Act 1: Who Wins, Who Loses?

Commonwealth Foundation provides guide to Gov. Rendell’s Property Tax Relief Act

Harrisburg, PA — Today, the Commonwealth Foundation released an analysis of the impact Act 1 of the 2006 Special Session will have on school property taxes and different groups of taxpayers. The policy brief, Taxpayer’s Guide to the Rendell Property Tax Relief Act of 2006, describes the additional rebates for senior citizens, the effect of “back-end” referendum on future property tax increases, and the winners and losers of the tax-shifting options on the May primary ballot.

Despite its billing by Gov. Rendell as the “largest property tax cut in Pennsylvania history,” Act 1 of 2006 is likely to fall short of expectations for the same reasons that its predecessors did; it merely shifts the school district tax burden, rather than cutting it. Act 1 also fails to provide taxpayers with meaningful control of future property tax increases.

Act 1 of 2006 would limit school districts’ annual tax increases to an index, which ranges from 3.4% to 5.5%, depending on the district, or face a voter referendum on the proposed tax increase above the district’s index. However, the law provides ten exemptions—categories of expenditures the district can apply to increase revenue above the index. Among the categories exempted are special education costs, debt payments, employee healthcare benefits, and pension contributions. These categories are frequently among the fastest growing segments of school spending, and are not included under the tax increase index that would require voter approval.

“Act 1 provides taxpayers with ‘referendum in name only’ on future property tax increases,” said Grant Gulibon, research fellow with the Commonwealth Foundation, and author of the study. “Instead of giving taxpayers the ability to control future school tax increases, the legislation is riddled with exemptions for school districts to circumvent taxpayer approval and continue raising taxes.”

At the heart of Act 1 is a tax shift—giving voters the option to partially shift from property taxes to income taxes for school district funding. On the May 15, 2007 primary ballot, voters will be asked if they want to establish a new Personal Income Tax or increase the local Earned Income Tax. The new income tax revenue would provide residential property owners an equivalent reduction in their property tax bill.

“This tax shift yields no net savings, but instead creates winners and losers,” said Gulibon. Senior citizens, low- and moderate-income homeowners, and those working in Philadelphia are the winners expecting a net tax break. The losers include all renters who are not seniors, as well as higher income families, who will pay a net tax increase.

Additionally, Gulibon notes that the glaring omission of business and commercial properties from tax relief threatens to worsen Pennsylvania’s already unwelcoming business climate. While the property tax reduction will apply only to owner-occupied properties, tax increases will apply to many small businesses that pay the personal income tax on business income.

Gulibon writes, “the only sure way to attain control over school district fiscal policy is to subject all district tax and spending decisions to referendum—with no exceptions. At the same time, policymakers need to recognize that merely shifting the tax burden does not solve the problem of rising school taxes.”

“Regardless of whether or not voters decide to shift taxes from Peter to Paul on May 15, it is clear that lawmakers need to go back to the drawing board,” said Matthew Brouillette, president of the Commonwealth Foundation. “Until we address the spending side of the equation in public education funding—not just the revenue side—we will continue to flail at the branches rather than striking at the root cause of rising school taxes.”

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EDITOR’S NOTE: The Policy Brief, Taxpayer’s Guide to the Rendell Property Tax Relief Act of 2006, is available here.

TheCommonwealth Foundation is an independent, non-profit public policy research and educational institute based in Harrisburg, PA.

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