March 1 2004

Who gets how much relief? The answer has important implications for taxpayers and schools. Find a pencil, roll up your sleeves, take a deep breath. Here's how it might work.

(March 2004) As Pennsylvania’s policymakers ponder how expansion of legalized gambling might provide property tax relief to homeowners and farmstead owners, they’re trying to answer this tricky question: Who gets how much relief? This question has important implications for taxpayers and Pennsylvania’s system of school finance.

IssuesPA analyzed the property tax relief proposals currently before the legislature. There are six steps, and unfortunately, the process is anything but simple. Change in the tax system is inherently complicated, and you knew it wouldn’t be easy. So take a deep breath.

Step #1: Certified Minimum Gambling Revenues

Before there’s any property tax relief, there must be a certain amount of money available. In current proposals, this "certified minimum gambling revenue" ranges from $600 million to $750 million.

Step #2: School District Qualification

To "qualify" for property tax relief, a school board must adopt a resolution or the county board of elections must place a voter referendum on the ballot calling for an additional 0.1% earned income and net profits tax to be used locally for property tax relief. Or, voters could decide on an equivalent increase in a local version of the state’s personal income tax. Either option would shift part of the local tax burden from the property tax - the tax that taxpayers love to hate - to an income tax, which is perceived as more fair. School boards could call for additional referenda to approve even greater increases to the earned income/net profit tax or local personal income tax, which would provide even more property tax relief. In Philadelphia, city residents would get a reduction in the city’s wage tax - rather than a property tax reduction. Homeowners who commute to Philadelphia would get both a wage tax reduction and property tax relief.

Step #3: The Property Tax Reduction Index

Each district would have a Property Tax Reduction Index (PTRI) calculated by using school district rankings on four indicators:

  • Personal Income Valuation per Average Daily Membership (PI/ADM) - a measure of wealth per student. The state establishes personal income valuation using tax returns for each school district. Average Daily Membership (ADM) is a measure of student population size.
  • Market Value/Personal Income Aid Ratio (MV/PI) - the district’s relative market value and personal income valuation, compared to the statewide average.
  • School Tax Ratio (STR) - total local school tax dollars divided by the district’s personal income valuation.
  • Equalized Millage (EM) - total local school tax dollars divided by the market valuation for a district (also established by the state).

The first two factors measure wealth; the second two measure tax effort. Each district receives a ranking (1-501) on each indicator, based on its relative position among Pennsylvania’s 501 school districts.

The rankings, added together, create the Property Tax Reduction Index. The higher the number, the more property tax relief funding the district could be eligible for per ADM.

Property Tax Reduction Index = PI/ADM + MV/PI + STR + EM

Example of Hypothetical School District
PTRI = 278 + 146 + 245 +172 = 0.841

Rankings ignore distances within and between indicators. Because the PTRI rankings don’t weigh the distance between ranks - but assume evenly-dispersed results within each category - the results of the calculations and, ultimately, the financial disbursements under the state formula may be distorted.

Step #4: The Rest of the Distribution Formula

Once a PTRI has been assigned to each district, it’s multiplied by the ADM. The result is multiplied by a constant based on the total money available for property tax reduction statewide. In this hypothetical example, $330 is the constant. The final result is the total amount of property tax relief taxpayers in a district are eligible to receive.

Total Property Tax Reduction = PTRI x ADM x Constant Multiplier

Example of Hypothetical School District
0.841 x 3,600 x $330 = $999,108

This school district, with roughly 3,600 students, would have nearly $1 million in state funds available for property tax reduction before adjustment for minimum and maximum limits.

Step #5: Minimum and Maximum Percent of Property Tax Relief

According to IssuesPA’s interpretation of the proposals, the product of Step #4 is added to the local share of property tax relief from a 0.1% increase in local earned income tax. This sum is compared against minimum and maximum property tax relief limits. For example, provisions in the proposed legislation specify that every school district should receive at least 10% to 15% but no more than 40% to 60% property tax relief on homestead and farmstead property. The more money available from gambling, the higher the upper and lower limits will be.

Step #6: 50% of Median Assessed Value of Homestead/Farmstead Properties

Once the amount of property tax relief per school district has been calculated, a homeowner’s (or resident farm owner’s) property tax bill would be adjusted downward based on a reduction to the assessed value of the home. That reduction in assessment could be as high as 50% of the assessed value of the median (middle or typical) property in that school district, a limit imposed by Pennsylvania’s Constitution.

Homestead and farmstead property owners must apply and qualify for a homestead exemption to receive property tax relief. The county would use the qualifying applications to determine the median assessed value.

What questions remain unresolved? Plenty. Among them:

  • Would districts deciding to raise income taxes through referenda get more property tax relief as their "tax effort" increases, compared to those that elect to restrict their spending and revenue?
  • What’s the impact of current property assessment practices? How much will the discrepancies due to outdated assessments within a district distort equitable property tax relief?
  • What’s the process for conducting cross-county referenda? Over 85 districts are in more than one county.
  • How would the formula be applied in districts that cross county lines? How are the differences in assessed values versus market values in different counties taken into account?
  • What is included in calculating minimum and maximum property tax relief - just the state share of property tax relief? Or is local revenue from the increase in local earned income taxes included also?
  • After the first year, what data would be used to calculate property tax relief - a base established the first year or the most recent data available? In the out-years, would the state share of property tax relief be factored into the property tax relief equation?

These seemingly technical problems would change the distribution of gambling revenue from the state to local school districts.

Under the current proposals, property tax relief would be delivered through a complicated formula with long-term implications for school districts, boards of elections and taxpayers statewide. There are plenty of questions about how the property tax relief formula would work - and no easy answers.