Survey Results: Act 1 Ballot Question

PSBA recently completed a survey of school districts regarding the status of ballot questions that are required under Act 1 of 2006. There were 479 total responses (19 districts did not respond to the survey). This represents a response rate of 96.2 percent. There are three school districts that are not subject to the provisions of Act 1 of 2006 – Philadelphia , Pittsburgh and Scranton . This leaves a total of 498 districts that are subject to ballot questions related to the provisions of Act 1.

Districts had the option of providing for either an earned income tax or a personal income tax for the purposes of implementing property tax reduction. Table 1 shows the distribution of districts by type of tax proposed. The majority of districts opted for the earned income tax. However, 55 districts (11.5 percent of those responding) selected the personal income tax.

Table 1

Table 1 also shows the actual ballot question in relation to the recommendation made by the tax study commission. Among the districts with an EIT question, 391 or 92.2 percent followed the recommendation of the tax study commission. A similar rate (94.6 percent) occurred for districts where the TSC recommended a personal income tax. The tax rate included in the ballot question was the same as the TSC recommendation for 386 (or 91.04%) of the districts using an EIT and 52 (94.55%) that are using a PIT. Several districts did not respond to either or both questions about the ballot question in relation to the TSC recommendation.

EIT ballot questions
An examination of the responses to questions about rate and property tax reduction provides an interesting mix of results. In part, the wide range of tax rates and property tax reduction amounts are reflective of the unique aspects of school district tax bases. Table 2 shows the tax rates for the district only that are included on the ballot questions.

Table 2

Table 2 includes the response to the amount of property tax reduction included in the ballot question. The statewide average tax bill reduction is $341 but the range of reductions is between $35 and $1,168.

The reduction in property tax is offset by an increase in the earned income tax. Table 3 presents an analysis of the break-even point for the districts. The break-even point is the dollar amount where the increase in earned income would offset the property tax bill reduction. In looking at the data in this table, it is important to understand that the amounts are based on total income earned by all residents of the property.

Table 3

Similar to the range of property tax reductions, the range of break-even points shows the disparity of tax bases across the state. The average income where the reduction is equal to the tax increase is $48,593. In one district the break-even is a low of $12,000, and another district records the high of $164,833.

The range of earned income tax rates for the districts is shown in Table 4. As of 2004-05, there were 38 of the 501 school districts that did not levy the earned income tax authorized by Act 511 of 1965. Among the 38 districts that did not levy an earned income tax, 20 of those districts indicated they were proposing to levy an earned income tax to provide for property tax reduction. The majority of the districts proposing an earned income tax levied a tax of 0.5% for the district. An additional 79 districts proposing an increase in the EIT currently levy more than 0.5% as the result of tax levies that repealed the occupation assessment tax under authority of Act 24 of 2001, or levied a higher earned income tax as the result of Act 50 of 1998.

Table 4

The increased earned income tax rate estimated to produce at least a 25 percent reduction of the median assessed value of property is presented in the proposed increase column. The range of increase is between 0.1% and 1.9%. This further displays the disparity of local school district tax bases. The total proposed tax rate, including the current levy and the shift from property tax to income tax, produces a range of earned income taxes between 0.55% and 3.4%. Currently, there are 13 different tax rates across the state. The proposed ballot questions, if all are approved, will provide for more than 15 different tax rates across the state, not including personal income tax rates.

PIT ballot questions
Table 5 presents the tax rates for districts that placed a personal income tax on the ballot. This is the first time that a Pennsylvania school district could use a PIT and the current rate is the conversion of the district's EIT to the appropriate PIT rate. Table 5 also presents the proposed rate for property tax reduction, along with the estimated amount of property tax reduction. The statewide average tax bill reduction is $409.51 for districts levying the PIT. The range of property tax reduction is between $102 and $1,180.

Table 5

The reduction in property tax is offset by an increase in the personal income tax. Table 6 presents an analysis of the break-even point for the districts levying the PIT. The break-even point is the dollar amount where the increase in earned income would offset the property tax bill reduction. In looking at the data in this table, it is important to understand that the amounts are based on total personal income earned by all residents of the property.

Table 6

Similar to the range of property tax reductions, the range of break-even points shows the disparity of tax bases among districts that propose levying a personal income tax. The average income where the reduction is equal to the tax increase is $51,119. In one district the break-even is a low of $12,200 in another district a high of $114,600.

Table 7 shows the distribution of districts proposing a personal income tax rather than an earned income tax. The column in Table 7 labeled Current Rate is the calculated conversion of the current earned income tax to a personal income tax. There are 11 districts that are among the 38 districts statewide, that do not currently levy an earned income tax. There are 41 districts that currently levy an EIT proposing a PIT. As shown in Table 7, the range of tax increases being proposed to provide property tax reduction is between 0.35% and 2.45%. The resulting total personal income tax rate including conversion of the current EIT is between 0.5% and over 2.95%. There are 11 different proposed PIT rates in addition to the more than 15 proposed EIT rates.

Table 7

Summary
Based on the survey responses, the school boards consistently relied on the recommendations made by the district Tax Study Commissions. While some boards did change either the tax or the rate, more than 90% of the boards accepted the TSC recommendations. The resulting variety of rates along with the broad ranges of the amount of the tax reduction, coupled with the wide range of break-even incomes, shows the disparity of school district tax bases. Even with the option of using a PIT rather than the EIT, the disparity is still large. There are 285 different property tax reduction amounts to be provided under the existing proposals based on the 424 responses.

No estimate is made of the likelihood of passage of the proposed ballot questions. However, if all of the ballot questions pass, the complexity of local tax collection will increase significantly with more than 15 local earned income tax rates and an additional 11 or more personal income tax rates.

For more information, contact David W. Davare PhD, (717) 506-2450, ext. 3372, or dave.davare@psba.org.