Section 1: Real Estate Taxes and Collection

The system of real estate taxation in the Commonwealth of Pennsylvania is unbalanced, in terms of which units of government collect what share of the tax. While counties, school districts and other municipalities levy the real estate tax, as a general matter school districts’ real estate taxes comprise by far the largest portion of taxpayers’ real estate tax bill. In 2001, out of a total property tax rate of 17.367 mills per dollar of assessed valuation on properties in Lower Merion Township, 12.297 mills (70.81%) was payable to the Lower Merion School District. Montgomery County (the “County”) and the Township divided the remainder (14.11% and 15.09%, respectively).

Lower Merion Township has not changed its real estate tax rate since 1993, when a 1.8% increase brought the rate to its current 2.62 mill level (reflecting changes in assessed values after 1998), notwithstanding inflation of almost 22% during the 1992-2001 period.[i] Over the same time, the Lower Merion School District (comprised of the Township and the Borough of Narberth) has increased its real property levy every year, and the County has both lowered and increased its millage at various times.[ii]

As part of this study, an examination was made of the impact of the Township’s 1993 increase, as well as the several tax increases imposed by the District on real property, 95.98% of the 2001 assessed value of which is for properties located in the Township, to determine if there is any basis to expect the Township to receive less than substantially all of any millage increase (in terms of percentage increase in revenue in comparison with percentage increase in rate).

The comparison was made solely on the basis of the reported “current” and “interim” collections of real property tax, excluding delinquent taxes, payments in lieu of taxes and receipts from the Public Utility Realty Tax Act,[iii] in order to focus on the most basic of property tax-related receipts. Also, in a further effort to minimize the impact of extraneous factors, the analysis was broken into two periods, the first covering 1991-1997, and the second looking to 1998-2000. The County’s comprehensive 1997 reassessment materially changed the reported assessed values of all properties in the County, provoked appeals and inquiries from property owners, and introduced a note of confusion into the process. The unsettled situation was such that it was difficult for taxpayers to compare their liabilities on a year-to-year basis, and inclusion of all years as if they were to be compared on exactly the same standard would not adequately take those factors into account.

Lower Merion Township’s 1993 Real Estate Tax Increase

The Township raised its real property tax from 55.50 mills per assessed dollar to 56.50 mills in 1993, a 1.8% increase. As the table below shows, the Township collected slightly less (on a dollar collected per dollar of assessed value basis) than its increase in millage. The difference, however, was very small in dollar terms. Had the collection rate equaled the increase in tax rate, the Township would have realized approximately $60,000 in additional tax receipts, or less than ½ of 1%, which is not statistically significant.

Table 1.1 Lower Merion Township Real Estate Taxes 1992-1993
Year	Township Assessed Value	Township Millage	Total Current - Interim Collections	Collection Rate ($/$ of value)	% Change in Millage	Yield per Mill
1992	$ 321,710,503	55.50	$17,444,092	.05422	n/a	$314,308
1993	323,193,703	56.50	17,778,878	.05501	1.80%	314,670
Cumulative:		+ 1.80%	+ 2.40%	+ 1.45%		+ .12%
Source: 2001 CAFR, p.52 and 54.

Lower Merion School District 1991-1992 through 1997-1998 Real Estate Taxes

The Lower Merion School District adjusted its tax rate annually during this period, increasing its millage from 122.5 to 188.5 per dollar of assessed valuation, a cumulative increase of 53.88%. The longer period of time covered by the review, during which assessments did not materially change (a decline of less than .8% in the aggregate over the study period, and a mix of annual changes, none of which was more than +.45% or -.63%), linked with questions about the accuracy of the assessments themselves over that time, compel a slightly different analysis than that used with respect to the 1993 Township increase.

Given that the real estate tax is levied on assessed value, quite apart from any imprecision in the values set by such assessment, it is reasonable to look to whether the increase in tax rate was productive of an equivalent increase in revenue, and do so with respect to a uniform standard across the time period. As shown below, the revenue produced by the increase, in percentage terms, was marginally in excess of millage change (.83%), and noteworthy in light of the incremental decline in the base (e.g., assessments).

Table 1.2 - Lower Merion School District Real Estate Taxes 1991-1998
School Year	Assessed Valuation	Current/Interim Collections	Millage
1991-1992	$ 336,219,480	$ 36,451,445	122.50
1992-1993	334,380,595	39,964,737	135.00
1993-1994	335,879,596	44,036,841	142.00
1994-1995	333,747,047	46,218,123	150.00
1995-1996	334,099,156	48,515,102	159.00
1996-1997	333,553,966	51,517,042	175.00
1997-1998	333,696,390	56,392,666	188.50
Cumulative:	- 0.79%	+ 54.71%	+ 53.88%
Sources: For Township share of District assessments and District millage, 2001 CAFR for all but 1990-91; for 1990-91, Consolidated Annual Financial Report, Year Ended December 31, 2000, Township of Lower Merion, Montgomery County, Pennsylvania (the “2000 CAFR”) ; for Narberth share of District assessments, Montgomery County Board of Assessment Appeals, July 18, 2002; for collection data, Selected Revenue Data and Equalized Mills for Pennsylvania Public Schools, Pennsylvania Department of Education, for 1991-1992, 1992-1993, 1993-1994, 1994-1995, 1995-1996, 1996-1997 and 1997-1998.

Lower Merion School District 1998-1999 Through 2000-2001 Real Estate Taxes

In the years following countywide reassessment in 1997, the District increased its real property taxes, moving from 9.52 mills per dollar of (reassessed) valuation in the 1998-99 academic year to 11.16 mills for 2000-2001, a cumulative increase of 17.23% (the 2001-2002 rate of 12.297 mills would bring the cumulative figure through that year to 29.17%) . The table immediately below shows the results of an examination based upon the same methodology as that used for the period described in Table 1.2:

Table 1.3 - Lower Merion School District Real Estate Taxes 1997-2000
School Year	Assessed Valuation	Total Current/Interim Collections	Millage
1998-1999	$ 7,250,973,332	60,879,756	9.52
1999-2000	7,259,800,053	66,581,493	10.45
2000-2001	7,303,485,204	73,575,333	11.16
Cumulative	+.72%	+ 20.85	+17.23%
Sources: For Township share of District assessments and District millage, 2001 CAFR; for Narberth share of District assessments, Montgomery County Board of Assessment Appeals, July 18, 2002; for collection data, Selected Revenue Data and Equalized Mills for Pennsylvania Public Schools, Pennsylvania Department of Education, for 1997-1998, 1999-2000, and 2000-2001.

The data indicate that the District was successful in growing its collections in an amount greater than the change in assessments or millage. During the same period the Township increased its collections by 1.20% on an assessed property value that grew by .73%, even with no increase in rate. The disproportionate increase in yield from real property tax relative to growth in rate and assessment may be indicative of some taxpayers shifting the timing of their payments from the “discount” period to the “flat” or “penalty” periods, and from “flat” to “penalty”, but there is no evidence that such shifts will adversely impact the revenue which may be expected from a real estate tax adjustment.

Real Estate Tax Rate Changes - Projection of Revenue

Given the integrated nature of the property tax system, where multiple taxing jurisdictions overlap and tax the same parcel several times, any estimate of revenue must take into account the probable impact the actions of one unit of government’s actions have upon the collections of the others.

Lower Merion Township and the Lower Merion School District have followed different paths with respect to real estate taxation over the past decade (and the County has followed yet another). Looking to the collection results, however, it appears that the County, the Township and the District have been successful in collecting substantially all of the revenue that would have been expected by adjustments in the tax rate in terms of percentage of increase versus percentage growth in collections.

In Pennsylvania’s Local Property Taxes: Distribution and Economic Effects, Professor Robert Strauss of Carnegie-Mellon University discusses factors which influence locational decisions and property values. He notes that over the long term property tax collections relate to value, and value in turn is linked to numerous perceptions, as well as both economic and non-economic judgments:

Economic theory tells us that in the short run, both capital and labor are immobile. Thus, an increase in local taxes, holding everything else constant, and ignoring the services provided for such increased taxes, will not cause labor or capital to leave the high tax community for somewhere else. Over time, however, it is reasonable to expect cost conscious companies and employees to relocate. Carefully done studies show that companies over time will move their assets, and employees will move from higher taxing jurisdictions to lower taxing jurisdictions.

When we inquire what theory tells us about into how local taxes and local services affect location decisions, we find that the conclusion about mobility becomes less clear. If the services are valued at the amount of the taxes paid, then mobility may not occur at all. Arms length housing prices (and apartment rents) will reflect the “netting out” effects which property taxes (which by themselves depress on a capitalized basis the price of homes), and local service quantity and quality (especially schools), add to the price (also on a capitalized basis) of a home.[iv]

In that each of those considerations eventually are expressed as tax receipts (and in comparison with “expected” yields), Professor Strauss writes, “[t]he right way to look at the distributional effects of the property tax is to compare the long-run property taxes paid to the long-run income earned,”[v] and on that standard there is no basis to conclude that the tax rates imposed in the Township have had a significant negative impact. Whether that is the result of the incomes of Township residents, the perceived value of services, demand for the residential amenities offered by location or other factors is not the critical point. Rather, it appears that both history and economics support the conclusion that the Township’s projection of an increase in real estate tax millage being productive of a near-equivalent increase in income is reliable. Further, apropos of Professor Strauss’ observations, and as noted in Section 6, Lower Merion Township is not a “high tax community” in comparison with most of its neighbors - nor would it become a high tax municipality under any of the options - thereby further limiting locational options in terms of tax-based economic choices.

In light of the above, it is estimated that under Option 1 the real estate portion of the changes under consideration would produce the yield described in Table 1.4 (the solid waste fee portion is discussed in Section 2, and the estimated aggregate return is described in Section 4). The estimates do not assume any increase in assessed valuations, which have grown by less than 2% since 1998.

Table 1.4 – Option 1 Real Estate Tax Effect
Real Estate Tax Component ONLY	Millage	% Increase (Annual)	$	$ Increase (Annual)
2002	2.62	n/a	18,000,000	n/a
2003	2.86	9.0	19,620,000	1,620,000
2004	3.08	8.0	21,189,600	1,569,600
2005	3.15	2.0	21,613,392	423,792
*Cumulative 2002-05 Increase*	*.53*	*20.07*	*3,613,392*

Option 2, which anticipates that all additional revenues will be generated by an increase in real property taxes, is estimated to produce the amounts set out in Table 1.5:

Table 1.5 – Option 2 Real Estate Tax Effect
Real Estate Tax Component ONLY	Millage	% Increase (Annual)	$	$ Increase (Annual))
2002	2.62	n/a	18,000,000	n/a
2003	2.86	9.0	19,620,000	1,620,000
2004	3.20	12.0	21,974,400	2,354,400
2005	3.29	3.0	22,633,632	659,232
*Cumulative 2002-05 Increase*	*.67*	*25.74*	*4,633,632*

Section 1: Real Estate Taxes and Collection

Lower Merion Township’s 1993 Real Estate Tax Increase

Table 1.1 Lower Merion Township Real Estate Taxes

1992-1993

Table 1.4 – Option 1 Real Estate Tax Effect