Issue: Tax Reform, Act 1 of 2006

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Act 1 NEWSLETTER
Vol. 1, No. 10, Oct. 10, 2006

IN THIS ISSUE: Now that PSBA has completed its statewide seminars on Act 1 and the web conferences on the Local Tax Study Commission, we thought it might be a good idea to share the many questions we've had from board members, superintendents and local tax study commission members about the various provisions of Act 1.

The questions are categorized into these major areas: Local Tax Study Commission/Act 1 Income Tax, Preliminary budgets and installment payments of property tax.

Questions on Local Tax Study Commission/Act 1 Income Tax

Q: Can the Local Tax Study Commission recommend no new taxes?
A: PSBA believes that is possible because the language of the Act simply requires the commission to make a non-binding recommendation to the school board "regarding the imposition of the taxes" authorized under Act 1 (an earned or personal income tax). Obviously, if the commission feels that neither tax is appropriate, it can recommend that no further taxes be levied. However, if such a recommendation is made, the board is bound to reject it. Section 331.2 of the Act explicitly requires a board of school directors to "submit at the primary election of 2007 a referendum question to the electors of the school district seeking voter approval allowing the school district to levy, assess and collect" an income tax authorized by Act 1.

Q: Can the school board provide more than one question regarding the income tax on the ballot to give voters a choice?
A: No. Section 331.2, which addresses the 2007 referendum question on the income tax, makes several references to "a referendum question" not "questions." Additionally, the act specifies that the ballot question, known as a front-end referendum question, be framed in one of the following forms, either as an increase or establishment of an earned income and net profits tax, as an establishment of a personal income tax or as a conversion of an earned income tax to a personal income tax.

A district could find itself in a position where both a front-end and a back-end referendum question appear on the ballot; however, only one front-end question is allowed.

Q: Who decides whether or not the commission should hire its own legal counsel and/or financial advisor?
A: Even though the act requires school districts to provide necessary and reasonable support staff, the commission should discuss among themselves the need for hired advisors and make their request known to the school board, but the ultimate decision is the school board's because they will have to foot the bill.

Q: Should school board members attend the meetings of the Local Tax Study Commission?
A: Yes. School board members should be aware of and have access to any information being provided to the tax study commission. The school board will make the ultimate decision on what question will be on the ballot next spring, so any information presented to the commission would arguably be helpful to the board in making that decision. Even though the board may have a representative on the commission, it may be helpful to have another set of eyes and ears at the commission meetings to help the board understand the data and the reasons why the commission made a particular recommendation.

Q: Given the act's restrictions on the board's proposing a Personal Income Tax, should the commission try to steer clear of recommending the imposition of that tax?
A: No. The act says that a school board cannot place a question on the ballot regarding the imposition of a Personal Income Tax unless the Department of Revenue has final approval of regulations regarding the collection of that tax. The school board will have to consider that restriction when making its decision on the question that appears on the ballot; however, the commission should focus on what is best, in their opinion, for the community. If the members feel that a Personal Income Tax is best, than that is the recommendation they should make. In order to ensure that the school board has a recommendation from the commission that is useable, the commission might want to consider making a second recommendation regarding the Earned Income Tax if their first recommendation is the Personal Income Tax.

Q: If the commission makes a recommendation to impose a Personal Income Tax and it cannot be accepted because final regulations regarding the collection of that tax have not been approved, can the board convert to a PIT at a later date without a referendum?
A: No. Act 1 is clear that a referendum, as well as a Local Tax Study and a resolution stating the question are all needed each time the board attempts to establish, increase or convert an income tax that is authorized by the act.

Q: What is the status of the Department of Revenue regulations?
A: A draft of the regulation is being prepared for delivery to the House and Senate Finance Committees, which must approve it. The regulation has been put on a fast track, meaning that it will not be subject to the usual regulatory review process. The fly in the ointment is the fact that the General Assembly's schedule might not include any session days after the upcoming election, which would drastically reduce the chances of the regulation being approved.

Q: Does Act 1 place a maximum limit on the income tax rate that can be proposed?
A: Yes, that rate is the rate that would provide an amount of revenue that the school district needs to provide all eligible property owners with the maximum amount of property tax relief that is available in that district.

Q: Is there a minimum amount of revenue that must be raised by the income tax?
A: On this issue, Act 1 appears to contain two contradicting provisions. The first is that the rate of the income tax must be sufficient to provide the district with enough revenue to fund the at least 50% of the maximum allowable homestead/farmstead exclusion allowed in the district. The second is that districts are not required to place an increase in the Earned Income Tax of over 1% on the ballot or a personal income tax that exceeds the equivalent of that amount. Therefore, if a district finds that it needs a 1.2% increase in the earned income tax to generate enough revenue to fund 50% of the maximum, it may levy that 1.2% increase or stop at 1% and provide property tax relief that is below 50 % of the maximum.

Q: How does a district's current earned income tax levied under the authority of Act 511 fit into this mix?
A: Districts that currently have an earned income tax levied under the authority of Act 511 or any other act may retain it at its current level. An earned income tax levied under the authority of Act 1, i.e. an earned income tax approved by the voters next spring, is separate from any other earned income tax the district currently levies. The language regarding a 1% increase cited in the answer above only takes into account the tax authorized under Act 1 and does not in any way take into account any EIT currently levied under any other act.

Q: Must the commission format its recommendation in the form of a ballot question?
A: There are no requirements in Act 1 regarding the format of the commission's recommendation. The best bet is for the commission to consult with the school board over the form the recommendation should take.

Q: What happens if the voters reject the referendum question on the income tax?
A: If the voters reject this question and no gaming funds are available there can be no property tax relief for property owners because there would be no revenue to "replace" property taxes reduced. School boards would not have to calculate a homestead/farmstead exclusion until such time that an income tax authorized by Act 1 is enacted or gaming funds become available. If the referendum fails, districts would still be eligible for gaming funds and the other provisions of Act 1 would still apply to the district.

Q: Do districts have other opportunities to get an Act 1 income tax enacted if the 2007 question fails?
A: Yes, Act 1 provides that districts can go back to voters in any odd-numbered year, beginning with 2009 to try to increase an Act 1 income tax enacted in 2007. We believe that these opportunities could also be used to try to enact an income tax if it fails in 2007. These elections would take place in the fall and the requirements for a Local Tax Study Commission, a resolution approving the ballot question and a hearing on that resolution would all be required for any front-end referendum question subsequent to 2007.

Q: Are welfare benefits, Social Security or pension income taxed under the income tax authorized under Act 1?
A: No, none of those classes of income are taxed under either the earned or personal income tax authorized by Act 1.

Q: Must all of the revenue received from the Act 1 income tax be used for property tax reduction?
A: No, subsections 321(b)(4) and 321(c)(6) allow districts to provide for an increase in revenue of not more than 2% of the estimated revenue from an earned or personal income tax levied under the authority of Act 1.

Q: In years following the first year of imposition of an Act 1 income tax, how much of the revenue from the must be spent on property tax relief?
A: In the year of imposition, all revenue, with the exception of the 2% cited above, that is directly attributable to the income tax must be used to fund property tax relief. In subsequent years, an amount equivalent to the revenue directly attributable to the imposition of the tax in the first full fiscal year in which the tax is levied and collected must be used to fund property tax relief. All remaining revenue may be used for the operations of the school district.

Q: Could a district reduce the Act 1 income tax?
A: Yes, there is nothing in Act 1 that would prevent any school district from reducing the income tax so long as the it generates at least the amount of revenue generated in the first year of implementation.

Q: What if a district collects less in revenue from the Act 1 income tax than in the first year of imposition, does the board have to find an alternative funding mechanism to make up the difference?
A: No. While the Act does not address what happens if there are fewer revenues from an Act 1 income tax than in the previous year, PSBA does not believe that the district has to make the funds up somewhere else. There are no provisions that would require such funding. In this instance, PSBA believes that the property tax reduction would be lower, simply because the amount of revenue the district has to finance the reduction is less than it had previously. In the event that the amount of revenue a district has to finance property tax relief, whether from gaming or from the Act 1 income tax, we advise districts to send out a notice with the tax bills explaining the reasons behind the reduced level of property tax relief.

Questions on preliminary budget adoption

Q: What happens if a district overestimates or underestimates its costs in the preliminary budget?
A: The more accurate the preliminary budget, the better a district will be able to determine the need for a back-end referendum, budget cuts, back-end referendum exceptions and other budget adjustments. However, the bottom line is that it is still a preliminary budget and adjustments can be made between March and June that better match actual numbers as they come in or as projections become more accurate. Several districts that have already undergone this process under Act 72 have said that they did not levy the tax increase that had been approved as a result of a back-end referendum exception, simply because the commonwealth came through with extra dollars that were used to balance the budget. Act 1 contemplates that the preliminary budget will be more the result of estimations than fact; because it says that the preliminary budget must include estimated revenues and expenditures and proposed tax rates.

Q: How does a district make its budget available for public inspection?
A: Under Act 1, districts that choose to develop their preliminary budget early have to make that document available for public inspection no less than 20 days prior to its adoption. The act also requires districts to print the document, so the assumption is that the public can access the document by reading a copy of it. The act does not prevent districts from making their preliminary budget available for public inspection in other ways.

Q: If a district chooses to make its preliminary budget available and adopt it earlier than the deadlines to do so, must it ensure a certain number of days elapse between the required notices and events?
A: Yes, regardless of the dates a district makes its preliminary budget available for public inspection or chooses to adopt it, there must be no fewer than 10 days between public inspection and notice of intent to adopt and no fewer than 10 days between notice of intent to adopt and final adoption.

Questions on Installment Payments of Property Taxes

Q: Does a school board need to adopt a resolution each year on installment payments of property taxes?
A: Probably. Act 1 requires districts to do this by 6/30/07; however, since the due dates for the various installments may change each year, it might become necessary to adopt a new resolution at the end of each fiscal year for the coming fiscal year.

Q: If a district already offers an installment plan, must it amend its program to fit the provisions of the installment plan required under Act 1?
A: No. The installment payment provisions of Act 1 should be considered a minimum. Therefore, a district must, at a minimum, give the installment payment option to owners of qualified property, have at least three installment periods and use the first installment payment as evidence that an individual wants to use the installment program.

Q: Can a district offer its taxpayers 12 monthly installments in which to pay property taxes?
A: The act specifically address installments between the time bills go out until the date established by the county for the turnover of delinquent taxes; however, as pointed out previously, the provisions in the act regarding installment payments should be considered a minimum and districts may allow 12 monthly installments, but in doing so they must declare that payments made after the date established for the turnover of delinquent taxes will not be considered delinquent.

Q: What is meant by "assigning" installment payments?
A: There are certain companies that will essentially "purchase" a district's property tax installments for a certain amount per dollar. In exchange, the company would agree to forward the district will an amount equal to the agreed-upon price per installment payment. Each agreement would spell out the contractor's responsibility for collecting the unpaid installments.

Miscellaneous questions

Q: Does a school district have to commit to the construction of a new school prior to making an application for the school construction exception to back-end referendum?
A: It depends on the definition of "commit." The school construction exception is based on the square footage of the new school and the exception cannot be granted unless six other conditions are met, one of which is PDE approval of the project. It appears, therefore, that some degree of commitment must be made.

Q: Can a school district apply for more than one back-end referendum exception?
A: Yes, a school district can apply for any back-end referendum exception for which it qualifies.

Q: If a district is granted an exception from the back-end referendum and does not use it because it is not needed, will the district need to re-apply for the same exception in the following year?
A: Yes, there are no provisions in Act 1 that allow the "banking" of funds allowed by a back-end referendum question. Another application may also be necessary since the applicable numbers may also change from year to year.

Q: Do the limitations on the use of "public funds" apply to all the referendum provisions of Act 1?
A: While the restrictions on the use of "public funds" are found in the back-end referendum section of Act 1, we believe it can be safely assumed that they apply for any of the 3 referendum provisions found in the act.