Articles

(April 2005) Many Pennsylvanians want property tax relief. Gambling revenues will offer "free money" to make it happen. Why, then, isn't every school district jumping at the chance to get its share for their homeowner taxpayers? IssuesPA investigated.

Here are the basics, and it's the tale of two laws. Act 71 allows up to 61,000 slot machines at various locations, taxing the revenues from those machines at 34%. Act 72 distributes a portion of those tax proceeds to school property homeowner taxpayers, using a complicated formula. School districts must opt into the new plan by May 30, impose at least a 0.1% increase in the earned income tax as local match for property tax relief, and accept certain referenda requirements for future tax increases.

Why isn't every school district climbing on board?

Governor Ed Rendell and proponents tout the advantages: a purported $1 billion of school property tax relief with only a small increase in the earned income tax to help pay for it. Those who choose to gamble - hopefully many visitors from other states - will foot the bill.

But so far only a handful of school districts have signed on to Act 72. Why are school boards hesitant? First, it's important to remember Act 72 produces no new revenue for school districts, but shifts the revenue source from school property taxes to gambling revenue and earned income taxes. Putting that aside, there are many other complicated reasons to proceed with caution.

Opponents often cite the back end referendum requirement as a key reason to steer clear of Act 72. Future proposed tax increases would be submitted to voters for approval before they could take effect - a provision that puts tax increase decisions directly in the hands of the voters.

There are exceptions. For example, school boards can raise taxes without a referendum as long as the increase is limited - that is, as long as the increased revenue doesn't exceed a wage and employment cost index. The index is the result of a complicated formula calculated by the state Department of Education and will vary from district to district, based on wealth.

Other increases excluded from the referenda requirement include costs to respond to emergencies, and those involving court orders.

What's the long term viability of funding property tax relief?

The level of overall property tax relief will depend on what's collected from gambling. A minimum of $500 million must be available before any property tax relief occurs. In the short term, license fees of $50 million each will capitalize the fund. However, longer term viability will depend on the amount lost at slot machines.

Some estimate up to $1 billion annually will be available. Others question that amount. For example, a Mansfield University survey and study suggests gambling will generate only about $120 million in tax revenues from slot machines. And IssuesPA has raised questions about Pennsylvanians' appetite for gambling.

School districts also must consider how the formula impacts each district. Actual property tax relief could vary dramatically between districts and homeowners. A minimum property tax relief is guaranteed - between 10% and 15% - depending on available gambling revenues. A cap limits property tax relief to no more than 40% to 60%. The formula for distributing the money is complicated, to say the least. Generally, school districts with high tax effort and/or low wealth likely will benefit most.

Taxpayer benefits will vary. The relief goes only to homestead or farmstead owners (owner-occupied residences). However, eligible property owners must apply for tax relief, and recent estimates suggest about three-quarters of eligible owners have applied.

Other issues?

There are other peculiar consequences of the exemption system. Within a district, the fewer eligible owners who apply, the more money is available to those who do. And because every eligible owner who has applied will get the same dollar amount of tax relief as every other owner in that district, the percentage of property tax relief is higher for those with lower property value.

To participate, districts must increase their earned income tax by at least 0.1% to help offset the property tax relief. Therefore, retired homeowners - with little or no taxable income - will benefit the most, while working renters actually will lose in the deal. There's a wide range of winners and losers in between - depending on wage levels and property value.

Finally, some school directors will consider the funding source during their decision-making process and reject the funds simply because they come from gambling, regardless of the amount.

What's the bottom line?

School boards are being asked to make a decision now for a tax relief that likely won't arrive until 2007 and base that decision on many unknowns. For those that do opt in, the decision will obligate them to participate for at least four years. After that, they can opt out with approval through a referendum.

So there will be gambling money out there for property tax relief. But is the price too high? Each district, based on its unique circumstances, must decide. That means 500 unique circumstances and 500 decisions, for 500 different reasons.

For more IssuesPA analysis of Acts 71 and 72, click here.