Act 1, Take Two

210, 102, 61, 133, and 228. Those numbers represent the total number of school districts that received referendum exceptions in the last five fiscal years under Act 1 of the 2006 special legislative session. Act 1 was set up to give taxpayers some say over school property taxes: each district would have an annual index that would determine how high school taxes could increase before triggering a referendum vote in that district. Nothing prevented a school board from increasing taxes up to the index, and the law built in ten exceptions that, if any were granted, would prevent a higher-than-the-index tax increase from going in front of the voters.

In other words, an out.

Legislation just passed last week that would take away seven of the ten exceptions. Left in place are three: for pensions, special education, and for school construction debt. It should be noted that in the last two fiscal years nearly all of the districts that secured an exception (and it is possible to get more than one in a single year) got one related to pension costs.

Conversely, there have been very few chances for voters anywhere in Pennsylvania to get a school tax increase measure in front of them on the ballot and to give it an up or down vote. Just goes to show how extensive the exception net was cast. Voters did get the chance to decide whether they wanted higher earned income taxes or to create a personal income tax in order to shift even more burden away from property taxes: few districts did so.

Is this the first step toward moving to a referendum with no exceptions? Or possibly one where any school tax increase, no matter how large, is put on the ballot in front of the electorate?

Referendum Finally Comes to Allegheny County

In a blog entry last week we wrote about Act 1 and pointed out that "voters have had little, if any, opportunity to vote a school tax increase up or down on a ballot". This is due to the school tax reform statute allowing for tax increases up to an index or the possibility of securing one or more of ten exceptions that allow for an above-index tax increase without having to face the voters.

Just today it was reported that the Clairton School District will put its proposed 5.57 mill increase on the ballot for voter approval. The District would be allowed to increase taxes .57 without triggering a referendum, and they have sought out exceptions from the state. But District officials viewed the state budget proposal for education and the uncertain nature of its exception requests and decided to push forth with the referendum.

County data on millage rates shows that the District, like the City of Clairton, has a bifurcated tax rate. This means land and buildings are taxed at separate rates. The District switched from a single rate in 2006. As of 2009 the district’s rates were 3.1 mills for buildings, 75 mills for land. Data for 2010 shows that the rates increased to 3.9 mills and 87 mills, respectively. That’s a jump of 25% for buildings and 16% for land. It is not clear if the 5.57 mill proposal applies to one category or the other or is split between land and buildings.

But it is an extraordinary increase based on the index and the current rates. Now the District can try and make its case to the voters why the money is needed and a clear up-or-down vote can be made on that argument.

Act 1: A Rewrite?

One of the items that came out of the Governor’s budget presentation on Tuesday was a possible change to Act 1 of 2006, the law that is aimed at providing school property tax relief through gaming money, tax shifts, and, if applicable, taxpayer referenda on tax increases that exceed a predetermined index. Many have opined that state level cuts to education will simply force tax increase at the school district level: one representative stated "it’s a no-state-tax budget, but it will not be a no tax budget at the end of the day for most Pennsylvanians. School taxes will have to go up".

To stave off what has been the norm for school districts in the past few years under Act 1-design a budget and, if a tax increase is included, either increase it to a level just under the index or seek one or more of the ten exceptions available under Act 1 from either the PA Department of Education or the courts-there might be a proposal to tighten the Act 1 requirements. Voters have had little, if any, opportunity to vote a school tax increase up or down on a ballot. The Pennsylvania School Boards Association does not have any hard data, but officials there counted about 12 referendums, none of which were successful. There were 2 approvals on 5 ballot questions on school construction. Contrast that with PDE data that shows just for FY2010-11 133 districts "sought and were granted approval" for referendum exceptions under Act 1.

Some officials fear that voters will choke off funding to schools if they get to vote on tax increases without exceptions. Another representative was quoted as saying "we have to make sure our school districts run as efficiently as possible, but I’ve got great concerns about placing those types of issues on the ballot". Why? Could it be because school officials would have to make a case for justifying their tax increase without getting a pass?

Just because there is referendum power does not mean that an increase will be automatically rejected. The Education Commission on the States showed that in 2008 eleven states put thirteen statewide education funding referenda questions on the ballot: seven passed, six failed. Nearby states have various forms of taxpayer say over tax increases. If education advocates believe in their cause and feel that there can never be too much invested in teachers, facilities, classrooms, and programs, why not make the case to the voters in Pennsylvania’s districts?

Lebo Takes Stage for Act 1

Question: if Mt. Lebanon school district is limited to a 3% tax increase under Act 1 then how is it that taxpayers woke up this morning to find that their school property tax bill is about to increase 10.7%?

Answer: there are so many exceptions built into Act 1 permitting school districts to ignore their "allowable" increase that the "so called" taxpayer protections have more holes than Swiss cheese.

Act 1 was supposed to change the school property tax system by allowing for tax relief from legalized slots and providing taxpayer protections by instituting a tax cap and allowing for voter referenda when the cap was exceeded. But the law also allowed districts the ability to secure exceptions for outstripping the cap without having to put the tax increase before the voters if the approved expenditures fell into one of ten categories, including school construction, health care benefits, special education expenditures, etc.

At the new rate of 26.69 mills Mt. Lebanon won’t have the highest school tax rate in the County, but it approaches the top of the list. But this increase is compounded by the events coming in the near term for the district: a countywide reassessment that will affect under valued homes and a growth in school spending that is currently forecast to increase property taxes (as witnessed by last night’s action) and earned income taxes. In short Mt. Lebanon homes could be facing significant tax hikes in the next four years.

More Choices on the Tax Menu

The real estate tax; the wage tax; the Local Services tax; the realty transfer tax; the parking tax; the poured alcohol tax; the gross receipts tax; the parking tax; the mechanical devices tax; the amusement tax…

You get the idea: there is a plethora of tax sources available to local government in Pennsylvania. That’s why it is always surprising to hear calls for even more sources of tax revenue, particularly when there is a call for layering more taxes upon the existing ones instead of phasing them out.

Just last week the PA League of Cities and Municipalities called for counties to get an additional 1 percent on the sales tax (except in Allegheny County and Philadelphia, which already have local add-ons) for "easing school property taxes (remember Act 1?) and helping county government and municipalities pay their expenses".

Or counties could get a poured alcohol tax like Allegheny County has or, failing those options, the state could just hand out revenue to offset the presence of tax-exempt property (which often generates much of the taxable activity that is captured by one of the many taxes listed above.

Maybe a better option-in light of the massive state budget shortfall, the looming problems with the two statewide pension systems, and the impact of legacy costs at the local level-would be to try and control the spending side of the equation with a spending cap that is tied to inflation and/or population, referenda on tax increases and creation of new tax sources, and a movement to a defined contribution system of pensions for new employees. Otherwise there might not be enough room in the local tax code to list all of those tax sources.

Taxpayer Protections Get Up or Down Vote Today—But Not Here

While Election Day is relatively "quiet" in southwestern Pennsylvania and the rest of the state with judicial and municipal offices dominating the ballot, there are questions on the ballots in other states that could determine whether taxpayers gain control of their government’s growth.

In Maine and Washington, voters get to decide on Taxpayer Bill of Rights measures: both states would control revenue or expenditure growth by pegging them to the rate of inflation plus population change annually. The National Taxpayers’ Union Ballot Guide points out that in Maine, should the measure pass, growth above the cap would be returned to the taxpayers and used for a rainy day fund. In Washington voters would get approval of proposed tax increases that exceed the cap.

If Pennsylvania had a similar measure in place there would have been enough money to close the $2-$3 billion shortfall that the state recently wrestled with and will wrestle with again. Just by tying spending growth to the rate of inflation (measured by the change in the Northeast consumer price index) spending since 2002 (when the state budget was $20.4 billion) would have grown 22 percent instead of the actual 36 percent state taxpayers have seen, resulting in $3 billion in savings.

But don’t look for any type of tax control measure soon. Even the highly touted Act 1 school property tax reform measure has received minimal play on ballots across the state, thanks to the loopholes built into the language. Voters have had little opportunity to see a tax increase proposal placed before them, and few districts seem interested in asking their voters to consider a shift to a higher earned income tax or a personal income tax in order to fund property tax relief.

Is Act 1 Temporizing School Taxes?

With all the tax talk of late-a possible boost in the state income tax, extending an extra percentage point on the sales tax to counties, etc.-the school tax provisions of Act 1 are slipping under the radar. Schools start their fiscal year on Wednesday and districts in Allegheny County are finalizing their budgets.

Recall that Act 1 utilizes gaming money to target tax relief to homeowners through an expanded homestead exemption and sets a cap on how high school taxes can go on an annual basis. It is this second component, the Act 1 index, that warrants scrutiny. It protects property owners from so-called "extraordinary" tax increases through setting a cap each year. This does not prevent a school district from enacting a tax increase-it just tries to control the size. For instance, Upper St. Clair’s 4.1 percent Act 1 index allowed them to adopt a 4 percent increase, going from 22.45 mills to 23.37 mills this year. Avonworth, Bethel Park, Fox Chapel, and Woodland Hills also plan to increase millage rates within the allowable index for this coming fiscal year.

Failing to live within the tax cap does not mean the matter goes to the voters, either. That’s because the law allows for ten possible exceptions by which a district can exceed its cap without putting it to a referendum.

In fact, it is fair to say that few voters across the state have had a referendum question on school taxes and spending come before them at the ballot box. That’s a far cry from the type of control voters in other states have and probably not what the voters of this state were thinking they would get when the Legislature went into special session on school taxes.