Editor’s note: What follows is the first of a four-part series
on an increase in income tax being proposed in the May 15 primary
election to help fund public education. Today’s stories examine the
origin of the proposal and details about how it works.

A new income tax is being proposed to lift some of the burden
for school taxes off property owners.

You’ll be asked in the May 15 primary election if you’re in
favor of this shift in taxes, with each district in Pennsylvania
proposing a slightly different formula.

The referendum is part of a mandatory tax reform plan approved
last year by the General Assembly, the latest attempt to shore up
beleaguered school districts until newly found gambling revenue
kicks in.

In Bradford, the referendum will ask voters if they favor a .5
increase of earned income tax. In exchange, it would mean a
decrease of $163 for the average homeowner.

All voters, regardless of party affiliation, get to cast a
ballot on the referendum.

If voters approve the referendum, it will be enacted in July. If
it’s rejected, the tax structure will remain unchanged for the time
being. Approval of the tax shift would also provide an opportunity
for residents to vote on any school budget which is increased
beyond the annual cost-of-living increase for that year.

A district does not lose its opportunity to share in future
slot-machine revenue if voters reject the tax shift.

The plan is “revenue neutral” for school districts, meaning it
will keep revenue at its current level with the combination of the
two taxes for the next fiscal year.

But what happens beyond that, however, is still somewhat up in
the air, according to school officials. Among the many
uncertainties is when revenue from statewide legalized gambling
will begin to assist local school districts and the taxpayers.

A complicating factor, too, is that the figures for income or
property tax will have to shift somewhat each year to compensate
for changes in revenue generated either by income or property
tax.

Tax reform has been uppermost on the state’s agenda since Ed
Rendell came into the governor’s office in 2003 promising relief
for embattled property owners, particularly senior citizens living
on a fixed income.

At least one previous attempt at tax reform – that one known as
Act 72 – failed when the voluntary measure was scuttled by school
districts across the state.

The effort to get legalized gambling off the ground in
Pennsylvania has also been delayed – also delaying any meaningful,
long-lasting tax reform.

This current version of tax reform got under way late last year
when school districts formed special tax study commissions to
provide input on the type and amount of tax proposed to voters.

Bradford’s Tax Commission had suggested the half-percent
increase in the earned income tax, a levy already in place in the
district. Kane and Port Allegany school districts also OK’d a .5
rate increase with Otto-Eldred and Smethport choosing .6.

Each commission chose the earned income tax over one other
option, a personal income tax which would have included interest
and investment income but also would have exempted social security
and pension income.

“Earned” income is wages, salaries or other reimbursements for
work. It does not include interest, dividends, pensions and Social
Security income.

After the school board ratified the commission’s recommendation,
it began the arduous process of crunching the numbers to decide how
much of a tax break property owners would receive based on the
amount of money the income tax would generate.

A key provision of this measure is what’s known as a “homestead
exemption,” a concept borrowed from the Act 72 process.

In essence, anyone paying taxes on an owner-occupied home – as
opposed to a rental property, business, retail establishment etc. –
is eligible for this flat exemption. All home owners, regardless of
the value of their house, receive the same exemption.

In Bradford, that figure is $163; in Kane, $180; in Otto-Eldred,
$199; in Port Allegany, $225; and Smethport, $206.

In Bradford, farmstead properties can see a reduction of an
estimated $61 in taxes.

But the exemption is not automatic.

Many people applied for and received the exemption and were so
notified several years ago when Act 72 was under way. Another
deadline to apply was March 1. New applications will be accepted,
but the savings, if a homeowner qualifies, will not begin until
next year.

Anyone uncertain if they will receive the exemption should
contact the McKean County Board of Assessors, McKean County
Courthouse, Smethport.

Tomorrow: How to calculate what the next tax would cost you – or
save you.

Tax reform has been in the works for years

State government for years has been attempting to respond to
constituent complaints of high school property tax – primarily from
senior citizens living on fixed incomes.

And so, not surprisingly, this group is one of the intended
beneficiaries of this new “Tax Payer Relief Act,” known to most
school districts simply as “Act 1.” The flip side of the coin,
however, is that the burden will be picked up by wage earners.

This most recent incarnation of tax reform – more of a shift
than a simple reduction – is somewhat of a stopgap measure to tide
districts and taxpayers over until long-term relief arrives in the
form of gambling revenue.

Act 1 also opens up a new door for Pennsylvania residents to
vote on any future school district budgets which exceed the rate of
inflation, a referendum long-sought by tax advocacy groups. That
provision is called a “back-end” referendum.

While limited in scope, this attempt to hold districts in check
had its origin in previous reform measures.

To understand Act 1, we need to go back to the most recent round
of tax reform measures beginning in November 1997 when voters OK’d
a change in the method of property tax relief, or “homestead
exclusions.”

Act 1’s personal income tax or earned income tax is the newest
version of four tax relief acts developed since 1998 when Act 50
first arrived on the scene. Later versions were Act 24 and, most
recently, Act 72.

All of the previous tax relief plans were posed to school
districts as voluntary.

Two years ago, Pennsylvania school districts were asked to
decide whether or not they would “opt in” to Act 72 legislation
that could provide homeowners with tax relief.

Residents were to have shared in the pot of a projected $1
billion a year in slot-machine revenue to offset their homeowner
taxes along with an increased earned income tax.

But many school districts found problems with Act 72 and it was
ultimately defeated when most chose to “opt out.”

School districts were unhappy on many fronts. Act 72 would have
forced school districts to have a quicker turnaround in creating
annual budgets before knowing the amount of state funding they
might receive; and it would have restricted districts from raising
taxes above a set threshold released every Sept. 1.

When it comes to those demands on school districts and
opportunities for taxpayers in the “backend referendum,” Act 1 and
Act 72 hold pretty much the same language.