Frequently Asked Questions on Act 1

Act 1: Pennsylvania Tax Relief Act

Charge of the Tax Study Commission

What is the Charge of the Commission?
What is the form of the ballot question?

Homestead

What is the total number of parcels that the tax exclusion could be divided by?
To date, how many parcels have applied for inclusion in the process?
How is the District notifying those homeowners who have not yet applied for Homestead exemption?

Relationship of Homestead to Overall Deductions of Tax Assessment

How does the base of money from the EIT or PIT serve as the base of Property Tax Reduction?
What are the possible ranges of EIT and PIT that the Commission may propose in its recommendation?
Is there any other option to create the base from an exclusion in property tax other than the Earned Income Tax?
What is the difference between the elements of an Earned Income Tax and a Personal Income Tax?
In general, what groups of taxpayers are affected differently by each of these taxes?
When T/E residents work in other municipalities that impose such a tax, what happens to the taxes that those T/E wage earners are currently paying to the municipalities (other than Philadelphia) in which they currently work?
What happens to those T/E taxpayers who work in Philadelphia and are subject to a Sterling Tax?

Gaming Money

What is gaming money?
When is the money projected to be available?
What is the relationship between gaming money and property tax exclusion?

Taxpayer Impact

Is it true that regardless of the amount of property tax one currently pays, all property tax owners will experience the same amount of dollar exclusion?
Does that mean this is not proportioned?
Is it possible that a property owner in T/E could pay more tax with the property tax exclusion under the shift to an Earned Income Tax or Personal Income Tax scenario?
What impact do renters experience under the Property Income Tax Reform Act?
Is it possible that the shift from a property tax base to a shared tax base of property and either Earned or Personal Income Tax could reduce the money available to operate the School District?
When the yield from the collection of either an Earned Income Tax or Personal Income Tax unexpectedly exceeds the maximum exclusion amount permitted under Act 1, what happens to the excess tax money?
Under Act 1 provisions, how is the Earned Income Tax base in T/E calculated?
Under Act 1 provisions, how is the Personal Income Tax base in T/E calculated?
What is the projected cost of collection should an Earned Income Tax or Personal Income Tax be instituted?
What collection rate should be used in years 1,2 and 3 to project revenues from an EIT or a PIT?

Ranking of School Districts

Where can residents see a list of the proposed tax change rates/amounts for each individual school district?

Charge of the Tax Study Commission

1. What is the Charge of the Commission?

To make a nonbinding recommendation to the School Board for a proposed front end referendum question for the May 2007 Primary Election. The front end referendum question must provide voters the option of funding homestead and farmstead property tax relief by replacing a portion of property tax revenue with revenue from an earned income tax (EIT) or personal income tax (PIT).

2. What is the form of the ballot question?

"Do you favor imposing a X% (insert EIT or PIT)? The revenue generated from the increased tax rate will be used to reduce taxes on qualified residential property by an estimated amount of $Y. The current (insert name of tax) rate for the school district is 0%."

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Homestead (for purposes of this memorandum this means "homestead and farmstead")

1. What is the total number of parcels that the tax exclusion could be divided by?

The Chester County Assessment Office must submit this information to the District on or by May 1, 2007. Until then, this number must be estimated by the Commission and the Board in formulating the ballot question. Commission Financial Consultant Dr. Davare sets the maximum number of eligible parcels based on current information available. While a lower number may be used by the Commission, it could have the effect of overestimating exclusions if more eligible residents apply than projected.

2. To date, how many parcels have applied for inclusion in the process?

According to the District's Business Office, the District does not have the number of parcels that have applied but does have the total of applications that have been approved as well as the number of homesteads that have yet to be approved but are eligible.

Total estimated homesteads per the Commission's Financial Advisor, Dr. David Davare, is 13,665
Homesteads not yet approved for exclusion are 3,847
Estimated homesteads already approved are 9,818 (calculated by deducting b. from a.)

3. How is the District notifying those owners who have not yet applied for Homestead exemption?

The District is ensuring that all owners of residential property in the District who have not yet been approved for a homestead exemption are mailed applications for homestead exemption on or by December 29, 2006.

III. Relationship of Homestead to Overall Deductions of Tax Assessment

1. How does the base of money from the EIT or PIT form to serve as the base of Property Tax Reduction?

In the first full fiscal year of the EIT or PIT, the amount received in the first year of the tax shall be used to fund exclusions for homestead and farmstead property. This amount will be an estimate of first year collections made before the start of the fiscal year.

In the second and subsequent fiscal years of the EIT or PIT, the amount of revenue directly attributable to the imposition of the tax, regardless of the year in which the revenue is actually collected, shall be used to fund exclusions for homestead and farmstead property.

2. What are the possible ranges of EIT and PIT that the Commission may propose in its recommendation?

The Commission's financial advisor, Dr. Davare has calculated the following:

Maximum Exclusion Per Property $1,831.81
Minimum Exclusion Per Property $915.90
Maximum Exclusion Requires an EIT of 1.62%
Minimum Exclusion Requires an EIT of 0.81%
Maximum Exclusion Requires a PIT of 1.23%
Minimum Exclusion Requires a PIT of 0.61*%

*According to Dr. Davare, this estimate is based on a collection rate of 100%.

Act 1 requires the minimum exclusion rate to be rounded to the nearest 0.1%. Act 1, read in conjunction with the Pennsylvania Constitution, requires the maximum exclusion rate to be rounded down to the nearest 0.1%.

Applying these legal principles to the calculations of Dr. Davare, the minimum EIT is 0.8% and the maximum EIT is 1.6%.The corresponding PIT rates are minimum PIT is 0.6% and the maximum PIT is 1.2%.

3. Is there any other option to create the base from an exclusion in property tax other than the Earned Income Tax?

Other options include the PIT and the revenue from gaming money.

4. What is the difference between the elements of an Earned Income Tax and a Personal Income Tax?

In general, EIT includes:

a. Gross Salaries
b. Gross Wages
c. Net income derived from operation of business
d. Commissions
e. Bonuses

In general, PIT Includes

a. All classes included in the EIT
b. Gains from disposition of property, including stock transfers
c. Rents
d. Royalties
e. Patents
f. Copyrights
g. Dividends
h. Interest income
i. Gambling winnings
j. Net gains or income from estates or trusts

5. In general, what groups of taxpayers are affected differently by each of these taxes?

Individuals whose income base is primarily earned income are affected by both the EIT and the PIT. Individuals whose income is in large part passive (such as retired persons or individuals who earn a great deal of investment income) are affected more
by the PIT. Tax rates may also affect property values for all District residents.

6. When T/E residents work in other municipalities that impose such a tax, what happens to the taxes that those T/E wage earners are currently paying to the municipalities (other than Philadelphia) in which they currently work?

If the T/E voters approve the imposition of an EIT or PIT to fund homestead exclusions, EIT paid by T/E residents to other municipalities will be used to fund homestead exclusions in T/E. T/E residents would get a credit against their EIT/PIT in T/E School District for any EIT paid to the municipalities where they work.

7. What happens to those T/E taxpayers who work in Philadelphia and are subject to a Sterling Tax?

The T/E residents would get a credit against their EIT/PIT in T/ESD for any EIT paid to Philadelphia.

IV. Gaming Money

1. What is gaming money?

This refers to money from the State Gaming Fund that is appropriated for deposit in the Property Tax Relief Fund used to fund homestead exclusions. The State Gaming Fund is funded by slot machine license fees and taxes on slot machine receipts.

2. When is the money projected to be available?

It is unknown at this time but not likely before the 2008-09 fiscal year.

3. What is the relationship between gaming money and property tax exclusion?

Each Pennsylvania school district is allocated a portion of the gaming money to only be used to fund homestead exclusions based on (1) the amount of Sterling tax paid by District residents and (2) a formula based in significant part on the wealth of the District ("State Funds Formula"). The allocation for Sterling Act tax paid by District residents is made before the allocation based on the State Funds Formula.

Only districts that impose an EIT or PIT are eligible for Sterling Act tax reimbursements, which will be made as follows:

· No payments of any kind to any districts for the purpose of funding homestead exclusions until there is $400 million in the state fund from gaming money.

· If the fund has between $400 million and $750 million, the money in the fund will be disbursed pursuant to Act 1, Section 324 to reimburse districts pro rata for all of the EIT/PIT paid by that district's residents as EIT to Philadelphia which the district would otherwise be entitled to collect from its residents as EIT/PIT if the residents worked somewhere other than in Philadelphia.

· If the fund has $750 million or more, the money in the fund will be disbursed pursuant to Act 1, Section 324 to reimburse districts fully for all of the EIT/PIT paid by that district's residents as EIT to Philadelphia which the district would otherwise be entitled to collect from its residents as EIT/PIT if the residents worked somewhere other than in Philadelphia.

· Once these payments are made to districts that qualify, any remaining funds from gambling revenues available for distribution will be made based on the following priority:

1. Certain limited approved claims for tax relief for senior citizens; then
2. School districts to fund homestead exclusions based on the State Funds Formula irrespective of whether or not those districts have an EIT/PIT under either Act 1 or Act 511.

V. Tax Payer Impact

1. Is it true that regardless of the amount of property tax one currently pays, all property tax owners will experience the same amount of dollar exclusion?

Generally yes, although the exclusion cannot exceed the amount of total property tax due before the exclusion. Therefore homestead owners with particularly low assessments may receive smaller exclusions but will not owe any property tax.

2. Does that mean this is not proportioned?

Yes.

3. Is it possible that a property owner in T/E could pay more tax with the property tax exclusion under the shift to an Earned Income Tax or Personal Income Tax scenario?

It is not just possible, it is certain that some property owners will pay more in EIT or PIT than they receive in property tax exclusions.

4. What impact do renters experience under the Property Income Tax Reform Act?

It depends on where they work and whether they have earned or personal income. Like all other residents, renters must pay an EIT or PIT but will not directly receive any property tax exclusion. Renters will receive credits for any EIT paid to municipalities in which they work.

5. Is it possible that the shift from a property tax base to a shared tax base of property and either Earned or Personal Income Tax could reduce the money available to operate the School District?

Yes. For example, if the collection costs for the EIT exceed the 2% allowance for collection under Act 1, the shortfall must come from District funds. Additionally, if the amount of property tax exclusion is overestimated, the District will be responsible for the shortfall. This could occur if the collection rate is overestimated or if the number of eligible homesteads is underestimated.

6. When the yield from the collection of either an Earned Income Tax or Personal Income Tax unexpectedly exceeds the maximum exclusion amount permitted under Act 1, what happens to the excess tax money?

Act 1 is not completely clear about this but it does state that any money collected from an EIT or PIT must go towards funding homestead exclusions. If for some reason the District collects more in EIT or PIT than the amount that would fund the maximum exclusion (i.e. the rate is set at the maximum and then earned income turns out to be more than estimated), then the excess money would be applied toward the next year's exclusion and the District must reduce the EIT/PIT or else reduce property taxes for all properties in the District, not just homesteads.

7. Under Act 1 provisions, how is the Earned Income Tax base in T/E calculated?

The Earned Income Tax Base was determined from Pa. Department of Revenue Data for 2003. The EIT Base is compensation and net profits as defined by the current laws and regulations of Pennsylvania. The 2003 EIT base was adjusted for estimated income earned by individuals working in Philadelphia. The adjusted estimate was then projected through 2005 based on the statewide average weekly wage increase. This then became the base for estimating revenue for an earned income tax.

8. Under Act 1 provisions, how is the Personal Income Tax base in T/E calculated?

The Personal Income Tax Base was determined from Pa. Department of Revenue Data for 2003. The PIT Base is total taxable compensation as reported by the Department of Revenue based on the income tax returns of residents of the district. The base was adjusted to reflect the impact of income earned by individuals working in Philadelphia. The adjusted base was then projected using the statewide average weekly wage for compensation and net profits, the unearned income was increased by 3.5% (historical average) and the two projections were summed to estimate the 2005 base used for calculations.

9. What is the projected cost of collection should an Earned Income Tax or Personal Income Tax be instituted?

It is estimated that the cost of collection is 2% of taxes collected.

10. What collection rate should be used in years 1, 2 and 3 to project revenues from an EIT or a PIT?

That is discretionary with the Commission but the danger of overestimating the collection rate is a possible financial loss to the District if it has to cover a shortfall in EIT/PIT.

VI. Ranking of School Districts

1. Where can residents see a list of the proposed tax change rates/amounts for each individual school district?

The Pennsylvania School Boards Association Web Site provides a list of school districts ranked by estimated tax reduction and type. The web site address is http://www.psba.org/issues-research/act1_index-main.asp. Click on “Ranked by Estimated Tax Reduction by Type and Tax”, which is just below Act 1 Ballot Question Survey Results. The schedule reflects the rates and homestead exclusion amounts for each school district, which was approved by local board of school directors as required by Act 1 of 2006. T/E School District accepted our Local Tax Study Commission’s recommendation to ask the voters at the election on May 15 if they wanted to implement a .6% Personal Income Tax (PIT) for the purpose of reducing property taxes.

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