March 1 2004

What are the primary goals? What factors drive the distribution of funds? And what is the long-term outlook for property tax relief funded primarily through gambling revenues?

(March 2004) Whether to authorize new gambling in Pennsylvania by legalizing slot machines has become a saga filled with questions. How many venues? Where should they be located? How many machines at each location? How should Pennsylvania regulate them?

Conspicuously absent are questions about how new state tax revenues from these slot machines would be spent. How would Pennsylvania's gambling jackpot be distributed for property tax relief? What if that bonanza dwindled over time? Who are the winners and losers? What are the implications for financing public education?

IssuesPA took a closer look.

What are the primary goals?

While there are differences about minimum and maximum guaranteed percentages of property tax relief and the amount of gambling revenues required to set the process in motion, proposals advanced by the state House of Representatives, Senate and Governor Ed Rendell share common goals of shifting part of the local school tax burden from property tax to an earned income or personal income tax - and using revenues from slot machines to provide even greater property tax relief.

Except in Philadelphia, taxes on every owner-occupied property (homestead or farmstead) would be lowered through a calculated exemption on assessed value, an exemption identical for every owner-occupied property within a particular school district. Depending on several factors, the exemption could result in tax relief as high as 50% of the tax levied on the median (middle or typical) property in that school district. The 50% upper limit is imposed by the state Constitution. In Philadelphia, tax relief would take a different shape; there'd be a reduction of the wage tax on city residents and commuters.

On average, the proposals shoot for $5 of property tax relief for every $1 of increased local taxes on earned income and net profits (or an equivalent increase generated by a local version of the state personal income tax). However, very few districts are "average." Most have unique characteristics that would determine the actual amount of property tax relief.

Each proposal has secondary impacts on Pennsylvania's school finance system - including the overall state share of educational funding. Some estimates forecast a shift in overall state share of education funding from 34% in 2003-2004 to 43%. Of course, few districts are average, and the state share has varied and will continue to vary significantly from district to district.

The proposals also would limit the current unchecked growth of local school tax rate increases. With few exceptions, school districts would need voter approval to increase tax rates beyond average increases of the Standard Average Weekly Wage and Employer Cost indexes.

What is in the distribution formula?

Current property tax relief proposals would change state and local shares of education funding by shifting part of the local property tax burden to the state. They'd distribute gambling revenues for local property tax relief using a formula that includes five primary factors: two measures of wealth, one driven by personal income, the other primarily by market value of properties; two measures of tax effort, one driven by personal income, the other by market value; and the Average Daily Membership, a measure of the size of a district's student population.

Generally, there are two kinds of districts that stand to benefit the most under the proposed formula:

  • High tax effort districts - where taxpayers pay high taxes relative to property market value and/or personal income levels.
  • Low wealth districts - where market values and personal income levels are relatively low compared to the number of students or compared to the state average.

To learn more about how the formula works, click here.

So what's the long-term outlook on property tax relief?

Property tax relief means replacing revenue from the local property tax -- a stable, predictable source of revenue - primarily with state proceeds from gambling, a revenue source that's not so stable or predictable. Whether Pennsylvania would get $1 billion per year from gambling remains to be seen, and the future stability of gambling revenues is uncertain.

There are a number of unanswered questions:

  • Will competition from other states reduce Pennsylvania's potential bonanza?
  • How will changes in the state's economy impact gambling behavior? Will slot machines lose their novelty after a few years?
  • If gambling revenue declines or stagnates from year to year, would the state make up for shortfalls from the state's General Revenue Fund? Would districts be required to make up for a shortfall with local tax increases? Would those increases be subject to voter approval?
  • What will be the effect of voter referenda on the ability of school districts to meet education standards through local taxes? Are voters in wealthy districts more likely to vote for future tax increases than voters in less wealthy districts, further widening the spending gap?

State policymakers want to place a large bet on gambling, and the stakes are high: property tax relief and the future stability of Pennsylvania's school funding system. Do Pennsylvanians know enough about the odds to make this bet?