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Legislative Update

Week Ending February 10, 2006

• Week in Review
• Political News & Notes
• Governor Delivers 2006-07 Budget
• Senate Approves Property Tax Relief Plan
• Rendell Signs Open Space Bill
• Senate Approves EMS Grants Legislation
• Local Govt. Bills Adopted by House
• Regional EIT System to be Studied
• Circular 230 Revisions Proposed
• Treasury Releases FY 2007 Blue Book
• New GASB Exposure Draft

Week in Review

Gov. Ed Rendell unveiled his $25.4 billion state budget for the 2006-07 fiscal year this week that Republicans quickly called an "election year special." Despite increasing spending by more than $900 million, the plan calls for no new taxes. Public schools are the big winners with an additional $517 million in state funding. From here the House and Senate appropriations committees will hold hearings on the proposed spending plan. The hearings get underway later this month.

The state Senate passed a modified property tax relief plan Monday evening that closely resembles a bill it passed in December. The plan doubles the size of the Property Tax and Rent Rebate Program, provides property tax reductions in 2006 if school boards approve increases in school district earned income taxes, and makes the backend referendum spending controls mandatory for all school districts. The earlier version was overwhelmingly rejected by the House. 

Political News & Notes

Scranton Ends Primary Bid. GOP gubernatorial candidate Bill Scranton announced Tuesday his withdrawal from the field in the race for Pennsylvania governor. In a statement, Scranton expressed his hope and confidence in the message of reform that embodied his candidacy from start to finish. However, he stated that he is, "Less convinced in our ability to win the precinct-by-precinct battles. We are strong but not strong enough to defeat a candidate that has received near unanimous backing of the state and national parties."

Special Election for 19th Senatorial District. May 16 is the date for a Special Election in the 19^th state Senatorial District that was represented by the late Sen. Robert Thompson, who died on January 28. The successful candidate will complete the remainder of Thompson's term that expires on Nov. 30, 2008. The district includes communities in Chester and Montgomery counties.

Senate Confirms State Secretary of Education... Dr. Gerald L. Zahorchak was confirmed this week by the state Senate as the next state education secretary. Dr. Zahorchak will oversee the Governor's education initiatives, including full-day kindergarten, pre-kindergarten, high school reform, tutoring programs, as well as reading and math tutors to boost student learning.

State Rep. Resigns. Allegheny County Republican state Rep. Jeff Habay was sentenced this week to 6 to 12 months in a half-way house for making his legislative staff do campaign work on state time. Habay also resigned from the state House effective immediately. A Special Election to fill the vacancy has been scheduled April 11.

Governor Delivers 2006-07 Budget

Gov. Ed Rendell proposed a $25.4 billion Fiscal Year 2006-07 budget Wednesday that contains no new taxes and increases spending by 3.8% over current 2005-06 budget.

The Commonwealth's total operating budget is just over $54 billion-$25 billion in the General Fund, $17 billion in federal funds and a number of other smaller sources. The proposed budget increases state spending by $924 million. Basic education is the largest expenditure totaling 34% of the budget, Medical Assistance accounts for another 19%, other welfare programs account for 17%, higher education is 8% and corrections is 6%.

The Governor's 2006-07 budget is built on revenue growth of 3.36%, or $852 million from growth in the collection of current taxes. A further $145 million of new revenue is also expected. The changes that will enhance revenue include increased efforts by the Department of Revenue in the areas of use tax compliance, cigarette tax compliance and "voluntary" disclosure of abusive tax shelters.

The major initiatives in the budget include: a $601 million increase in education funding, a $75.5 million investment in pubic libraries, PACE Plus Medicare prescription drug coverage for an additional 120,000 seniors, a $500 million investment in bioscience research through the Jonas Salk Legacy Fund, an additional $130 million for highway and bridge improvements, and 90 additional State Police troopers.

Following the budget address, Revenue Sec. Greg Fajt outlined additional details of the Governor's business tax initiatives.

The proposed budget will cut business taxes by $221 million, according to Fajt, by retroactively reducing the Capital Stock and Franchise Tax rate to 4.89 mills from 4.99 mills, continuing to phase-out the CSF tax to 3.89 mills in 2007, increasing the net operating loss tax deduction to $3 million up from $2 million, and increasing the Research and Development Tax Credit cap to $40 million from $30 million.

Fajt also stated that the Governor is committed to the recommendations made by the Business Tax Reform Commission, which include mandatory combined reporting and reforming the state's tax appeals process with a tax tribunal.

Budget hearings on the proposed spending plan begin later this month in the House and Senate.

Senate Approves Property Tax Relief Plan

The state Senate passed a modified property tax relief plan Monday evening that closely resembles a bill it passed in December. Special Session House Bill 39 was approved by a vote of 39 to 10.

Under the Pennsylvania Taxpayer Relief Act, before June 30, 2006, each school district (except Philadelphia, Pittsburgh and Scranton) may adopt a resolution authorizing an increase in the Earned Income Tax in order to provide property tax reductions through the homestead and farmstead exclusion. The resolution may increase the EIT rate up to the rate required to provide a property tax reduction of up to 35% of the maximum homestead and farmstead exclusion.

In the 2007 primary election, any school district that did not approve an EIT increase to provide property tax reductions in 2006 will propose a referendum question asking voters to authorize an increase in the EIT in order to provide property tax reductions through the homestead and farmstead exclusion. School districts that did approve an EIT in 2006 will have the option to propose a referendum question.

The plan also will double the size of the Property Tax and Rent Rebate Program (PTRR), increasing payments by some $147 million. The income eligibility requirements for PTRR will be increased to $25,000, up from $15,000.

Backend referendum requirements are included in House Bill 39. School districts that opted-in to Act 72 will be governed by backend referendum requirements beginning in 2006. For 2006 only, school districts that did not opt-in to Act 72 will be prohibited from increasing their tax rates above the annual inflationary percentage and will not be able to place referendum questions before the voters to approve further increases. However, these school districts may petition a court of common please for an additional tax increase if the school district proves that it can not otherwise balance its budget. Beginning in 2007, these school districts will be governed by the same backend referendum requirements that apply to school districts that opted-in to Act 72.

Finally, beginning in 2006, all school district that did not opt-in to Act 72 (except Philadelphia and Pittsburgh) will be required to offer homestead and farmstead property owners the option to pay their property taxes in installments. School districts that did opt-in to Act 72 will be required to offer this option in 2007. 

Special Session House Bill 39 now goes to the House for consideration. 

Rendell Signs Open Space Bill 

Gov. Rendell this week signed into law House Bill 87, which gives local governments the right to purchase and hold land for open space uses.

The bill allows municipal corporations to purchase certain types of real property without having to resell it within a given time period, mainly to preserve open space and prevent sprawl. The bill permits the purchase of real property to be exempt from real property tax millage increases and that each taxing school district which is affected approves the exemption.

The bill becomes effective in 60 days.

Senate Approves EMS Grants Legislation

The state Senate this week approved a bill that would pave the way for an anticipated $25 million in grants for Pennsylvania volunteer fire companies and ambulance services.

Under House Bill 599, volunteer fire companies and EMS crews would have until April 30, 2006 to submit applications for the grants, and funding would be available as soon as this summer. Grants to volunteer fire and rescue companies would range from a minimum of $2,500 to a maximum of $15,000 and could be used for construction or renovation of the fire company's primary structure; purchase or repair of firefighting, ambulance or rescue equipment; training; or debt reduction.

The bill returns to the House for consideration.

Local Govt. Bills Adopted by House

The House overwhelmingly adopted a package of bills this week that may help local governments save money during the contract bidding process. The measures now move to the Senate for consideration.

House Bills 1854 through 1858 and 1860 through 1870 increase the dollar amount requiring full advertising and bidding contracts to $25,000 and increases the range requiring telephonic quotes to $10,000 to $25,000. The current limit for written and telephone price quotes is between $4,000 and $10,000.

The bills also direct the Department of Labor and Industry to adjust both the competitive bidding and telephonic price quotation figures.

Regional EIT System to be Studied

The House has passed a resolution that directs the Local Government Commission-a legislative research arm that can perform in-depth studies of local government issues-to study the feasibility of a regionalized collection system for municipal and school earned income taxes.

Under House Resolution 509, if a regional system is determined to be feasible, the Local Government Commission will work with Department of Community and Economic Development (DCED) to draft legislation focused on implementing a regional tax collection system within six months of adoption of the resolution.

The Local Government Commission would study this issues in the context of these acts: Local Tax Enabling Act (Act 511 of 1965); Homeowner Tax Relief Act (Act 72 of 2004); Optional Occupation Tax Elimination Act (Act 24 of 2001); and any other acts authorizing local taxing authorities to impose taxes.

Circular 230 Revisions Proposed 

Revisions to Circular 230 were proposed this week by the Treasury Department and the IRS.

The revisions would modify: the definition of practice, eligibility for enrollment, unenrolled practice, and the rules concerning contingent fees, conflicts of interest, standards with respect to tax returns and documents, affidavits and other papers, sanctions, discovery, publicity, and appeals. The proposed regulations do not address the standards for written tax advice that were the subject of final amendments to the regulations issued in December 2004 and modified in May 2005. 

A hearing on the proposed regulations is scheduled for June 21, 2006 with comments due by April 7, 2006.

Treasury Releases FY 2007 Blue Book

The U.S. Treasury Department recently released its General. Explanations of the Administration's Fiscal Year 2007 Revenue Proposals, otherwise known as the Blue Book. In addition to permanent extension of the President's tax relief enacted in 2001 and 2003, the President's FY 2007 Budget includes several new initiatives.

New GASB Exposure Draft 

On January 31, the Governmental Accounting Standards Board released a proposal to set standards for when governments should report liabilities related to their obligations to clean up pollution and how they should measure those liabilities. The comment deadline is May 1, 2006.

Specifically, the proposal sets forth the key circumstances under which a government would be required to report a liability related to pollution remediation. In addition to the liabilities, expenses, and expenditures which would be estimated using an "expected cash flows" measurement technique and be reported in the financial statements, the proposed standard would require governments to disclose information about their pollution clean up efforts in the notes to the financial statements.

The requirements would be effective for financial statements for periods beginning after June 15, 2007.