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. 15, Jan. 18, 2007

IN THIS ISSUE: PSBA's advice on the notice and resolution authorizing the front-end referendum question.

SUMMARY : Act 1 requires school boards to adopt a resolution by March 13, 2007 , that authorizes the May 15, 2007 , ballot question. This is the question that will ask voters if they approve of an increase or the establishment of an income tax for the purpose of generating revenues to be used to fund exclusions for eligible homestead and farmstead property.

The Act also requires districts to "give public notice of its intent to adopt the resolution in the manner provided for in section 4 of the Local Tax Enabling Act" and conduct at least one public hearing on the resolution.

Section 4 of the Local Tax Enabling Act states that such notices "shall set forth the substantial nature of the tax.to be imposed by the proposed ordinance or resolution, the reason which, in the judgment of the officials of the subdivision, necessitates the imposition of the tax, and the amount of the revenue estimated to be derived from the tax." It also states that publication of such notice must be made by advertisement once a week for three weeks in a newspaper of general circulation within the district or, if there is none, a newspaper of general circulation within the county in which the district is located.

Act 1 also requires that districts accept or reject the recommendation of the Local Tax Study Commission before they adopt the resolution. Therefore, the entire process is one that consists of multiple steps, which we will illustrate later in this newsletter.

ANALYSIS : Back in November, PSBA advised, in a previous Act 1 newsletter (Vol. 1, no. 12, dated Nov. 20, 2006), that districts, under certain circumstances, were not required to include any details on the front-end question in their advertisement of its intent to adopt a resolution authorizing the front-end referendum question. After several discussions with its own legal staff and outside solicitors regarding the pertinent provisions of Act 1, PSBA is clarifying its advice.

Current thinking is that the notice of intent to adopt must contain the information required by Section 4 of the Local Tax Enabling Act. The confusion was over the phrase that the district must "give public notice of its intent to adopt this resolution in the manner provided for in Section 4 of the Local Tax Enabling Act" (emphasis added). The error was in interpreting that the public notice only consisted of the once a week for three weeks requirement, not the requirement that the notice contain the information about the tax itself.

Coupled with Act 1's requirement to conduct at least one public hearing on the referendum and the Act 511 requirement for school boards to advertise a notice of its intent to adopt a resolution increasing or implementing a new income tax, what appears to be a rather simple process, is not. PSBA suggests that, for the sake of efficiency, the notice of the intent to adopt the resolution authorizing the May 15, 2007 , referendum question and the notice of the resolution levying the new tax be combined into one document, along with the notice of the required public hearing. Because the Act 1 income tax is self-executing and continues in force each year except when the rate is changed or repealed, a new notice and resolution regarding the new rate of tax is not necessary every year, but only if and when the tax is increased or repealed.

The procedure can be broken down into responsibilities for districts to adopt:

  1. A resolution accepting or rejecting the Local Tax Study Commission's recommendation.

This resolution can be adopted any time before the board gives notice of its intent to adopt the resolution authorizing the front-end referendum question and the resolution authorizing the assessing and levying of the Act 1 income tax, should the voters approve it. Once the board agrees on the question, it can simply insert the desired wording into each of the next three documents.

  1. A resolution authorizing the board secretary to proceed with advertising notice of the resolution authorizing the May 15, 2007, ballot question and the new income tax, as well as the information pertaining to the hearing on the resolution. While this step is not mandatory under Act 1, it creates a document that will serve as a record to the public that the board has taken a vote and, through its wording, indicates the result of that vote.
  2. Notice of intent to adopt the resolution authorizing the front-end referendum question and the resolution authorizing the board to assess and levy the Act 1 income tax, along with information on the public hearing . As noted, combining these separate notices into one will create greater efficiency.
  3. A resolution authorizing the front-end referendum question. Required under Act 1. This document will be the official authorization for county election officials to place the question on the ballot.

Sample documents of all of the above are available on PSBA's Act 1 Resource page in the members-only section of the PSBA web site (see the Act 1 index).

There are four separate notices, depending on what option the districts decides to follow. For school districts that currently levy an Earned Income and Net Profits Tax, the available options are to increase that tax or to convert it to a Personal Income Tax. For school districts that do not currently levy any income tax, the available options are to impose an Earned Income and Net Profits Tax or a Personal Income Tax. Each school district should choose the appropriate notice. Once the notice of intent has been given, a draft resolution can be prepared. The sample resolution on PSBA's web site will fit all school districts, regardless of which option they choose.

Board members should note that the sample ballot questions that appear within the notices are worded slightly differently than the sample questions in Section 331.2(e)(1)(i-iii) in Act 1. PSBA is suggesting language that makes it clear that the school district is imposing the tax and that the tax reduction number given on the ballot is an approximation, since it will be impossible to state the exact amount of property tax reduction at the time of the election. Because the Act only requires that the question be "framed" in one of the three examples given in the statute, PSBA believes there is window for flexibility in the wording of the question. Section 331.2(e)(1), in describing the structure of the question also refers to "the estimated per homestead tax reduction"

Also, the ballot questions put forth by PSBA assume that school districts will use the same rate for the homestead and farmstead exclusion. While this is permitted, the rate of the two exclusions can be different, as long as the farmstead exclusion rate does not exceed the homestead exclusion rate. Districts that want to use different rates for both homestead and farmstead property should change the second sentence of the question to read: The revenue generated from the increased tax rate will be used to reduce taxes on qualified owner occupied residential properties by approximately $_____, and on qualified farm buildings by approximately $______.

Questions and Answers

Q : What is best order for all the events leading up to the adoption of the resolution authorizing the May 15, 2007 , ballot question?
A : PSBA recommends the following timeline: 1) Board should accept or reject the Local Tax Study Commission's recommendation; 2) Board should approve the question it wants to appear on the May 15, 2007, ballot; 3) Board should put the question in the form of a resolution and authorize the Secretary to advertise the notice of intent to adopt the Resolution authorizing the question, the Resolution assessing and levying a new income tax should the voters approve it and the date of the public hearing on the Resolution; 4) Advertise notice of the board's intent to adopt the Resolution authorizing the May 15, 2007, as well as its intent to adopt a Resolution assessing and levying an [Earned Income and Net Profits or a Personal Income Tax] and the date of the board's hearing on the Resolution; 5) conduct the public hearing and implement any changes the board feels necessary and 6) adopt the Resolution. The process cannot begin until the board agrees on the question it wants to place on the May 15 ballot and must be concluded by March 13.

Q : What are the specific deadlines for these actions?
 A : The only specific deadline contained in the Act is for the adoption of the resolution authorizing the May 15, 2007 ballot question, which is March 13, 2007. The Act does include other deadlines by reference. For example, the board must decide to accept or reject the recommendation of the Local Tax Study Commission before it adopts the resolution. Additionally, notice of intent to adopt the resolution must be given once a week for three weeks before the resolution is adopted and the notice must contain information relating to the nature of the tax, why the board feels that it is necessary and an estimate of the revenue to be generated by the tax. Given the advice in the answer below, the latest that the advertising would have to begin is during the week of Feb. 18. Therefore, this is the latest that a board can wait to reach agreement on the ballot question.

Q : Are there other requirements for advertising the notice of intent?
A : PSBA recommends that the three advertisements be scheduled as follows: 1) the first advertisement should appear at least three weeks before the date of adoption of the resolution authorizing the May 15, 2007 ballot question and the Act 1 tax resolution; 2) The three advertisements must appear during three separate calendar weeks and 3) At least five days must elapse between each advertisement.

There also is some dialogue among solicitors as to whether or not this notice must be advertised in legal journals. The Newspaper Advertising Act states generally that whenever advertising is required in a newspaper of general circulation, advertisement in also required in a legal journal unless one of a number of exceptions applies. PSBA is attempting to get a ruling from PDE or another agency stating that such advertising is not required.

Q: Can we schedule the public hearing on the Resolution authorizing the May 15, 2007 , question on the same evening as a school board meeting?
A: Yes, as long as you have separately advertised the public hearing.

Q: Other than the March 13 deadline, what other provisions are there regarding the adoption of the resolution?
A: Only that it be adopted after the board accepts or rejects the recommendation of the Local Tax Study Commission and holds at least one public hearing on it prior to adoption.

Q: If the voters approve the new income tax, what are the board's responsibilities?
 A: The board would have to adopt a resolution in the same manner as it would if it increases property taxes or imposes a new tax. If you include the notice of intent to adopt this resolution in with the notice of intent to adopt the resolution authorizing the May 15, 2007 , referendum question, as PSBA is suggesting, you do not need to further advertise the intent to adopt the resolution implementing the new income tax. The sample notices of intent to adopt on PSBA's members only Web site includes notices of intent to adopt both resolutions.