Issue: Tax Reform, Act 1 of 2006
When new legislation passes, PSBA is seen as the leader in analyzing it and helping members make sense of it.
Act 1 NEWSLETTER
Vol. 1, No. 11, Nov. 13, 2006
IN THIS ISSUE: The school board's duties after the Local Tax Study Commission makes its recommendation.
SUMMARY: Act 1 contains several provisions that spell out a board's responsibilities for dealing with the tax study commission's recommendation once it has been made to the board. Most importantly, it requires boards to adopt a resolution stating the front-end question that is to appear on the spring ballot by Mar. 13, 2007. A district must advertise its intent to adopt its resolution once a week for three weeks prior to adopting it. The wording of Act 1 suggests that the content of the resolution will answer the question of whether or not the board agrees with the tax study commission' regulation, since there is no requirement to formally adopt or reject it otherwise. The only requirement is that a decision on the commission's recommendation be made before the board adopts the front-end resolution.
In addition to an explanation of Act 1's provisions on this matter, this edition of the Act 1 newsletter also contains several suggestions that are not included in the act, but will be helpful in your implementation of this portion of Act 1.
ANALYSIS : By now, most Local Tax Study Commissions are in the process of formulating their nonbinding recommendations to school boards regarding the type and rate of income tax they believe should be on the 2007 front-end referendum ballot question. Once the commission's proposal has been made and received, the spotlight turns to school boards and how they implement that recommendation or their own, should they find that they do not agree with the commission's proposal.
Before we begin the discussion about the recommendation, however, there are four "housekeeping" responsibilities with which the board must deal.
PSBA's advice to boards all along has been to adopt a resolution discharging the commission from its responsibilities once the recommendation has been made to the board. This will send a clear message to the public that the commission's work has been completed and to the commission that the board now has the duty to decide how the ballot question will read.
Second, districts also are charged with reimbursing the members of the commission for necessary and reasonable expenses in the discharge of their duties. The act requires receipts for all reimbursable expenses under this section of the law. Boards should set a deadline by which all receipts and expenses must be submitted so that they can dispense with this responsibility.
Third, the commission is required to turn over to the board all records, including receipts, tapes, minutes of meetings and written communications. The board must make these records available for public inspection during the regular business hours of the school district. The procedure the board uses should be consistent with its policy on public records, so long as the minimum requirements of the act are met.
Finally, districts are charged with the responsibility of making the commission's recommendation available to "interested persons upon request." Here again, boards should adopt procedures that are consistent with their policy on public records in determining how they want to make this happen.
Once these tasks have been attended to, the board can turn its attention to the commission's recommendation. There may be an expectation on the part of the public and the members of the tax study commission that the board act quickly to formally accept or reject the commission's recommendation. Act 1, however, does not require such a procedure; it simply requires boards to adopt a resolution no later than March 13 that authorizes the question to be placed on the ballot. The act also requires boards to accept or reject the commission's recommendation prior to adopting this resolution. This latter requirement will be satisfied automatically by the board's obligation to advertise its intent to adopt the resolution once a week for three weeks prior to its adoption.
The resolution should be worded in such a way that an observer will be able to easily gauge the board's decision on the commission's recommendation. In the alternative, boards can choose to make and publicize their decision on the commission's recommendation at a board meeting or on some other occasion before it begins advertising its intent to adopt the resolution.
The components that make up the front-end referendum ballot question, namely the type of income tax and the rate, are subjects that should be decided upon only after careful review of the available information. Hopefully, boards will have access to the same information as was made available to the commission because the legislature has deemed this information to be vital not only to the commission in the formulation of its recommendation but also, by extension, to the board in making a final decision on the appearance of ballot question.
PSBA has been advising commissions that their recommendations have to balance the needs and desires of property owners to attain meaningful property tax relief with the needs of the entire taxpaying public to keep any income tax increases or levies affordable. This is especially true for the 2007-08 school year, because the level of property tax relief depends solely on the amount of revenue generated by the income tax authorized under Act 1. In subsequent years, the revenue from the income tax and gaming funds together will determine the level of property tax relief that can be given by the school district.
There has been some concern on the part of school board members and school administrators that voters will likely not approve the front-end referendum question because they will not understand the reason for the new or increased tax or how the revenue generated will be used. Some members feel strongly that the wording of the question, which must be framed in such a way that first asks if voters favor imposing/levying an X% earned or personal income tax followed by the statement that the revenue generated from the tax will be used to reduce taxes on qualified residential properties, will cause most voters to vote in the negative. It has been suggested that the two components of the question be reversed so that the ballot question starts by asking voters if they would like to have the taxes on qualified residential property reduced, followed by a statement that to do so will require an increase or levying of an earned or personal income tax.
School boards take a risk by switching the order of the question's components. While Act 1 says that the questions "shall be framed" by asking for the increase first and then stating that the revenues generated will be used to reduce property taxes, reversing the order of the two as illustrated in the paragraph above is not necessarily prohibited. Solicitors that PSBA has contacted on this question say that a board risks a lawsuit from an aggrieved party by taking such action. Although the district would have a strong legal argument to support switching the question's component parts, the outcome of potential litigation on this issue is uncertain.
Other seemingly contradictory provisions in Act 1 add to the confusion. One such example that has been well publicized are the act's provisions that the income tax rate be set so that it generates sufficient revenues to allow each school district to reduce property taxes by at least 50% of the maximum allowed. On the other hand, the act also says that school districts "shall not be required" to propose or increase an earned income tax under Act 1 that is more than 1% or a personal income tax that is greater than the equivalent of an earned income tax of 1%. The conclusion drawn from reading these two provisions together is that if a district can raise the revenue necessary to attain the minimum only by increasing the earned income tax by 1% or more or levying a personal income tax that is more than a 1% earned income tax would generate, it can hold the line at 1% and end up generating an amount of revenue that will prevent the district from reducing property taxes by at least 50% of the maximum allowed.
Similarly, the requirement under Act 1 to round the tax rate off to the nearest tenth of a percent may cause a district to enact a rate that is less than that which would generate the revenue needed to fund the "minimum" level of property tax reduction or, at the other end of the spectrum, cause a district to enact a tax rate that generates more than what is needed to fund the maximum allowable property tax reduction. PSBA's advice is to round up when trying to reach the minimum and round down when trying to stay within the maximum, even though the "nearest" 10th of a percent is not the one chosen. In PSBA's view, this is a more reasonable approach than taking action that could potentially cause more harm to school districts in the long run.
In order to help you through this stage of implementation, PSBA will be conducting seminars in January and February that are designed to help you explain Act 1 to your constituents in a way that will help all community members understand the many nuances and changes the law requires. Keep an eye out for the date and time of the seminar nearest you.
This newsletter is an edited version of an article that will appear in the December edition of the PSBA Bulletin.