of taxation, not to the revenues generated by the tax. For example, a school district that was subject to the base 2006-07 index of 3.9% with a millage rate of 100 mils on property could increase that tax to103.9 mils without having to place the increase on the ballot for approval by voters. The index applies separately to every tax that the school district levies, although in most districts the only tax affected will be the property tax.

Like Act 72, Act 1 contains ten exceptions to the index. Commonly referred to as back-end referendum exceptions, these exceptions, if granted, allow districts to increase a tax by a rate exceeding the index. The exceptions themselves are for costs that are difficult for school boards to control, such as those for special education, for court or administrative orders, for increasing enrollments and other costs.

The index is of obvious importance to school districts in developing their preliminary budgets. Districts that cannot balance their budget, even after including revenue to be obtained by increasing taxes to the maximum extent allowed by the index, are eligible to seek one or more back-end referendum exceptions and must then determine the exceptions for which it qualifies. If the additional dollars received through the exceptions are still not adequate to balance the budget, districts must either decide to go to the voters for approval of a tax increase or make further cuts to its budget to fit the revenues available from the maximum index tax hike and the exceptions granted.

Q: Must a district increase taxes by the index each year?
A: No, the index is meant to serve as the maximum percentage by which a district can raise its taxes without seeking voter approval. Districts must propose the maximum tax increased allowed by the index in order to qualify for a back-end referendum exception.

Q: Could districts potentially have two separate questions on the 2007 primary election ballot?
A: Yes. All districts except Philadelphia, Pittsburgh and Scranton must have a front-end question, which asks voters how they want to shift taxes within the local school district to generate revenues to fund property tax relief. Some districts will also have a back-end referendum question, asking voters to approve an increase in taxes over the index. The two are separate questions and each have their own requirements .

Tax Study Commission
Act 1 requires all school districts to place a question on next spring's primary election ballot asking voters if they want to increase or implement a school district Earned Income and Net Profits Tax (EIT), implement an EIT or a Personal Income Tax (PIT) or shift the current EIT to a PIT, all for the purpose of generating revenues that can be used to replace a portion of the district's property tax revenues. This shift in taxes would then allow school districts to reduce property tax rates for those who own eligible homestead or farmstead property.

This referendum question, known as the front-end referendum, must contain a rate or an increase in the rate of taxation that is sufficient to generate enough revenues to allow the school district to provide property tax relief that is equal to at least 50% of the maximum permissible homestead/farmstead exclusion. (The maximum permissible homestead/farmstead exclusion in any school district is equal to 50% of the median assessed value of eligible homestead/farmstead property in the district.) However, a district is not required to propose an EIT rate greater than 1%.

Act 1 requires all school boards to appoint a Local Tax Study Commission (LTSC) by Sept. 14, 2006, to make a nonbinding recommendation to school boards about this front-end referendum question.

Makeup of LTSC
Act 1 authorizes boards to appoint an LTSC of five, seven or nine members who are resident individuals or taxpayers of the school district. The appointees must reflect the socioeconomic, age and occupational diversity of the district to the extent possible. One member of the LTSC may be a member of the school board; however, no school district officials, employees or their relatives can be appointed.

Duties of LTSC
The LTSC must study the existing taxes levied, assessed, and collected by the school district and the effect of any county or municipal taxes imposed concurrently with the school district. The LTSC must determine how the tax policies of the school district could be improved by the levy, assessment, and collection of any tax authorized by Act 1 (earned or personal income taxes). The study must include all of the following:

* Historic and present rates of and revenue from taxes currently levied, assessed, and collected.
* The percentage of total revenues provided by taxes currently levied, assessed, and collected.
* The age, income, employment, and property use characteristics of the existing tax base.
* Projected revenues of taxes currently levied, assessed, and collected, including taxes authorized and taxes not levied under Act 1.

Within 90 days of its appointment (deadline Dec. 13, 2006), the LTSC must make a nonbinding recommendation to the school board regarding the imposition and the rate of an EIT or PIT to be placed on the question at the May 2007 election. If the question is approved, the tax and the rate appearing on the question are levied beginning in the 2007-08 fiscal year. Prior to making this recommendation, the LTSC must hold at least one public hearing. The commission's recommendation must be presented at a public meeting of the school board, and the board must make the commission's recommendation available to interested persons upon request. If the LTSC fails to make a recommendation within 90 days of its appointment, the school board must discharge it. The school board must accept or reject the recommendation of the LTSC before it adopts a resolution notifying the public of its intent to place a front-end referendum question on the ballot. The deadline for the board to adopt this resolution is March 13, 2007, although the practical deadline will be earlier because of advertising requirements.

At their meeting on September 13, the board of school directors will appoint a study commission that is representative and comprised of individuals with a genuine interest in providing this important service. Because of the law's requirement for diversity, there will be a screening process to ensure the commission's composition reflects ?the socioeconomic, age, and occupational diversity of the school district."

Q: Are school districts that participated in Act 72 required to set up local tax study commissions?
A: Yes. Because Act 1 repeals Act 72, all districts are now operating under the provisions of the new act, including appointing a Local Tax Study Commission.

Q: Is there any appeal available if the board does not accept the commission's recommendation?
A: No. Act 1 contains no such appeal provision.

Learn more:
PA Department of Education

PA School Boards Association

PA Association of School Business Officials

State Tax Equalization Board (STEB) - Go to Market Value on the left menu; fill in your county name in the drop down box; select 2005 for the year; click "County's Assessed Values"; hit "Go".