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A Vote for Tax Exclusion Doesn’t Necessarily Mean Paying Less Tax

James "Jay" Brower, CPABy James (Jay) M. Brower Jr., CPA | Marks Paneth LLP

MoneyLife100Tuesday, Nov. 7 is Election Day. Along with candidates for county and local offices and statewide judicial races, voters throughout Pennsylvania will face the following question when they enter the voting booth:

Property-Tax-Referendum“Shall the Pennsylvania Constitution be amended to permit the General Assembly to enact legislation authorizing local taxing authorities to exclude from taxation up to 100 percent of the assessed value of each homestead property within a local taxing jurisdiction, rather than limit the exclusion to one-half of the median assessed value of all homestead property, which is the existing law?”

Voters may select “Yes” or “No.”

Whether or not they can decipher the sentence is another matter.

What is being asked is whether or not you want to amend the Pennsylvania Constitution to give the state legislature the power to give counties, municipalities, and school districts the ability to exempt up to 100 percent of a “homestead” property’s assessed value from local property taxes. Currently, the state constitution gives the legislature the power to authorize local tax authorities to exempt up to 50 percent of a homestead’s value from property tax.

Due to the Pennsylvania Constitution’s “Uniformity Clause,” tax rates on properties in a taxing jurisdiction must be the same, so, absent a constitutional amendment, a homestead property valued at $100,000 must pay the same amount in property tax as a commercial property valued at $100,000.

A “homestead” is someone’s principal residence. It does not include rental property, business property, vacation homes, etc. If a homestead has an assessed value of $150,000 and the municipality in which it is located provides for a 25 percent homestead exemption, the municipal property tax (millage) rate is applied to 75 percent of the property’s assessed value ($112,500) to determine the municipal property tax for the assessment year.

A “Yes” vote means that you favor giving the legislature the ability to grant local tax authorities the power to exempt up to 100 percent of a homestead property’s value from property tax. A “No” vote means that you do not want to give the legislature that power, in which case the current 50 percent limitation will continue to apply.

Understand that if this referendum passes, it does not mean that local property taxes will be eliminated.

It means that voters are conferring power upon the state legislature to draft new laws that might give local tax jurisdictions the ability to provide for up to a 100 percent exemption from property taxes for homesteads. If the referendum passes and the legislature, with the governor’s consent, enacts such legislation, it would be up to the local tax jurisdictions to provide homestead exemptions of up to 100 percent of a property’s value as they choose to see fit. Currently, very few jurisdictions actually exempt up to the allowed 50 percent of a property’s assessed value.

The reason why is that, under present law, a local jurisdiction that provides for a homestead exemption may not increase property tax (millage) rates on nonhomestead properties to pay for homestead tax relief. In other words, they’re not allowed to force nonhomestead property owners in the jurisdiction to pay more in property taxes by increasing tax/millage rates on them so that homestead owners can pay less by providing homestead exemptions.

Instead, the jurisdictions are required to hold voter referendums to ask residents whether they favor providing homestead relief in return for increasing earned income taxes or imposing a personal income tax. If they do, the tax jurisdiction would set the earned income or personal income tax rates at a level to generate enough tax to make up for the reduction in property taxes. Back in 2007, all school districts in Pennsylvania (except for Philadelphia) were required to hold these referendums, and less than 2 percent had a majority of their residents approve an income tax increase in exchange for a property tax decrease.

If the referendum passes, it is possible that in the future we may see local tax authorities asking their residents to vote on imposing additional local earned or personal income taxes to provide for a complete exemption from property tax for homestead owners in the jurisdiction. The legislature might also allow the jurisdictions to impose additional sales or other taxes, although current legislation does not provide for that.

Alternatively, instead of holding local voter referendums, the legislature might decide to fund local property tax relief by allocating additional state funding to jurisdictions that have enacted increased homestead exemptions. Suffice it to say, if a local jurisdiction does decide to provide for homestead exemptions, the decrease in property tax revenues will need to be made up by increasing other taxes or decreasing spending.

James (Jay) M. Brower Jr., CPA, is a partner in the firm Marks Paneth LLP in Jenkintown, Pa. He is a member of the PICPA Federal and State Taxation committees, and past president of the Greater Philadelphia Chapter.

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