Dare Inquire Representatives Truth

CITIZEN INFORMATION ALERT The Homestead/Farmstead Exclusion Program

The Homestead/Farmstead Exclusion Program Act is legislation with which every residential homeowner and farm owner should become familiar because the legislation could allow the following to occur:

The current system of property taxation for the purpose of raising revenues to fund school district operations may be altered by the electorate and school board within individual school districts.

The current system of property taxation for funding school district operations may be replaced for an individual school district with a system which relies on raising revenues by means of new earned income and net profits taxes.

For a school district that implements the new system, the electorate can be enabled to participate in a back-end referendum when the school district desires to raise the millage rate.

Once the new system is initiated, Act 50 restricts the ability of school boards to raise property taxes in the future. (P. 13) CHECK MILLAGE RATE RAISE

Interestingly however, technically, a school district, municipality or county may implement a homestead and a farmstead exclusion WITHOUT IMPLEMENTATION OF THE ALTERNATIVE SYSTEM of the Earned Income/Net Profits Taxes. (P. 37)

Who may apply? Anyone who is a natural person who owns a dwelling, including the parcel of land on which the dwelling is located, and lives in the dwelling on the residential property claimed as the owner’s "primary residence."

Anyone can apply to the local county department known as the tax assessment department or office.

The application form is very simple to complete.

Median Assessed Value (MAV) - as defined in Act 50, "the value which is the middle point in the sequential distribution of assessed values, above and below which exist an equal number of assessed values."

This Median Assessed Value figure will be determined only from the qualifying APPLICATIONS for the year FOR EACH INDIVIDUAL SCHOOL DISTRICT. In Fayette County, there are 8 school districts. Therefore, the Tax Assessment office must determine the MAV figure for each of 8 school districts. The figure will likely be different for each school district. The figure would be altered if in successive years, new applications are made, or other factors are involved, such as owners moving out of the school district, selling of homes, deed transfers to family members, or unfortunate situations such as fires, etc.

Once the county assessment office determines the MEDIAN ASSESSED VALUE figure for each school district, the figure will be given to the school district.

Residential property owners/ taxpayers who apply for the Homestead Exclusion will not see an increase in the tax assessment of their property if they qualify for the Homestead Exclusion Program.

Residential property owners/taxpayers who DO NOT APPLY for the Homestead Exclusion WILL NOT see an increase in the tax assessment of their property because they did not apply.

However, residential property owners/taxpayers who DO NOT APPLY for the Homestead Exclusion and who are WAGE EARNERS, would have the new EARNED INCOME TAX imposed. Residential property owners/taxpayers who derive income from the operation of a business, profession or other activity, except corporations, and who report net profits on federal Income Tax Schedule C would have the new NET PROFITS TAX imposed.

The switch from the current system to the new system is contingent upon these important events: · The school board must place the question on the General Election Ballot in an ODD-NUMBERED YEAR. · If the school board does not place the question on the General Election Ballot, the electorate for each school district can force the school board to formulate the question, and the electorate for each school district can force the question to be placed on the General Election Ballot. · The voters must pass/approve the question placed on the General Election Referendum.

Figures will be different for each school district, so the following referendum question leaves blanks.

The question that must be on a General Election Ballot for approval by the electorate: Do you favor the imposition of an earned income and net profits tax of ___% (1.0%, 1.25%, or 1.5%) to replace ___ (names of local taxes to be repealed), reduce property taxes by ___% by means of the homestead exclusion, and provide for a one-time revenue increase of ___% over the preceding fiscal year?

Once the voters approve the new system by way of the referendum, the school district can then, and only then, begin implementing the ALTERNATE SYSTEM of generating revenues: the EARNED INCOME TAX and NET PROFITS TAX of one of the following percentages: 1%, 1.25%, or 1.5%.

Earned income - as defined in Section 13 of the Local Tax Enabling Act, "salaries, wages, commissions, bonuses, incentive payments, fees, tips and other compensation received by a person or his personal representative for services rendered."

Net Profits - as defined in Act 50, "the classes of income defined as net profits in Section 13 of the Local Tax Enabling Act." Income (revenue less expenditures) from the operation of a business, profession, or other activity except corporations. Net profits are reported on federal Income Tax Schedule C.

The school district will use the figure of one-half (50%) of the median assessed value to make other calculations to determine the feasibility of imposing the Earned Income/Net Profits Taxes to replace the current system.

The school district can then choose a figure up to the figure determined above to apply across the board to each qualifying application/property owner.

IMPORTANT: The reduction in tax assessment figure will be the same dollar amount per qualifying application. If the school district chooses a figure of $200, the reduction figure would be applied to each of the qualifying applications only.

However, before the Homestead/Farmstead Exclusions are able to be applied, the school district MUST ELIMINATE certain NUISANCE TAXES. Repeal of certain nuisance taxes must be done first.

Nuisance Taxes - those taxes that must be repealed before an earned income and net profits tax can be imposed under the authority of Act 50. These taxes include: occupational tax occupational privilege tax per capita tax Act 511 taxes including earned income, poll, per capita, residence and head taxes

The school district can also increase operating revenues as authorized by the voters in the referendum before the Homestead/Farmstead Exclusions are able to be applied.

The district may retain amusement, realty transfer, and business privilege/mercantile taxes.

Therefore, the school district can determine that it is not fiscally prudent to implement ANY Homestead/Farmstead Exclusions.

The increase in the operating revenues would be determined by the calculations for the earned income/net profits taxes, and are not to exceed the percentage growth of the Statewide Average Weekly Wage.

Scenario for a school district: Nuisance taxes are eliminated under the authority of Act 50. The school district increases operating revenues. The school district does not implement any Homestead/Farmstead Exclusions. The district utilizes the newly imposed Earned Income/Net Profits Taxation system.

Should the district determine it is feasible to implement Homestead/Farmstead Exclusions, the amount of tax assessment reductions may not exceed one-half of the median assessed value as determined from the qualifying applications.

Then, the school district can reduce property taxes by means of a millage reduction after the limit on the homestead exclusion has been reached.

IMPORTANT: The school district can choose to retain the same millage rate even if the Homestead/Farmstead Exclusions are implemented. The school district is NOT OBLIGATED to reduce the millage rate. The school district can choose to reduce the millage after the homestead exclusions.

Once the new tax system is adopted, no voter approval is required for a property tax rate hike that causes total revenues to rise by less than the percentage increase in the SAWW for the preceding year, nor are increases in the earned income/net profits tax rate subject to referendum.

However, once the school board has implemented the new tax system of the earned income/net profits tax, the board may not raise property tax rates in the future without the approval of the district’s voters. This back-end referendum must be held at the primary election immediately preceding the fiscal year in which the property taxes are proposed to be increased. If the voters reject the higher millage rate, the school board is limited to the rate already in effect.

IMPORTANT: The electorate should determine the benefit of this aspect of implementation of the new system. The electorate would have to be consulted with this back-end referendum before a higher millage rate can be imposed by the local school district. Therefore, if voters reject the higher millage rate, the school board is LIMITED TO THE RATE ALREADY IN EFFECT.

This one feature of the Act 50 legislation may be THE MOST CRUCIAL POINT for the electorate to consider whether to force the front-end referendum question of altering the current property taxation system locally for their individual school district.