Act 1 Property-to-Income Tax Shift

May 8, 2007 Policy Points

What Voters Need to Know

On May 15, 2007, voters across the Commonwealth will be asked to vote on a property-to-income tax shift to pay for public education expenditures. The Property Tax Relief Act of 2006 (Act 1 of the Special Session) requires every school district—except Philadelphia, Pittsburgh, and Scranton—to ask voters if they want to increase taxes on income earners in order to pay for property tax rebates for homeowners. Such a shift will result in a higher tax burden on some, and a lower tax burden on others.

Each local school district income earner would pay a higher Earned Income Tax (EIT) or Personal Income Tax (PIT), depending on the tax type chosen by the local school board. The PIT includes a broader definition of income than the EIT. The higher school district income tax rate would be effective July 1, 2007.
Owner-occupied homesteads and farmsteads can apply for a school property tax rebate. Commercial and rental properties would be excluded. School districts must send out rebate applications to homeowners by December 31, 2007. Rebates for homeowners must be submitted by March 1, 2008.
Each homeowner would receive the same dollar amount rebate, regardless of their current school property tax bill or property value. (School property taxes will be reduced to $0 for those receiving a rebate amount that is higher than actual school property taxes paid.)

Earned Income Tax (EIT) vs. Personal Income Tax (PIT) The EIT is a tax on compensation and net profits, including:

Salaries
Wages
Commissions, bonuses, stock options, and incentive payments
Fees
Tips
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
Interest
Dividends
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

The Winners and the Losers Under the property-to-income tax shift, there would be winners and losers in terms of net tax burdens. Some residents of the district would see a net reduction in their tax burden (a property tax rebate greater than their income tax increase), whereas others would see a net increase in taxes (an income tax increase above what they receive in property tax reduction). The higher taxes on some will be used to lower taxes on others. Winners:

Homeowners with household income below the "break-even" point (For more information, click here).
Suburban homeowners working in Philadelphia.They will get a property tax rebate, as well as a credit for their EIT/PIT increase based on what they pay in Philadelphia Wage Taxes.

Losers:

Renters. All renters will pay higher income taxes, and will get no property tax rebate (nor will their landlords, as rental properties don't qualify for the rebate).
Homeowners with household income above the "break-even" point (For more information, click here).
Small businesses. Since small businesses (non-corporations) pay taxes on profits/owner's income at the individual income tax level, they will see a tax increase. Business properties get no property tax rebate (except for home-based businesses).

Break-Even Point: The break-even point between winners and losers among homeowners will vary by district, depending on the amount of the rebate and the amount of the income tax increase. According to the available data (click here) on the Act 1 ballot measure, the median household income break-even point is $43,238. Any homeowner with a household income above the break-even point will pay more in higher income taxes than they will receive in a property tax rebate. Any homeowner with a household income below the break-even point will receive are larger school property tax rebate than they will pay in higher income taxes. The Commonwealth Foundation has compiled data (see "Act 1 Property-to-Income Tax Shift (May 15 Ballot Question), by School District") on the various property-to-income tax shift proposals, including the break-even point for all Pennsylvania public school districts. The data come from the April 2007 survey of school districts by the Pennsylvania School Boards Association, the tax study commissions for each district, and information from the House of Representatives Appropriations Committee. Voters should check with their local school district about the actual ballot question (Click here). Additional Resources

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The Commonwealth Foundation (www.CommonwealthFoundation.org) is an independent, non-profit public policy research and educational institute based in Harrisburg, PA. For more information, call 717.671.1901 or visit www.CommonwealthFoundation.org.

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