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Calculate your Act 1 choice
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Article RatingWondering whether you should vote for Act 1 referendum in May?
Relax. There's an easy way to tell whether the change will save you money this year. The answer lies in a simple equation, with variations for renters and homeowners.
If you rent, multiply your annual earned income by your school district's proposed earned income tax percentage increase. (For the equation, a 0.6 increase translates into a multiplier of 0.006.) The resulting figure represents the extra money you'll be paying in taxes this year if the referendum passes.
If you own your home, divide your district's 2007 estimated property tax exemption by the proposed earned income tax percentage increase. If your yearly earned income is greater than the resulting figure, the change will cost you more. If it's smaller, the change will cost you less.
But don't stop reading yet: The law has some wrinkles that complicate matters.
Property tax exemption
Probably the most visible part of the equation is the property tax exemption. In general terms, if the referendum passes, qualified homeowners will receive a set amount off their residential property taxes. The exemption is a flat amount within each school district. “One of the things that people ought to know is that no matter what the size of your property, you'll get the same amount,” said Cumberland Valley School District business manager Michael Diessenbach.
In Cumberland Valley, that means that all qualified homeowners will receive approximately $317 off their property taxes in 2007.
The amount is different in each district.
From there, it gets more complicated.
Diessenbach explained that the exemption would not go to homeowners automatically. Instead, it is for only homeowners who were registered under the Homestead/Farmstead Exemption Act by March 1.
Some property owners were already on that list, Diessenbach said, and the others were notified by the county tax assessor's office. Rental and business properties do not qualify. But farmers who live on their farms may qualify to receive the exemption twice - once because of the farm and once because of the home - according to a document prepared by the state to explain Act 1 to taxpayers.
About 80 percent of eligible property owners in his district got their names on the list in time, Diessenbach said.
Homeowners should also be aware that if the amount they've been paying in property taxes is less than the exemption, they're not going to be credited for the balance of the exemption. According to Steven Dart, business manager at Big Spring School District, homeowners will not receive more in exemption than they have been paying in property taxes.
Down the road
Finally, the amount of the exemption is expected to rise in 2008 and subsequent years as districts start receiving a full year's worth of earned income taxes.
“You lose 100 percent (of the old tax) in the first year, but you don't receive 100 percent of the replacement tax in the first year,” said Dart. “It takes a couple of years for the flow of dollars to move from the payer through the collection entity to the school.”
He explained that Big Spring experienced a similar situation several years ago when it replaced its old occupation assessment taxes with an earned income tax.
Based on that, Dart said, he expects it to take several years for the district's property tax exemptions to reach their full amount. However, some of the other districts' business managers said they expect the exemptions to plateau at their 2008 rates.
“There will be a time lag with collecting the earned income tax,” said Beth Weiner, business manager for West Perry School District. “Once everything catches up, so to speak, then it should become consistent.”
Although districts can guess what the property tax rebates will be in coming years, those figures, like the ones for this year, are estimates. Dart said he had discussed the issue with colleagues and thinks it may vary by district, since each has a different economic composition and method of collection and distribution.
The trade-off
The property tax exemption was the good news, for property owners.
The bad news, for property owners and renters alike, is that for people who are still earning incomes, the money would be a trade-off, not a gift.
Balancing the exemption would be an increase in earned income tax or personal income tax. Area districts have chosen the EIT, which taxes all money earned in salaries, wages, commissions, bonuses, stock options, incentive payments, fees, tips and net profits from businesses, professions or farms.
Area districts will put referendums with EIT increases ranging from 0.6 to 1 percent on the ballot.
So, to figure out whether the change is a good deal for them, homeowners need to find out if the property tax rebate is large enough to cover the EIT increase. To do that, taxpayers can just follow the formula above: Multiply the amount of the rebate by 100, then divide by the percentage of the EIT increase.
In Cumberland Valley, Diessenbach said, the EIT increase would be 0.6 percent, so the break-even point is $52,833 in earned income. People who bring home that much or more each year will pay more in 2007 taxes, overall, if Act 1 passes; people who make less than that will, accordingly, pay less overall in 2007 taxes.
Online math
Although the Sentinel's informal survey Thursday showed that no area districts' Web sites offered residents a way to compute how the referendum would affect its residents, some may be coming.
Jeff Ammerman, business manager of Boiling Springs School District, said he was working on a spreadsheet that should appear on the district's Web site soon. Business managers and financial directors at several other schools told The Sentinel that they had not thought about including such a tool but might consider it.
For a glimpse of how the referendum may affect them after 2007, taxpayers may also want to visit www.ptcc.us (Pennsylvania Taxpayers Cyber Coalition) and try the Act 1 Tax Calculator.
For the calculator to work, users must have Microsoft Excel installed on their computers.
Taxpayers should also be aware of the coalition's note that the calculator is intended to give a “close estimate” and may not return exact numbers because the latest available data supplied by the state when the calculator was built in late 2006 was from 2004.
According to the web site, the coalition is willing to construct a more specific calculator for any district for free at the request of the district's business manager.
