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. 8, Sept. 25, 2006

IN THIS ISSUE: This issue looks at the three different types of voter referendum in Act 1: front-end, back-end and gaming revenue.

SUMMARY: As we move toward the actual implementation of Act 1, it will be important for school directors and others to know and differentiate between the various referendum provisions of Act 1, both to be clear in implementing the act and to help the public understand the differences between the various provisions. The three types of referendum in Act 1- front-end, back-end and gaming revenue, their respective purposes, when they might occur, what happens depending on the results of the vote and the associated board responsibilities are listed below:

Front-end referendum

Purpose - The purpose of a front-end referendum is to give voters the opportunity to vote on the type and rate of income tax they want to offset a portion of property tax revenues. The mandated 2007 front-end referendum question will ask voters to establish which type of income tax they would like levied, while the front-end referendum in subsequent odd-numbered years will ask voters if they want to increase the rate of the tax established in the 2007 FER or convert it from an Earned Income Tax to a Personal Income Tax to provide for additional property tax relief.

When it occurs - All school districts must place a front-end referendum question on the ballot for the May 2007 primary election. As noted above, the question must ask voters if they want the school district to impose an earned or personal income tax and at what rate in order to generate revenue to offset property tax revenues.

After 2007, school districts can place a front-end referendum question on the ballot in the fall of any odd-numbered year. This question will ask voters to increase or convert the tax established in 2007 in order to facilitate increased property tax relief.

The question - The question itself will read in one of three ways, depending on the type of tax adopted and whether or not the district was implementing it for the first time or converting an earned income tax into a personal income tax. For the 2007 front-end referendum, the general requirements are that the question must state the rate of the proposed income tax, the reason for the tax, the estimated per homestead tax reduction and the current rate of the school district's earned income tax.

In much the same manner, a question posed in a year subsequent to 2007 will read differently, depending on whether or not the district is asking voters to increase a tax established in 2007 or to convert an earned income tax to a personal income tax. Generally, the question must contain the rate of the income tax to be levied, the reason for the tax, the estimated per homestead reduction and the current rate of earned income tax levied by the school district.

Results - If the 2007 referendum question passes, the district can begin implementing the approved income tax on July 1, 2007. If the question fails, districts will have no major source of revenue with which to provide property tax relief until either gaming money becomes available or voters approve a replacement tax at a subsequent municipal election (odd-numbered year).

Board Requirements - Boards must appoint a Local Tax Study Commission, adopt and advertise a resolution on the question and hold at least one public hearing on it every time they propose a front-end referendum question. Districts must also provide a non-legal interpretive statement, through consultations with county officials, that explains the reason for the tax, the estimated increase in revenue that the board will receive for district operations (in the year of implementation of a tax, districts are allowed to retain 2% of the estimated revenue generated for district operations), the estimated per homestead tax reduction, the current rate of earned income and net profits tax levied by the school district and the proposed tax rate. Finally, districts must submit the question to county election officials no later than 60 days prior to the election.

Back-end referendum (BER) 

Purpose - The purpose of a back-end referendum (BER) is to give voters an opportunity to approve a school district tax increase of more than the index (the index is 3.4% for 2007-08), to allow districts to implement a tax not levied in the 2005-06 fiscal year or to increase their current Earned Income Tax. Districts are not mandated to use back-end referendum, but cannot take any of the above actions without the approval of voters.

When it occurs - The back-end referendum will occur at the election immediately preceding the start of the school district's fiscal year. For all but two school districts, this means the primary election.

The question - If the question is asking voters to approve a proposed tax increase that exceeds the index, it must contain the specific rate or rates of the tax increase. If the question is asking voters to approve a new tax, it must state the proposed tax and the rate at which it will be levied.

Results - If the back-end referendum passes, boards can increase taxes to the approved rate or impose the new tax that was approved. If the referendum fails, boards are limited to increasing taxes up to the index level, and may have to make budget cuts to fit the allowable revenue. If the referendum question sought approval of a new tax, that tax could not be levied.

Board requirements - The board must submit the question to county election officials no later than 60 days before the election (55 days if an application for a back-end referendum exception is denied). Additionally, the board must provide a non-legal interpretive statement, through consultations with county officials, that includes information that references the items of expenditure for which the tax increase is sought and the consequence of the referendum being disapproved by the electorate. Act 1 does not elaborate on whether or not the stated consequence(s) must be specific as to programs that may be cut or if it can be a general statement, such as "the board will reduce its budget." PSBA recommends that if specific consequences are listed that the board follow through with action if the referendum fails.

While Act 1 does not impose requirements for the adoption of a resolution or for advertising the back-end referendum question, PSBA suggests that boards adopt a resolution stating its intention to pose the question, as well as advertise it once a week for three weeks to ensure that the voters know what the question is.

Referendum on gaming revenues

Purpose - To give voters an opportunity to register their sentiment on a board resolution to reject gaming revenues.

When it occurs - At the first election following a board's resolution to reject gaming funds, most likely a fall election.

The question - The question must read as follows: "Do you favor the (name of school district) receiving State funds to reduce property taxes on qualified residential properties?"

Results - Regardless of the outcome of the referendum vote, the board becomes eligible to receive gaming funds in the fiscal year after the vote is taken. Even though eligibility is restored, the board can adopt a resolution rejecting the funds in a year following an election by the voters to accept them.

Board requirements - This process is activated when a board adopts a resolution to reject gaming funds. This must be done within 30 days of the receipt of the notice from PDE that such funds will be available (May 31 in a year when gaming funds are available). The resolution renders the school district ineligible to receive gaming funds for the upcoming fiscal year. A board that adopts such a resolution must notify PDE within 5 days after its adoption. PDE will then notify the appropriate counties, which must then place the referendum question on the ballot.

Boards must also provide a non-legal interpretive statement, in consultation with the county.

Questions and Answers - Act 1 Referendum requirements

Q: Does the board have to place a front-end question on the 2007 primary ballot? What if the Local Tax Study Commission recommends that the board not place a front-end question on the ballot?
A: Act 1 states that the commission must make a non-binding recommendation to the school board regarding the imposition of an income tax. From this language, one could imply that the commission could make a recommendation not to impose any tax. However, the commission's recommendation is not binding on the school board and the board is not compelled to follow that recommendation. In fact, from a legal perspective, the recommendation and a school board's response to it are irrelevant with respect to a board obligation, under the act, to place a front-end referendum question on the ballot.

Q: If the 2007 front-end referendum question fails, is the board required to follow the other requirements of Act 1?
A: There is nothing in the Act that excuses a board from the other provisions of the act, such as back-end referendum or the requirement to allow installment payments of property tax, if a front-end referendum question fails.

Q: If the 2007 front-end referendum question fails, is the district still eligible for gaming funds when they become available?
A: Yes, the only time a district would not be eligible for gaming funds is if the board approves a resolution refusing those funds within 30 of being notified that such funds are available. That decision is subject to a referendum vote by the district's voters. If the voters override the board's decision, the district is eligible for gaming funds in the next fiscal year.

Q: If the 2007 front-end referendum question fails, are districts precluded from ever adopting an income tax under Act 1?
A: No, a district can seek to establish an income tax authorized by Act 1 in any odd-numbered year after 2007. This must be done at the fall election.

Q: What happens if a district's voters approve a back-end referendum question and the ensuing state budget provides for an increase in funds to a district that would have precluded the need for the referendum?
A: Act 1 contains no provisions for what happens in this situation. The board could use the money to guard against property tax increases in the following year, find a way to rebate some of the money to taxpayers or use the money for any other purpose the boards deems necessary. Whatever its decision, the board should communicate its reasoning to the community.

Q: If a district's voters uphold a board's decision not to accept gaming revenues, is the board precluded from ever receiving those revenues again?
A: This is another situation that is not contemplated by Act 1. It appears that any referendum on a board's resolution to reject gaming funds is only on that specific referendum for that specific year. In that case, the board would have to repeat the same procedure to reject the gaming funds.

Exceptions: Philadelphia , Pittsburgh and Scranton

PSBA suggests that the question include only the school district's portion of a shared earned income tax. The required non-legal interpretive statement should clarify the total tax rate, and delineate the district's share and the municipality's share.

Web Conference for Tax Study Commission Members
Don't forget to register your tax study commission members for PSBA's upcoming Web conferences on their roles and responsibilities. This Web conference will be held on Sept. 21 at 7 p.m., and will be repeated Sept. 29 and 30 at 10 a.m. http://mymeetingcentral.com/registration/Register_List.aspx?custid=15105