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. 12, Nov. 20, 2006

IN THIS ISSUE: Updates on the regulations regarding the collection of the local Personal Income Tax, additional advice on the board's duties once the recommendation of the Local Tax Study Commission is received.

SUMMARY: Regulations regarding the collection of a local Personal Income Tax (PIT) have been finalized. The regulation received approval from the Attorney General's Office two weeks ago and the Independent Regulatory Review Commission (IRRC) last week. Neither the House nor the Senate Finance Committees acted on the regulation, so it is deemed to have legislative approval. The regulation now must go through a final review for form and legality before it can be published in the Pennsylvania Bulletin , at which time it will be come official.

ANALYSIS: Now that this regulation is final, school boards can place questions on next spring's ballot for the Personal Income Tax. Most of the conversations PSBA is having with school board members indicates that the large majority of tax study commissions, and likely most school boards, will decide to ask voters if they want to increase or implement an Earned Income and Net Profits Tax (EIT). At the same time there are many questions and discussions taking place surrounding the PIT, so it seems likely that at least a handful of districts will be placing that option on the ballot. If approved, those districts would become the first in the commonwealth to levy this newly authorized tax.

The new regulation calls for the local PIT to be collected in the same manner as the EIT, using local tax collectors. Unfortunately, employers are only required to withhold the tax from employees who are residents of the district in which their employer is located, a situation that could lead to increased collection costs delays in receiving PIT receipts for some districts. The new regulation would also require districts to develop their own PIT returns to be used by taxpayers in determining their tax liability. These returns must ask for the taxpayers name, address and social security number, any tax credits due to the taxpayer, whether the taxpayer made any payments before or with the filing of the return, the taxpayer's income, a calculation of the school district's Personal Income Tax, calculation of the balance due, a statement that overpayments will be refunded or credited, the signature of the taxpayer and information about any person who prepared the return on the taxpayer's behalf.

Concerns over ballot question abound
Another issue that has led to many phone calls and questions to PSBA is the responsibilities of the board once the commission has made their recommendation and how the front-question should relate to the actual circumstances that unfold during the 2007-08 school year.

In a prior Act 1 newsletter, PSBA declared that by advertising and including the agreed-upon language of the front-end referendum question in the advertisement, school boards would meet the requirement in Act 1 that obliges them to approve or disapprove the commission's recommendation before they actually adopt the resolution. Since the advertising must be done once a week for three weeks before the resolution must be adopted, by advertising the entire question, the board's intentions regarding the commission's regulation would be made obvious.

There is at least one other recommendation on this issue that PSBA can make. If the school board is likely to adopt the recommendation of the tax study commission as its own, it should proceed in the manner described above or it can signal its assent with the regulation at some other regularly scheduled meeting that would be held between the time the commission makes its recommendation until the time the board adopts the front-end question resolution.

If the board is unsure or is leaning towards disapproving the commission's recommendation and replacing it with a recommendation of its own, it may want to advertise only that it is intending to adopt a resolution by March 19, certifying that they will be placing a front-end question on the ballot. This is all that is required under the Act. In this situation, the board can wait until it holds its required hearing on the resolution to gauge public sentiment before deciding what question will be included in the resolution.

Said a different way, there is no need to put the actual language of the front-end question into the resolution at the time you advertise it. The act only requires boards to advertise their intent to adopt such a resolution on a date certain. However, if the board and the commission agree on the recommendation, boards should go ahead and announce their affirmation either by advertising the recommendation as the board's intended question or by stating its agreement with the commission at another public meeting to be held in the timeframe described above.

Many members have also expressed concern that the estimated homestead reduction cited in the ballot question will not match the actual amount. Tax collection rate, number of delinquents, number of eligible properties in the district, revenue levels from the new tax and other issues will determine the amount of property tax relief that is actually available. Unfortunately, school boards will have to estimate all of those items at the point in which the front-end question has to be mailed in to the county.

PSBA does not believe that there is any requirement for the estimated homestead reduction number on the ballot to match what actually becomes available. In fact the ballot number may not become available until the third for fourth year after implementation of the tax. Some have suggested that districts use a range in estimating the amount of the homestead exclusion, at least in the first two years of implementation until collection, number of eligible properties, revenue levels and other issues have become somewhat more stable. At the very least, districts should use a conservative number when listing the estimated homestead reduction on the ballot question.

This anomaly is just one of many nuances that boards need to prepare their communities for in the implementation of Act 1. To assist boards with this and other issues, PSBA will be conducting seminars around the state in January and February on how school boards can best explain this act to their taxpayers. Watch for the coming advertisements and we hope to see you at one of these seminars.

UPCOMING ACT 1 DEADLINES:

12/13/06 - Deadline for Local Tax Study Commissions to make their recommendations to school boards.

12/15/06 - Deadline for school districts to report the amount of any Sterling Tax credit due to them to PDE. Forms for this purpose are available on the PDE web site ( www.pde.state.us.pa ) simply go to "Property Tax Relief" on the left hand side of the screen.

12/26/06 - Deadline for PDE to announce which years' data will be used in determining whether back-end referendum exceptions will be approved.

12/31/06 - Deadline for school districts to mail out homestead/farmstead applications to district property owners. This mailing can be limited to property owners whose properties have not yet been declared eligible for a homestead/farmstead exclusion and those who own properties where the eligibility will expire in 2007.

1/25/07 - Deadline for boards who are preparing preliminary budgets to print copies of that budget and make it available to the public.

Also the deadline for any board that wishes to bypass the requirement to develop and adopt a preliminary budget to adopt a resolution that it will not raise the rate of any tax used to support the public schools by more than its index.

1/30/07 - Deadline for any board that adopts the resolution described above to submit information to PDE on their proposed tax increase.

PSBA sample documents available online

• Sample resolution discharging the Local Tax Study Commission after it makes its recommendation to the school board.

• Sample resolution for boards that want to bypass the requirement to adopt a preliminary budget by limiting its 2007-08 tax increase to the school district's index.

• Sample resolution for the Local Tax Study Commission to use in making its recommendation to the school board.

• Sample cover letter districts can include with the mailing of homestead/farmstead exclusion applications.