Pennsylvania provides various incentive programs for new businesses or business expansion in Pennsylvania. These programs include programs to provide equipment financing (MELF), general financing (PIDA), and various tax incentives (TIF's, LERTA's, etc.).
One of the tax incentive programs of great confusion and a paucity of case law is the LERTA (Local Economic Revitalization Tax Assistance Act) (72 P.S. §4722 et seq.) program. Two cases are currently seeking allowance of appeal to the Pennsylvania Supreme Court to obtain guidance.[1]
These appeals suggest that LERA relief may not be arbitrarily granted or denied by local taxing authorities, especially school districts.
The LERTA statute provides that the municipal governing body determines which areas are designated "deteriorated" for purposes of LERTA tax relief. 72 P.S. § 4725(a). This determination is made pursuant to a public hearing procedure, where the local taxing authority is required to participate, and is in fact charged with making recommendations as to the advisability of the deteriorated area(s) then under consideration by the municipal governing body. 72 P.S. §§ 4724-4725.
A township or municipality is the "municipal governing body" vested with the authority, pursuant to LERTA, to determine which areas of real property are "deteriorated" and eligible for LERTA tax relief.
School districts, by contrast, meet the definition of a "local taxing authority" pursuant to LERTA. As such, a school district is required to participate in the public hearing procedure referred to supra. A school district however, should not have the authority to decide which real property actually is a "deteriorated area," nor should it have the authority to determine which real property owners are entitled to LERTA tax relief. 72 P.S. §§ 4724-4725.
LERTA clearly indicates that the municipal governing body designates the area as "deteriorated." 72 P.S. § 4725(a). The only thing a school district can do, subject to the requirements of due process, uniformity, and reasonableness, is to determine the amount of exemption from taxation by resolution or ordinance. See Id. Nor should the use of the word "may" in the LERTA statute authorize a school district to provide tax exemptions to some taxpayers in deteriorated areas and not others.
While there is a paucity of case law on this issue, the plain language of the statute reveals that a school district does not have the authority to determine which areas are “deteriorated areas” eligible for LERTA tax relief.[2] Rather, once the municipal governing body designates certain real property as a "deteriorated area," the "local taxing authority" should be required to determine the amount of exemption from taxation by enacting the appropriate resolution or ordinance.
LERTA contains no express provision that a local taxing authority has the discretion to deny a LERTA application once the municipal governing body designates the subject property as a "deteriorated area," nor does it contain a provision that a local taxing authority may create a "LERTA district" for one entity, but not for another. Further, permitting a local taxing authority, such as a school district, to overrule the municipality's decision violates LERTA's division of authority between municipalities and school districts. The Commonwealth Court decisions cited in footnote 1, supra, apparently improperly read into the LERTA statute this discretion for local taxing authorities. This will hopefully be addressed by the Pennsylvania Supreme Court shortly.
In addition to issues concerning the LERTA statute itself, determinations concerning LERTA tax relief must comply with the uniformity in taxation requirements of the Pennsylvania and United States Constitutions.
The Uniformity Clause of the Pennsylvania Constitution provides:
All taxes should be uniform, upon the same class of subjects, within the territorial limits of the authority levying the tax, and should be levied and collected under general laws.
Pa. Cons. Art. VIII, Section 1 (emphasis added).
Moreover, the very enabling provision of the Pennsylvania Constitution further provides for uniformity in taxation:
§ 2. Exemptions and special provisions
(b) The General Assembly may, by law:
(iii) Establish standards and qualifications by which local taxing authorities may make uniform special tax provisions applicable to a taxpayer for a limited period of time to encourage improvement of deteriorating property or areas by an individual, association, or corporation, or to encourage industrial development by a non-profit corporation[.]
Pa. Const. Art. VIII, § 2(b)(iii) (emphasis added).
In McKnight Shopping Center Inc., v. Board of Property Assessment, 209 A.2d 389 (Pa. 1965) our Supreme Court explained the application of the uniformity provisions of the Constitution to real estate taxes:
Our Constitution, Art. 9, § 1, P.S., requires all taxes to be uniform on the same class of subjects within the territorial limits of the authority levying the tax. In applying this provision of our Constitution to the taxation of real estate, it is clear that all real estate is the class entitled to uniform treatment and that the ratio of assessed value to market value… must be applied equally and uniformly to all real estate within the jurisdiction of such authority.
Id. at 392 (emphasis in original).
Thus, properties located within the same local taxing authority territorial limits must receive uniform treatment. In other words, the location of a property can never be the determinative factor as to whether to apply a tax or a tax exemption.[3]
The principles governing the validity of tax classifications are well established in Pennsylvania. In Leonard v. Thornburgh, 489 A.2d 1349 (Pa. 1985) for example, the Supreme Court stated:
In cases where the validity of a classification for tax purposes is challenged, the test is whether the classification is based upon some legitimate distinction between the classes that provides non-arbitrary and "reasonable and just" basis for the difference in treatment. Stated alternatively, the focus of judicial review is upon whether there can be discerned "some concrete justification" for treating the relevant group of tax payers as member of distinguishable classes subject to different tax burdens. When there exists no legitimate distinctions between the classes, and, thus, the tax scheme poses substantially unequal tax burdens upon persons otherwise similarly situated, the tax is unconstitutional.
Id. at 1352.
Pennsylvania courts have applied the Leonard principles to determine whether challenges based on uniformity and equal protection standards are meritorious.[4] In City of Harrisburg, et al. v. School District of the City of Harrisburg, 710 A.2d 49 (Pa. 1998), the Supreme Court ruled that the imposition of a tax on the privilege of leasing tax-exempt realty did violate the uniformity provision of the Pennsylvania State Constitution, as well as the Equal Protection clause of the Federal Constitution. The tax at issue in Harrisburg, Resolution 276, imposed a ten (10%) percent rate of tax on the rental consideration paid for the privilege of leasing tax exempt realty in the city. The tax, passed by the School District of the City of Harrisburg, did not affect individuals or entities that leased private or other non-exempt realty in the City. Id. at 50-51.
On appeal, the Supreme Court determined that the relevant class of taxpayers are those individuals or businesses that lease property within the City of Harrisburg. Thus, the Court had to determine whether the unequal tax treatment of lessees of public and nonpublic property was based upon a legitimate distinction between them. Id. at 53, citing Leonard v. Thornburgh, supra. In support of its tax, the Harrisburg School District argued that the rental rates of lessees of nonexempt property included a share of the owner's real estate taxes. Thus, the School District contended that the different impact of real estate taxes upon the lessees made a "perfectly reasonable distinction between lease transactions that are completely unaffected by real estate taxation." Id.
The Supreme Court rejected this argument, first noting that classifications made by other tax legislation cannot remedy the non-uniformity of the tax resolution at issue. As the Court stated, the non-uniform treatment of lessees of exempt and non-exempt property arising from Resolution 276 was "not legitimized by reason of other legislation according to the lessees' distinctive treatment." Id. at 54.
The Court further reasoned that there was no concrete distinction between the rental consideration paid by lessees of exempt and non-exempt property. Id. Accordingly, because Resolution 276 distinguished between lessees of public and non-public property, in the absence of a reasonable and just basis for the difference in treatment, the Supreme Court determined that the tax violated both the Uniformity Provision of the Pennsylvania Constitution and the Fourteenth Amendment to the United States Constitution. Id.[5]
The Uniformity of Taxation Clause has similarly been applied to real estate/real property taxes. In Madway v. Board of Assessment and Revision of Taxes, 233 A.2d 273 (Pa. 1967) the Supreme Court ruled that 1963 amendments to the First Class Township Code, prohibiting interim assessments for unconveyed or unoccupied residential structures, while allowing interim assessments for other "improved" property, was violative of the Uniformity Clause. In reaching this conclusion, the Madway court stated:
[T]he Uniformity Clause forbids the taxing of one man's land at a lower rate than another simply because of the type of building erected, or the type of business connected thereon. This is not to say that the business cannot be taxed according to its type. It merely means that one person's real estate tax must be computed in the same manner as his neighbor's.
Id. at 278. See also, Mill Creek Township School District v. County of Erie and Erie County Board of Assessment, 737 A.2d 335 (Pa. Cmwlth. 1999).
Applying LERTA principles to the constitution requirement of uniformity, this should mean that all taxpayers in areas determined by municipalities to be deteriorated and LERTA eligible, should be treated uniformity, as a single class. All taxpayers should be entitled to equal treatment for LERTA tax relief. School districts, particularly, should not have discretion to discriminate between such similarly situated taxpayers.
The Pennsylvania Supreme Court will hopefully provide further guidance in this area. The availability of tax incentives and state financing should be carefully examined by developers and business owners who are considering locating in Pennsylvania or expanding their business operations.
If you have any questions about LERTA or any other tax relief or pubilc financing, or any other matter related to property management or development, please contact Richard B. Sandow at rbs@jgcg.com or Robert L. Monks at rlm@jpcg.com.
