Penn. School Districts Overwhelmingly Reject Tax Shift

Published July 1, 2007

Voters across Pennsylvania have overwhelmingly rejected a proposal to shift public school tax burdens from property taxes to income taxes.

In a May 15 election in 498 school districts across the Commonwealth, voters in only a handful of districts approved the tax shift. Early returns on May 16 showed only four of 377 school districts with complete election results going for the shift.

In the 42 suburban and rural school districts in Allegheny County, none approved the shift.

Overwhelming Opposition

Prior to the vote, an official from the Pennsylvania School Boards Association was quoted in the Pittsburgh Post-Gazette expecting “about 20 percent of the referenda would pass.” Nowhere near that many school districts voted for the shift.

The tax shift referenda were included as part of Act 1, the Taxpayers Relief Act, which Pennsylvania lawmakers implemented one year ago after years of looking for ways to lower school property taxes. Act 1 included a provision for voters in individual school districts, excluding Pittsburgh, Philadelphia, and Scranton, to choose whether to hike local income taxes to lower property taxes.

In addition to the option for voters to approve a higher income tax to lower property taxes by a flat dollar amount, Act 1 also provides school property tax relief for homeowners through an expansion of the senior citizen rebate program and distribution of funds from legalized slot machine gaming.

Tax Relief Uncertain

The question of how much net tax relief a person or business could expect by shifting some of the burden to income taxes was a driving factor in the voting booth.

Eligible seniors could get the rebate and lower taxes through gaming money, and possibly pay no income tax. Renters and businesses would receive no tax relief and would pay higher income taxes. Homeowners would be either winners or losers depending on their household income and the amount of the property tax reduction.

By and large, the question of how much net tax relief taxpayers in individual school districts might enjoy is still up in the air. School districts have yet to be told how much of a distribution they will receive from the slot machine money, and they will have to opt in to take the money. If they refuse, voters can override them in another referendum.

In addition, school districts will be responsible for collecting the income tax if passed. Evelyn Weaver, president of the Keystone Oaks School Board in the South Hills of Allegheny County, said the tax shift would “adversely impact the district’s ability to accurately predict cash flow.” Municipalities and school districts may levy a wage tax and collect it themselves or hire a private tax service to collect it. The state collects a personal income tax.

Real Control Over Spending?

Where homeowners agree to a tax shift and will get some gaming money, there is still the issue of whether school spending will eat away at the savings.

Since passage of Act 1, school districts must submit tax increases to the electorate if the increase outpaces a Pennsylvania Department of Education (PDE) index. That provision has been sold as a surefire method for giving some spending control to the taxpayers.

But nothing prevents a district from steadily boosting its taxes at a rate lower than the index. Year-over-year increases smaller than the index can happen, and the index is revised each year. To date, 233 districts have passed resolutions indicating they will not increase taxes above their index amount for the 2007-08 school year.

In addition, 10 exceptions built into Act 1 allow school districts to raise taxes above the index and avoid a referendum. Exceptions include emergencies, court orders, and school construction. The PDE has approved exceptions for 210 school districts for next year.

Pension Obligations Might Hurt

One exception–for retirement payments to the Public School Employee Retirement System (PSERS)–could significantly affect how much tax relief there will be from Act 1.

At the end of 2006, PSERS had 263,000 active members, $52 billion in assets, and $65 billion in liabilities. This means the system was 81 percent funded in 2006, about in line with other state employee retirement systems.

But PSERS’ “projection of contribution rates” shows the employer share will increase sharply to 18.7 percent in 2013 and will remain in double digits annually through 2032.

In 2001 the state sweetened benefits for active employees and in the following year did the same for retirees. Susan Madeja, president of the Mars Area School District, noted, “If a district had salaries of $15 million, they currently pay a $1,069,000 pension contribution. If the rate jumped to 18.73 percent, it would double to $2,089,000. … To fund only the increase, [Mars Area] would need to raise our property taxes [$12.50 per $1,000 of assessed value]!”

Madeja notes that because Act 1 does not mandate any control over pension funding, which will be of utmost importance in the coming years, it could be a recipe for disaster and could eat away at any property tax savings after income taxes are raised.

Eric Montarti ([email protected]) is a policy analyst for the Allegheny Institute for Public Policy.