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General Information About Special Session Act 1 of 2006
The Taxpayer Relief Act, also known as SS Act 1, benefits taxpayers as follows:
- SS Act 1 guarantees that homeowners in every school district can benefit from state-funded property tax relief. (Exception: In Philadelphia, the funding will be used to reduce the wage tax.)
- It protects taxpayers in every school district from extraordinary tax increases in the future by implementing voter controls through a fair referendum requirement that gives voters control over the most severe tax increases while protecting school districts' ability to raise the funds they need.
- It provides extra property tax relief to senior citizens - who are the hardest hit by rising property taxes – through a major expansion of the state Property Tax and Rent Rebate Program.
- Act 1 gives local communities new options to choose the right mix of local taxes to fund their schools.
Every municipal election (held
in odd-numbered years) –
Every school district except Philadelphia will have the option of asking
voters to approve an additional income tax increase in order to fund
greater local property tax relief.
Choosing whether to receive
state-funded property tax relief –
If a school board rejects state funding for property tax relief through
gaming, then the final decision goes to the voters. In a referendum
question, voters can overrule their school board and decide to accept
state-funded property tax relief.
Power over extraordinary tax
increases – Voters in every school
district will have the final say on extraordinary tax increases. School
boards will still be able to raise property taxes each year to keep up
with inflation, and they can receive referendum exceptions for emergencies
and educational necessities. But after that, tax increases will require
Funds from expanded gaming will be used to reduce local school property taxes. In addition, voters can choose to further reduce their property taxes by shifting to a local income tax.
SS Act 1 expanded the income thresholds for qualification for property tax and rent rebates. The program only requires senior citizens to count 50% of Social Security payments towards their income.
- Before SS Act 1, senior citizens who earned up to $15,000 could receive a property tax or rent rebate up to $500. In 2004, the average participating homeowner received a $375 rebate from the Property Tax and Rent Rebate program.
- Beginning with their 2006 tax bills, homeowners are eligible to receive the following:
|$0 to $8,000||$650|
|$8,001 to $15,000||$500|
|$15,001 to $18,000||$300|
|$18,001 to $35,000||$250|
In addition, the law gives even more property tax relief to the senior citizens with the highest need, beginning in the first year that statewide property tax relief occurs for homeowners in all school districts:
- Because school districts in cities with high wage taxes will be unlikely to ever make a shift to increase their wage taxes to fund property tax relief, senior citizens in Philadelphia, Pittsburgh and Scranton who earn up to $30,000 a year will have their property tax rebate increase by an additional 50%.
- Senior citizens who earn up to $30,000 a year and pay more than 15% of their income in property taxes (and who do not live in Philadelphia, Pittsburgh or Scranton) will also have their property tax rebate increase by an additional 50%.
- Renters are eligible to receive the following:
|$0 to $8,000||$650|
|$8,001 to $15,000||$500|
The Senior Citizens Property Tax and Rent Rebate Assistance Program is administered by the Department of Revenue. The application and information for filing a claim can be found at www.revenue.pa.gov. Click on Forms and Publications; then click on Property Tax/Rent Rebate.
Homestead and Farmstead Exclusions
A homestead exclusion lowers property taxes by reducing the taxable assessed value of the home. For example, if a home is assessed at $50,000 and the homestead exclusion is $5,000, then the homeowner only pays taxes on an assessed value of $45,000.
A homestead must be a Pennsylvanian's permanent primary residence on which property taxes are paid. Included with the term "homestead exclusion" is "farmstead exclusion."
A farmstead exclusion provides property tax relief to farmers. A farmstead applies to buildings used for agricultural purposes on a farm that is at least 10 contiguous acres. The farmstead must also be the primary residence of its owner. Farmers can be eligible for both a homestead exclusion and a farmstead exclusion since each covers a different part of the property.
To receive a homestead or farmstead exclusion, a Pennsylvania resident must submit an application to the county assessment office.
School districts are required to send an application to all owners of residential property in the school district by December 31 each year; however, annual notification may be limited to owners of residential property not currently approved as a homestead or whose approval is due to expire.
Homestead exclusion applications are due by March 1. Homeowners cannot be required to resubmit their application more than once every three years. Residents that acquire property in the school district after the March 1 deadline must wait until the following year to qualify for a homestead or farmstead exclusion.
The county assessor must notify the property owner of the approval or denial of the homestead or farmstead exclusion no later than 30 days after receipt of the application.
SS Act 1 only applies to residential property owners. Pennsylvanians in 66 counties will receive property tax relief through homestead and farmstead exclusions.
In Philadelphia, the state funding for tax relief will be used to reduce wage taxes instead of property taxes. Wage taxes will be reduced for both resident and commuter wage taxpayers. Scranton School District has the option of using up to 50% of its property tax reduction allocation to reduce the rate of its earned income and net profits tax.
The extent of property tax relief in a particular school district will depend on whether the taxpayers in the school district approve a local income tax increase and whether the school district accepts its state allocation of revenue from expanded gaming.
The amount of property tax relief will vary from one school district to another. The property tax relief formula is designed to take equity into account – sending the most state resources to the communities with the greatest tax burden and least local wealth.
Local Income Tax
All school districts, except Philadelphia, Pittsburgh and Scranton, must give voters the opportunity to raise the local Earned Income and Net Profits Tax (EIT) or switch to a Personal Income Tax (PIT) at a municipal election in order to raise revenue to fund local property tax relief. The school board will decide which kind of income tax voters will get to decide on, and at what rate. At least 98% of the additional revenue must be used for local property tax relief; up to 2% can be used for the school district's operations.
School districts do not have to increase or establish a local income tax to receive state-funded property tax relief.
There are several types of income – ranging from the hourly wage that a worker earns to the dividends on an investor's stocks. The EIT and PIT include different types of income.
The EIT is a tax on compensation and net profits, including:
- Commissions, bonuses, stock options and incentive payments
- Net profits from the operation of a business, profession or farm
The PIT taxes compensation, net profits and other kinds of income:
- Compensation and net profits (everything that is taxed by the EIT)
- Net gains or income from the dispositions of property
- Net gains or income from rents, royalties, patents and copyrights
- Income derived through estates or trusts
- Gambling and lottery winnings
Neither the EIT nor the PIT taxes Social Security or retirement pensions.
Before giving voters the choice to generate property tax relief by increasing a local income tax to replace a portion of property taxes, a school board must form a Local Tax Study Commission to evaluate the school district's existing tax structure and the impact of levying a new earned income and net profits tax (EIT) or personal income tax (PIT).
The school board can appoint a 5-, 7- or 9-member commission. Only one of the members can be a school board member; the rest must be residents or taxpayers of the school district. Membership should reflect the socioeconomic, age and occupational diversity of the community.
The Local Tax Study Commission is responsible for studying the district's current taxing structure and making a recommendation to the school board within 90 days on the impact of levying a new EIT or PIT to provide property tax relief. The commission must consider:
- historic, present and projected tax rates and collections,
- the proportion of taxes that come from each source, and
- the characteristics of the tax base.
The commission's recommendation is not binding, but the school board must vote to either accept or reject it.
Local income taxes will increase only if voters approve an increase. The school board will decide whether residents of the school district vote on an Earned Income Tax or a Personal Income Tax, and the school board will set the proposed income tax rate based on the level of property tax relief that it decides to offer voters:
At a minimum, the proposed increase to an income tax must reduce property taxes by what is known as "50% of the maximum homestead exclusion." If achieving the minimum requires an increase in the income tax rate greater than 1%, a school district is not required to propose a rate greater than an increase of 1% for voter approval (in addition to the school district's existing Earned Income Tax rate).
Referendum Requirement for Tax Increases
The law requires a voter referendum if a school district proposes to raise its property tax rate – or the rate for other school taxes – faster than its inflation index after accounting for approved referendum exceptions.
The Department of Education provides each school district with its index annually by September 30.
Further information about the index is available at www.education.pa.gov/PropertyTax.
A school district may also qualify for one or more referendum exceptions; these exceptions allow a school district to raise tax rates beyond its index for specific purposes without voter approval.
SS Act 1 includes sensible and flexible referendum requirements that protect homeowners while ensuring that school districts can afford to adequately fund their schools. A school board will need voter approval before enacting extraordinary tax increases.
In order to increase property taxes beyond the inflation index without seeking voter approval, a school board must receive a referendum exception for specific costs. As amended by Act 25 of 2011, the remaining referendum exceptions cover:
- For school construction, including:
- Debt on an existing school construction projects
- Electoral debt (previously approved via referendum)
- Special education costs that increase by more than the index
- Increases in retirement payments that rise faster than the index
Distribution of State Property Tax Reduction Funding
State Property Tax Reduction Allocations are provided to school districts in the fiscal year following certification by the Secretary of the Budget that sufficient funds are available for a distribution.
School boards are given a limited opportunity to "opt out" of receiving state property tax reduction allocations. After the Department of Education notifies each school district of its property tax reduction allocation (no later than May 1 for the July-to-June fiscal year that starts that July 1), a school board can pass a resolution within one month refusing its property tax reduction allocation.
If a school board votes not to accept its state property tax reduction allocation, voters get the final say. In the subsequent election, voters will be asked to decide whether the school district should accept state funds to reduce property taxes. If the majority of voters approve, then the district will receive state-funded property tax relief beginning with the next fiscal year.