Real estate tax is the main source of locally generated revenue in Pennsylvania school districts.  Like most taxes, the calculation is the base (real property value) multiplied by the rate (expressed in mills).  Unfortunately, the basic calculation is often viewed as a complex process even though it is simple and straightforward.  The calculation used by school districts is the same calculation used by both county and municipal governments.

The base for the property tax is the value of all real property within the borders of the district.  Property contains two elements, the value of the land and the value of any structures erected on the land.  The County Board of Property Assessment and Appeals has the legal responsibility for determining the value of land for inclusion in the tax base.  Taxes are based on assessed value.  In some cases, the assessed value is equal to the estimated market value and in other cases it is a portion of the estimated market value.  In either case, a school district must use the official (county determined) recorded assessed value of a property.  While land may be classed as residential, commercial, industrial, agricultural or any number of other classes, all values are combined and the millage rate is applied uniformly to the total.

Taxes in a school district will increase for several specific reasons.  Each reason is a reaction to either an alteration of the base (exemption or adjustment of assessed value), actual collection of revenues, or increased revenue needs.

Alteration of the base or assessed value occurs when properties are added to the tax rolls as the result of new construction.  Alteration of the base also occurs when property is removed from the tax rolls.  Reduction of property value occurs when a building is demolished for any reason, or the use of the property is for a tax-exempt, charitable purpose such as schools, hospitals or churches.  When individual owners feel that the assessed value of the property is excessive, they may appeal the assessed value to the County Board of Property Assessment and Appeal.  To the extent that the owner can prove that the value recorded is higher than it should be, the County Board of Property Assessment and Appeal has the authority to revise the value downward.

Example: Tax base changes
If the assessed value is $1 million, this means that the district will generate $1,000 per mill.  If the loss of buildings due to flood, fire or other natural disaster reduces the assessed value by $100,000, then the new total assessed value becomes $900,000.  The new base means that the district will generate only $900 per mill.  Thus, a district that needs 22 mills on $1,000,000 to generate $22,000 will need 24.44 mills, or an increase of 2.44 mills to generate the $22,000 needed in this example.

Actual collection of revenues compared to the estimated collection produces a collection rate.  Pennsylvania school districts are required to provide for a discount on property taxes if paid during a two-month period at the beginning of the year.  The same requirement also applies to counties and municipalities.  Thus, the best a school district can usually expect is 98 percent of the anticipated revenue.  As a result, various taxing jurisdictions will need to increase the tax millage rate to assure that they collect the amount of revenue necessary to provide the services that are expected/demanded.  Another element of a collection rate is that some individuals intentionally fail to pay their share of the property tax for a variety of reasons.  Therefore, the taxing jurisdictions typically collect between 85 and 98 percent of the anticipated revenue.  As the history of the jurisdictions collection experience declines or increases, the anticipated collection rate must also adjusted.

Example: Collection rate changes
If the assessed value is $1 million, this means that the district will generate $1,000 per mill.  If the district is required to provide a 2 percent discount and all individuals pay their tax bill during the discount period then the district will only collect $980 per mill instead of the $1,000.  If the district needs $20,000 in revenue, then the district needs to levy a millage rate of 20.41 mills to offset the discount that must be provided.  In this example, the discount required by law means the millage rate must be increased by 0.41 mills to generate the required revenue.

Increased revenue needs of the school district over time is one of the primary reasons for a property tax increase.  Demand for revenue increases accordingly as salaries, utility costs or additional students are enrolled in the district.

In some older, more developed school districts, the need for additional revenue is often caused by increased costs for personnel, supplies, equipment and utilities.  If the tax base remains unchanged for years and the revenue needs increased, the millage rate must increase to maintain the same level of service.  In a growing district, if revenue needs to meet increasing enrollments and costs grow faster than the tax base, then the millage rate must be increased to offset the additional required revenue.

Example: Costs increasing faster than tax base
If the assessed value is $1 million, the district will generate $1,000 per mill.  Last year the district levied 20 mills and generated $20,000.  If the assessed value increases by $100,000 to $1.1 million, one mill of tax will generate $1,100. In a case where the district costs increase and the district will need $24,000, the millage necessary to generate the extra revenue needs to be increased by 1.82 mills to 21.82 mills.  In this example, even though the tax base increased, the required revenue grew at a rate faster than the tax base.  The difference between cost increase and tax base growth in this example requires increased millage.

Programs, such as Keystone Opportunity Zones (KOZ), which eliminate all tax revenue from a specific property or properties, causes spreading of the revenue needs over the remaining tax-paying properties in a taxing jurisdiction.  Programs such as Local Economic Tax Revitalization Abatement (LERTA) maintain the current tax base and defer future increases in revenue.

Special treatment of properties such as "Clean and Green" also results in the tax burden of a district being spread over non-eligible properties.  In this program, if one property benefits by a reduction of the tax burden on that specific property the remaining properties in the tax jurisdiction will pick-up the difference through higher property taxes just to maintain the same amount of revenue.

Summary
Property tax revenue to a school district, municipality or county is basically a zero-sum game.  A taxing jurisdiction will need to generate a specific amount of revenue to pay for any programs and services being provided.  If the tax base declines then the millage rate needs to increase to maintain revenue.  If the tax base is unchanged then the taxing jurisdiction may need to increase millage rates to generate the revenue necessary to pay for programs and services.  If the tax base grows at a rate that is less than the increased costs then the tax rate needs to increase to provide the additional revenue to for the expanded service requirements.

Special treatment of properties, non-payment of taxes by individuals, special legislative requirements such as required discounts will shift the tax burden and may require an increased millage rate to offset special treatment.

For questions or comments, please contact David W. Davare, PhD at (717) 506-2450 ext. 3372 or (800) 932-0588.