Closing of Pennsylvania school-tax loopholes has had questionable effect

Last year, the Pennsylvania legislature closed many loopholes in the Rendell-era Taxpayer Relief Act, also known as Act 1, with lawmakers and Corbett administration officials proclaiming that, finally, residents would get more say on school-tax increases.

But one year in, that has not happened.

Act 1, passed in 2006, calls for voter referendums on proposed property-tax increases that exceed an annually set education inflation rate, called the "index." For 2012-13 budgets, the index is 1.7 percent. Poorer districts are allowed a higher rate.

Until last year, the law included 13 spending loopholes, called exceptions - categories that were partly excluded when calculating allowable tax increases. The most used were pension-fund payments, special-education spending, and tax increases needed to compensate for shrinking local tax revenue.

School boards can raise taxes higher than the index and avoid referendums by subtracting exceptions from expenditure totals. For example, if a district's special-education costs rise $100,000, it has to count just 1.7 percent of that amount - $1,700 - in calculating its allowable tax increase.

Only 11 proposed tax increases or tax rises to fund specific projects have ever been put to an Act 1 vote. (All but one were defeated.) More than half of Philadelphia suburban districts raised taxes this school year by more than the index would have allowed but did not have to put their budget to a vote. (Philadelphia is exempt from the law.)

Last year's Act 1 amendments left just four spending exception categories: pension-fund and special-education increases, some school construction costs, and expenditures approved by district residents in a special vote.

That "puts taxing and funding decisions where they belong - in the hands of the voters who are footing the bill," Corbett said at the time.

Last Tuesday was the day proposed 2012-13 district budgets exceeding the index and exceptions would have been on the ballot for approval. None was; school boards kept proposed tax increases within the limits.

So, did last year's changes to Act 1 at least force school boards to keep proposed taxes lower, to avoid referendums?

It's hard to tell.

In 2011, before Act 1 was amended, 228 school districts were granted more than 500 exceptions totaling more than $265 million - spending they could exclude from their tax-increase calculations.

If the amended Act 1 had been in effect last year, more than $70 million of that $265 million would no longer have been allowed.

State Education Department spokesman Tim Eller said that because exceptions were eliminated, "school districts either have to reduce expenditures to remain in their index or seek voter approval to increase taxes. Since the latter is unlikely to occur, reducing expenditures is a more viable option."

But the smaller number of exceptions this year did not necessarily reduce the tax burden, because districts typically apply for far more exceptions than they use, to give themselves flexibility. Only 60 percent of districts that applied for exceptions last year ended up using them, and only 36 percent of the exceptions granted - $95.5 million - was enacted as tax increases.

This year, 197 districts received spending exceptions, allowing them to raise taxes by $160 million more than would have been allowed without an exception or a referendum. Thirty-one fewer districts applied for exceptions this year, and they received about $105 million less in exceptions.

Still, the lower dollar amount districts got this year might be due not to changes to Act 1, but to the higher index rate of 1.7 percent for 2012-13, up from 1.4 percent last year. That means districts can raise taxes more without seeking exceptions.

One change in Act 1 last year might trigger future referendums. The legislature froze the payroll amount districts use to calculate the pension-plan exception at this year's level.

That means that if payrolls go up to fund pay increases or new hiring in future years, a percentage of districts' payments to the pension plan will not count in exception calculations. That "could have a substantial impact down the road," said Jay Himes, executive director of the Pennsylvania Association of School Business Officials, especially since pension-plan payments are expected to increase dramatically over the next decade, and keep going up for a decade after that.