EPLC Education Notebook

Wednesday, November 23, 2005

Pennsylvania Education Policy Activity

Special Session on Property Tax Relief - House Actions


• This week, the House began debate on a package of legislation introduced by the Commonwealth Caucus that would eliminate school property taxes and fund schools through a decreased, but broadened, state sales tax. The package consists of Special Session House Bills 39, 40, 41, 42, 43 and 59. The House passed Special Session House Bill 39, which prohibits school districts from levying property taxes after December 31, 2007. The House also amended parts of the package that would have made goods and services not currently taxed subject to a 5% sales tax, but the legislation (Special Session House Bills 42 and 43) did not come before the chamber for a final vote. House members added exceptions to exempt food, clothing and other items that would have been subject to the proposed 5% sales tax. It is now clear that the Commonwealth Caucus proposal lacks anywhere near the votes required to be approved by the House. Serious questions had been raised about whether the legislation in its original form would raise enough new revenue to replace the property taxes that were to be eliminated. The additional exemptions added during House floor debate make it clearly impossible for the state to raise enough revenue to replace school property taxes as the plan originally proposed. This legislative idea appears to have effectively died although it still sits on the House calendar and is subject to further action. A more detailed description of the original Commonwealth Caucus proposal is available in the November 18 edition of the EPLC Education Notebook at www.eplc.org/notebook/November18,2005.html.



• A special House Subcommittee charged with crafting a proposal for what a back-end referendum on school budgets should look like met Monday and Tuesday to discuss what district costs should not be subject to referendum. The Committee has reached general consensus on including referendum exceptions for certain costs related to: special education, health care, pensions, responding to emergencies, implementing court orders, paying interest and principal on debt, implementing a school improvement plan required by NCLB, maintaining per-student local tax revenue, and maintaining revenues. Many of these exceptions were included in the back-end referendum established by Act 72 of 2004, however, the parameters for some have been changed (including the calculations for special education, health care and PSERS costs not subject to referendum). A chart distributed by the Subcommittee that compares its draft proposal to the referendum exceptions in Act 72 of 2004 and Act 50 of 1998 is included at the end of this Notebook.
  
  Additionally, the Subcommittee debated whether an exception should be included for school construction to address the needs of growing school districts. A suggestion was made to include an exception based on square-foot per student that would allow districts to construct up to a certain amount of space before having to turn to referendum for additional construction funding. The concept behind setting square-foot per student parameters is to limit districts from building large "Taj Mahal" schools without voter consent, but not restrict districts with burgeoning student growth from meeting their basic needs. Finally, the Subcommittee rejected including exceptions for increases in energy costs and costs to respond to threatening conditions.
  
  Under referendum, school districts are required to seek voter approval for tax increases beyond a certain index (districts that chose to participate in Act 50 of 1998 and Act 72 of 2004 already are subject to this requirement). However, a number of exceptions are included in Act 72 that allow districts to increase taxes beyond the index for specific purposes. The Special Session House Subcommittee on Local Control Initiatives is considering what the appropriate referendum exceptions should be and will present its recommendations for consideration by the House Finance Committee after Thanksgiving.



• On Tuesday, the Special Session House Subcommittee on Income Tax Initiatives and the Subcommittee on Alternative Revenue Sources gave a nod to legislation introduced by the Local Tax Policy Caucus. Special Session House Bill 14 would have the state pay for and administer special education services for students with disabilities. Services would continue to be provided locally to students. Gifted education would remain under the purview of local school districts. The change would shift approximately $800 million from local school districts to the state. Initially, the state takeover was to be phased-in, however, bill sponsor Rep. Carole Rubley said using gaming funds to support special education could speed up the process. Special Session House Bill 15 breaks education costs into two categories - fixed costs (such as construction and insurance) and instructional costs (such as teacher salaries, books, and benefits). Instructional expenses would be funded through a local personal income tax; all other costs would be funded through a local property tax and realty transfer tax. The bill also eliminates local nuisance taxes. House Bill 15 requires districts to use PIT revenue leftover after meeting instructional expenses to reduce residential property taxes. The bill also includes limitations for increasing local property taxes and the local PIT in the future. Finally, Special Session House Bill 16 provides property tax relief for homeowners who meet income eligibility guidelines related to poverty. Qualifying homeowners would be exempt from paying the balance of school property taxes that exceed 3% of their household income. The state would reimburse school districts for their lost revenue. Bill sponsor Rep. Tony Melio said an old fiscal analysis of the bill from a previous legislative session estimates the cost to be $600 million in the first year, increasing annually by 1.5%. Melio said the legislation could be implemented quickly by using proceeds from the sale of gaming licenses. Special Session House Bill 17, the last in the four-bill package, has been referred to another Subcommittee.



• On Monday, the Special Session House Subcommittee on Property Tax Reduction met to review legislation related to the Senior Citizens Rebate and Assistance Act, Homeowner Tax Relief Act (Act 72 of 2004) and General Property Tax Bills.
  
  Special Session House Bills 30, 44 and 58 would amend the Senior Citizens Rebate and Assistance Act, and were tabled for future discussion. The Subcommittee agreed that since Special Session House Bills 44 and 58, in particular, pertain to revenue from gaming proceeds, it is difficult to know what funds will be available and when they will be generated. The Subcommittee also wants more information about the fiscal costs of the amendments before making any decisions. The Subcommittee also shelved Special Session House Bills 37 and 46 for further discussion, again citing the need for more concrete information on the legislations' costs before being able to reach consensus on whether it will support the bills. Special Session House Bills 37 and 46 makes changes to the Homeowner Tax Relief Act.
  
  The Subcommittee also discussed four bills related to property taxes in general - Special Session House Bills 13, 22, 24, and 32. The Subcommittee was not favorable of House Bills 13, 22 or 32. Some felt House Bill 13 - which prohibits property tax increases unless approved by voters - was too broad, while others felt House Bill 22 - which would create special tax provisions for disabled veterans through a constitutional amendment - was too narrow. Members were undecided about Special Session House Bill 24. A summary of the legislation reviewed by the Subcommittee is included at the end of this Notebook.



Special Session on Property Tax Relief - Senate Actions


• The Senate will start with a clean slate when it returns to consider property tax reform after the Thanksgiving holiday. On Tuesday, the Senate Special Session Appropriations Committee gutted Special Session Senate Bill 30, which represented the property tax relief plan backed by Senate Majority Leader David Brightbill. Only a provision requiring back-end referendum on school budgets remains intact in the legislation. Senators will have an opportunity to submit amendments to the bill when the legislature returns to session the first week of December. As initially introduced, Senate Bill 30 would have driven property tax relief through an increase in the state sales and personal income taxes. Increases in state taxes would have been subject to voter approval. A review of Senate Bill 30 as originally proposed by Senators Edwin Erickson and David Brightbill is available in the November 18 edition of the EPLC Education Notebook at www.eplc.org/notebook/November18,2005.html.



• Links to all legislation introduced in the Special Session on Property Tax Relief is available online in EPLC's Education Policy Information Clearinghouse at www.eplc.org/clearinghouse_k12finance.html#legislation.



Proposals to Limit State Spending


• The Senate passed an amended version of House Bill 2082, which limits state spending to an inflationary index. Annual spending increases would be limited to the lesser of either: 1) the average percentage change in personal income in PA or 2) the average percentage change in inflation plus the average percentage change in state population. (Personal income, inflation and state population changes are all calculated based on the preceding three calendar years. Appropriation limit is based on amounts approved as executive authorizations by the Governor plus preferred and nonpreferred appropriations from the General Fund for the prior fiscal year.) The General Assembly could exceed this spending limit to respond to a presidentially declared emergency (approved by a majority vote of members of the House and Senate), a gubernatorially declared emergency (approved by a vote of three-fifths of members of the House and Senate), or in any other situation as long as the spending is approved by a vote of two-thirds of the members of the House and Senate. In any year in which the Commonwealth experiences excess revenue, excess funds would be distributed between the Budget Stabilization Reserve Fund (Rainy Day Fund - 35% of excess revenue) and returned to taxpayers through a new Taxpayer Fairness Fund (65% of excess revenue). If the Rainy Day Fund exceeds 7.5% of the prior year's General Fund appropriations, all excess revenue would be transferred to the Taxpayer Fairness Fund. HB 2082 has been referred to the House Rules Committee.
  
  This is the second time the Senate has voted to limit state spending. Legislation that would have restricted spending through statute and through a constitutional amendment (Senate Bill 4 and Senate Bill 884) was passed by the Senate on October 26.



• Legislation that would reduce the state personal income tax from 3.07% to 3.05%, beginning in 2007, is on its way back to the Senate. The House concurred in Senate amendments to House Bill 515 on Tuesday and amended the bill further. HB 515 also makes changes to certain state business taxes. The legislation now heads back to the upper chamber for consideration of House changes. The reduction in the personal income tax would save the taxpayer $2.00 per $10,000 of taxable income.



Other House Actions


• The House amended and passed legislation ( House Bill 1427) designed to streamline the local earned income tax collection system. For details on the reforms made by HB 1427, contact the office of bill sponsor Rep. Gordon Denlinger at (717) 787-3531. HB 1427 awaits assignment to a Senate Committee.



• On Tuesday, the House Finance Committee approved House Resolution 509, which directs the Local Government Commission to study the feasibility of implementing a regional earned income tax collection system. HR 509 now goes to the full House.


All legislation from the Pennsylvania General Assembly, including bills cited in this Notebook, can be found at www.legis.state.pa.us/cfdocs/legis/home/session.cfm.


Research and Reports


• IssuesPA looks at how the diverse tax reform proposals introduced in the special session fit together in its latest issue brief titled "Everybody Wants to Change the Tax System - Is Anybody Connecting the Dots?" at www.issuespa.net/articles/15052/. In another new article, IssuesPA discusses legislative proposals to limit state spending. Read more about "Tax and Expenditure Limits (TELs): Pennsylvania Takes a Serious Look" at www.issuespa.net/articles/15054/.



• The National Center for Education Statistics recently released the following report:
  
  Indicators of School Crime and Safety: 2005
  http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2006001



Other


• Next week...The Goldman Sachs Foundation and the Educational Testing Service co-sponsor a symposium on "Addressing Achievement Gaps: Developing High Potential Youth" in Princeton on November 29-30. The House Special Session Subcommittee on Property Tax Reduction meets Wednesday in Harrisburg. The Governor's Commission on College and Career Success meets Friday in Harrisburg. For information on these and other upcoming events, see www.eplc.org/calendar.html.

• Amends the Senior Citizens Rebate and Assistance Act, Section 4 (Property tax; Rent Rebate and Inflation Cost)



• Maintains allowed rebates in sub-section (2) through calendar year 2005


• Adds sub-section (3) with an increase in household incomes


• Adds sub-section (4) to allow the department to adjust household incomes if there is an increase in the monthly Social Security Benefit.

• Amends the Senior Citizens Rebate and Assistance Act, Section 4 (a.1) and (b) (Property tax; Rent Rebate and Inflation Cost)



• Maintains allowed rebates in sub-section (2) through calendar year 2004.


• Adds sub-section (3) with an increase in household incomes


• Amends 4(b) to increase the property tax or rent rebate to a limit of $1,000


• Repeals Act 72 and transfers funds from the Property Tax Relief Fund into the State Lottery Fund

• Amends the Senior Citizens Rebate and Assistance Act, Section 4 (a.1) and (b) (Property tax; Rent Rebate and Inflation Cost)



• Maintains allowed rebates in sub-section (2) through calendar year 2004.


• Adds sub-section (3) with an increase in household incomes


• Amends 4(b) to increase the property tax or rent rebate to a limit of $1,000


• Annual transfer of $250 million from the Property Tax Relief Fund into the State Lottery Fund

• Amends the Homeowner Tax Relief Act (P.L. 654, No. 72) by adding a new chapter. Chapter 9: Homeowner Tax Rebate. This chapter is to apply to residents that are not eligible to receive a reduction under Chapter 5 (State Funds Formula). The provisions of the bill are as follows:



• Rebate eligibility


• Payments - Fund money will be equally divided among eligible homeowners and paid in the form of rebates


• Rebate Administration


• Petitions for review, penalties, erroneous rebates


• Property tax rebate received under this chapter will not be considered "income" for the purpose of determining eligibility for any State government program.

• Amends the Homeowner Tax Relief Act (P.L. 654, No. 72), Sections 503 (e), deleting 704 (Senior citizen homestead property tax reduction in cities of the first class) and adding a new Section 901 (Senior citizen homestead property tax reduction).



• Any resident eligible to receive a property tax rebate through the Senior Citizens Rebate and Assistance Act is eligible to receive an additional 50%.


• Transfer of funds from the Property Tax Relief Fund to the State Lottery Fund.

• Establishes the Real Property Tax Limitation Act, stating on 1/1/2006, no political subdivision will have the authority to authorize a real property tax increase unless there is approval from the electors in the form of a referendum.



• Referendum exemptions identified.

• Proposes an amendment to Constitution of the Commonwealth of Pennsylvania, Section 2 (c) (Exemptions and special provisions) of Article VII (Taxation and Finance):



• Deleting provision specifying involvement in "any war or armed conflict", by generalizing the involvement to be in "the armed forces of the U.S."


• Real property taxes are decreased by the percent of an individual's disability as determined by the U.S. Department of VA.


• Extends this to unmarried surviving spouse.

• Property tax prohibition.



• The establishment of the Homestead Tax Elimination Fund.



• Deposited into the fund



• Sales and use tax - an additional 2% on each separate sale at retail on tangible personal property or services. All exclusions as stated presently in the Tax Reform Code of 1971 shall apply.


• Personal Income Tax - an addition of 1% on each class of income.


• Distribution of funds.



• No later than June 30 of each year the political subdivisions will certify amount lost as a result of property tax prohibition.


• No later than July 15 the Department of Revenue will reimburse the subdivision for revenues lost under prohibition.



* Similar to SS HB 38 (Habay) referred to Alternative Rev. Sources)

• Prohibits school districts from levying the real property tax for any purpose.

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