HARRISBURG, Pa. – From the perspective of the Pennsylvania Farm Bureau and to Pennsylvania land owners, Act 50 looks like a way to ensure farmers cannot be taxed off their land.
From the perspective of local Pennsylvania school boards and the Pennsylvania School Board Association, Act 50 looks like a no-win situation that can only weaken public education.
Act 50, passed by the Pennsylvania General Assembly in 1998, allows school districts to reduce property taxes by substituting increased earned income tax.
A local school board may ask voters to increase the 1/2 percent earned income tax boards can already impose with a tax of up to 11/2 percent.
If a ballot referendum is approved, then the district must use its increased revenue to reduce other taxes in a specific progression.
It must first eliminate any occupational, occupational privilege, or per capita “nuisance” tax it has levied.
If there is additional earned income tax revenue above that, then the school board is directed to reduce its property taxes by providing a homestead or farmstead exclusion to qualified property owners who apply.
Finally, the board must reduce the general property mill levy until property tax reduction equals earned income tax increase.
After backing the provision in the Pennsylvania General Assembly for more than 20 years, the Pennsylvania Farm Bureau sees this limited opportunity to reduce property taxes as a test case for the cause of Pennsylvania property tax reform.
A first step.
“This is the first step toward true tax reform,” said Mike Pechart, director of local affairs for the Pennsylvania Farm Bureau. “Until now, taxpayers have had no real control over local taxing powers.
“But if we don’t take advantage of this opportunity to demonstrate interest, if we allow the school districts to fail to deal with property tax reform, then there won’t be any more.
“This is the first step, but one that we have to take in order to show the legislature what works and what doesn’t.”
Until this year, the tax was strictly voluntary. Each school district board could decide whether or not it would ask voters to approve the tax.
Starting this year, however, boards can be forced by voter petitions to first study and then to impose the tax.
The Farm Bureau is urging its county chapters to begin passing petitions immediately, to force the question of earned income tax increase onto local ballots.
Only five of the state’s 501 school districts have put the question on the ballot. It passed in three of these.
The state school board association said these districts are now having budget problems due to the inflexibility of the taxing formulas provided by Act 50. On the other hand, the Farm Bureau says there has definitely been some reduction in general property taxes in each of these districts.
According to state Sen. James Gerlach, R-Glenmore, chairman of the local government committee, school district property taxes in Pennsylvania have been growing 8 percent to 12 percent a year in recent years.
Gerlach led the effort to get Act 50 through the general assembly in 1998, supported by the Farm Bureau which was intensely interested in making sure the act contained a provision for the homestead and farmstead exclusion that had been authorized by constitutional amendment in 1997.
According to Thomas Gentzel, director of governmental relations for the state school board association, virtually every school district in Pennsylvania has studied Act 50. Many have appointed community task forces to look at its implications. Most have come to the conclusion it can’t work for them, Gentzel said.
The conditions of Act 50, he said, are so restrictive school boards see it as limiting their options to design a tax program that fits the needs of their district.
It provides no options to increase school district revenues, at the same time it closes off the nuisance taxes districts have been using to keep from raising property taxes even more.
And because there is no way to get firm figures of future assessed valuations, Gentzel said, there is really no way for school boards to get an accurate reading on how the change in taxing structure would affect district budgets.
And while Act 50 decreases the assessed valuation in the district, it also closes off, through the “backdoor referendum,” a district’s authority to raise its mill levy without asking voters.
Back door open.
And it is this back door referendum – the provision of Act 50 that requires any district adopting earned income tax to take any future property tax increase to its voters for approval – that most observers believe has been making school districts slow to act.
But now the Farm Bureau is getting ready to push back.
Under the Act, petitions signed by 2 percent of a school district’s voters who voted in the last gubernatorial election can force the district to appoint a commission to study the revenue effects of Act 50 on the district.
If the study commission reports favorably to the school board, and if the board fails to authorize earned income tax, then a second round of petitions signed by 5 percent of the voters in the district can force the measure onto the district ballot.
When its passes.
If the measure goes into effect, the school board loses its ability to assess “nuisance” taxes, has the taxing power of its mill levy reduced by the homestead exclusion, and is prohibited from raising its mill levy without an election for at least three years.
“But all of this doesn’t take place in a vacuum,” Gentzel said. “Some districts experience population pressures. There are changes in the distribution of state funds to school districts than can cost the districts millions of dollars.
“And there is no way to see some of these things coming. If a district is under the strictures of Act 50 at the same time it is attempting to deal with all the other forces, it becomes impossible.”
Feel the squeeze.
But, according to Farm Bureau’s Pechart, farmers, who have all of their productive resources assessed for local property taxes, are feeling particularly squeezed by rising mill levies.
In Cambria County, where the school board put the issue on the ballot in 1999 and it failed, people are already working at getting the question back on the ballot in November.
Pechart said he expects there will be petition drives this year in all 54 Farm Bureau local areas, and that many of them will result in a referendum this fall.
At the same time, Sen. Gerlach is talking about necessary reforms to make Act 50 more flexible and more usable to the school districts.
“Each school district has different needs and different levels of support,” Gerlach said. “What works for one district may not be right for another.”
“The act right now seems to be too restrictive,” he said.
Gerlach said as long as the back door referendum is provided, it should be possible to give each school district more freedom to figure out how to apply the authorized taxing powers, and still realize the intended reduction in property taxes.
The maximum level of earned income tax allowed probably ought to be higher, he said, probably 21/2 percent. The legislature also should look at granting a personal income tax.
“The higher the income tax goes, the more you can reduce property tax,” Gerlach said.
How the homestead and farmstead exclusion is being applied should also be reviewed, he said.
“Some districts may want to reduce business taxes as well as residential taxes in order to encourage business to stay,” Gerlach said. “Property tax revision can encourage more development, which, in turn, will produce more kids.”
Do the math.
Pechart said the only way these issues can be resolved is for the voters to force the district to appoint a tax study committee to do the math and see if these measures will provide significant tax reform.
“If this law is not effective in reducing property taxes,” he said, “the General Assembly needs to know about it.”
Pennsylvania’s homestead exclusion.
The homestead exclusion is seen as one method of reducing the property tax for middle income Pennsylvanians by rewarding permanent residents.
It was approved by Constitutional Amendement in 1997, was included in the provisions of Act 50 as a method of reducing school district property tax levies, and is being considered by the Pennsylvania General Assembly as a formula for dispersing to school districts future surplus state revenue.
Homestead properties, or those occupied by the property owners as a permanent residence, are granted an exclusion for a portion of their assessed valuation.
This has also been seen by the Farm Bureau as a way of shielding family farms from some of the pressures of development and forced sale.
The farmstead exclusion is applied to those farm buildings and structures not already exempt from property tax, and is granted in addition to the homestead exclusion applied separately for the house.
Where the exclusion is available, all property owners in the taxing district who apply for and receive the exclusion have the same dollar amount deducted from the assessed value of their property. The amount is established at up to one-half of the median assessed value of all homestead properties in the district. The farmstead exclusion is set at a level that cannot exceed the homestead exclusion.