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(July 2004) Slots are coming to Pennsylvania, and so is property tax relief.  What’s the “skinny” on the property tax relief elements of Pennsylvania’s Big Gamble?  IssuesPA prepared this analysis.

Earlier this month, the Senate and House of Representatives approved House Bill 2330, The Pennsylvania Race Horse Development and Gaming Act, which authorizes slot machines, and Senate Bill 100, The Homeowner Tax Relief Act, which provides school property tax relief from two sources – revenues from a 34% gambling tax on gross terminal revenue and a 0.1% increase in the local earned income tax.

Under the original property tax relief plan proposed by Governor Ed Rendell, the state would have tapped a variety of sources, including slots revenue, and would have restructured the school funding system.  Ultimately, it’s become a zero-sum game for school districts – a shift from local to state (gambling) resources and a 0.1% increase in local earned income tax to replace a part of the school property tax.

And consider this: 61,000 slot machines divided by 1.8 million public school students equals one machine for every 30 students – about one slot machine per classroom.

Compared to earlier versions, there were changes, and some questions have been resolved, but the heart of the plan essentially is unchanged.

What’s coming?

State government will distribute a share of gambling revenues as local property tax relief, using a formula including two measures of wealth -- one driven by personal income excluding retirement income, the other driven primarily by market value; two measures of tax effort using the same criteria; and the size of a district’s student population.

School directors or voters must act first to qualify for property tax relief funds. They must implement a  0.1% earned income/net profits tax or schedule its implementation prior to receiving any gambling revenue.

Those qualifying districts are guaranteed a minimum level of relief – between 10% and 15%, depending on revenues available from gambling. Relief is capped between 40% and 60% or – and this is a change from previous versions – a prorated amount if gambling revenues are below $750 million.

Another change: to provide local property tax relief, the state must have a certain level of funds available. A minimum of $400 million – down from $750 million and $600 million in previous versions – is required to provide the first property tax relief distribution, and $400 million in reserve for future years.

(click here for more on the property tax relief formula)

Which districts do best?

Generally, two kinds of districts will benefit 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.

Initially, the Governor touted the plan as providing an average $5 property tax relief for every $1 increased local tax effort. At $1 billion in slots revenue for property tax relief, the average would be about $5:$1. However, very few districts are average, ranging from less than a dollar to more than $20 in property tax relief for every $1 increase in local earned income.

(click here for an overview of the policy goals for property tax relief)

So who wins?  Who loses?

Most working renters lose. They likely won’t benefit from property tax relief and will pay more taxes because of a higher local earned income tax, unless they live or work in Philadelphia. Renters will face an increase in their total state and local taxes ranging from less than 1% to as much as 2.3% of their income.

Homeowners win. Because the proposal will provide property tax relief to homeowners in most parts of the state, homeowners will win big under this plan. In Philadelphia, only low-income seniors will see property tax relief; both homeowners and renters will get wage tax relief.

The amount of property tax relief will be, at most, 50% of the median assessed value of homestead/farmstead properties in the district. A district with extremes at either end – lots of high or lots of low value home/farmstead properties – will experience the most impact. Homeowners must apply to qualify for the property tax relief.

Working middle-income homeowners benefit more than high-income homeowners. Property tax relief is greater as a percentage of income for middle-income homeowners than for high-income homeowners because relief is administered through a homestead exemption.  Relief in dollars per homestead is the same for all homeowners within a school district, regardless of assessed property value or homeowner income.

Retiree homeowners win. Retiree homeowners generally benefit more than working Pennsylvanians.  They will get property tax relief but won't pay additional income taxes on eligible retirement income.

(click here for more about how taxpayers fare)

What’s the impact on school finance?

The plan calls for voter referenda on future tax increases above cost-of-living increases, except in limited circumstances.  This diminishes the authority traditionally held by school directors and is a dramatic change in school finance policy. While many states have some mechanism for voter approval of school spending, this will be a first for Pennsylvania.

The Homeowner Tax Relief Act doesn’t put new money into education – it merely shifts funding sources. Instead of the steady and reliable local property tax, school districts will depend on a combination of revenues: revenues from a slight increase in the local earned income tax rate and revenues from gambling. The long-term implications are unclear. Will districts be able to use referenda to increase tax rates if necessary? Will gambling revenues decline over time, forcing districts to make up the budget gap?

(click here for more about the impact on school finance)

The Governor and the legislature placed a huge bet on gambling, and the stakes are high.  It could be, as many are claiming, the most significant and impactful legislation in three decades of Pennsylvania public policy.  Still, it is a big gamble.