Public education embroiled in a taxing situation

NEA Today, Mar 2002

School funding has been battered by the recession. Here's how poorly designed tax systems are making the situation worse.

Budget shortfalls and poorly planned tax strategies have combined during this recession to put increased strain on public education funding. Consider these facts:

* Combined state budget shortfalls have now soared to $40 billion-the result of a recession-related revenue decline, soaring health care costs, and the growing price tag for homeland security. So says a recent analysis by the National Association of State Budget Officers and the National Governors Association.

* Many states have compounded their shortfalls by making big pre-recession tax cuts or by failing to create tax systems that keep pace with growing personal incomes and a growing population's need for services.

* States' use of property tax abatements to attract corporate investment is at an historic high-at a time when most other state and local taxes are linked to slow-growth aspects of economic activity, such as alcohol and gasoline sales.

"We have a tax system instituted in the early 1900s," notes Ed Hurley, an economist in NEA Research. "It's a system focused on tax revenue from the sale of manufactured goods. But in the 21 st century, we've shifted from manufacturing to services, especially electronic commerce."

* Forty-five states and the District of Columbia rely heavily on the sales tax to fund critical services, including education, according to a study recently completed by the University of Tennessee's Center for Business and Economic Research. Yet in 2001, the report estimates, state and local governments lost an estimated $13.3 billion in sales tax revenue "due to the inability to collect taxes from remote online purchases."

And by 2006, the revenue loss could climb to $45.2 billion.

States with Built-In Deficits

How do we extract ourselves from this taxing morass? NEA Resolution A- 13 (f) states: "The state and local share of education finance must be derived from a tax system that is balanced and complementary in nature, includes all broad-based taxes, reduces the excessive reliance on property taxes, and protects subsistence income." And NEA is working with state affiliates to bring tax policies in line with this ideal.

NEA Research, which provides training, publications, and consulting services for state affiliates on tax policy and school finance issues, has helped several NEA state affiliates introduce to legislators the concept of structural deficits.

Structural deficits, as opposed to cyclical deficits caused by recessions, arise when there's a mismatch between growth in spending needed to maintain current services and growth in revenues from current taxes and fees.

States hardest hit by structural deficits often have chronic fiscal problems-in good economic times or bad. They lack personal income taxes and find it hard to capture revenue from economic growth.

In Tennessee, a state with a high corporate tax but no personal income tax, a heavy reliance on sales taxes has yielded a "huge structural deficit of $500 million a year" and two downgrades of state bond ratings, notes Graham Greeson, research director for the Tennessee Education Association. This unending fiscal crisis has harmed public education (see page 19) and has prompted TEA to put tax reform at the top of its legislative agenda.

Two NEA state affiliates are working to create better tax systems:

* Being proactive in Nevada. In fast-growing Nevada, school funding is based almost exclusively on gaming and sales tax revenues, while corporations pay state taxes amounting to only $100 per employee a year.

In 2000, members of the Nevada State Education Association shook up the status quo by campaigning for a ballot initiative to levy a 4 percent tax on business net profits to support public education. While this publicly popular "Let's Be Fair" initiative was halted on constitutional grounds by the state Supreme Court, NSEA built a reputation as a force for tax reform.

The state legislature quickly created the Governor's Task Force on Tax Policy in Nevada, which was charged with focusing on broader tax policy issues and considering ways to reduce reliance on "volatile or cyclical revenue streams."

NSEA Executive Director Ken Lange was named to this eight-member body. NSEA will be applying "Universal Guiding Principles of Fair Taxation Policy" to gauge others' recommendations-measuring for qualities like tax stability, equity, simplicity, and accountability.

During the tax panel's deliberations, Lange adds, NSEA members will be conducting a public campaign on the pressing needs of Nevada schools. The goal: raise the state's per-pupil expenditure to the national average.

"This increase will lead to substantial raises and better working conditions in the classroom," Lange says.

* Being aggressive in Michigan. Public schools in Michigan are heavily dependent on sales and use tax revenues.

"But when somebody elects to make out-of-state purchases by phone, catalogue, or the Internet, the-state school aid fund loses millions of dollars in uncollected revenues," says Michigan Education Association field lobbyist Dave Stafford. "If we could collect use taxes alone that are owed by consumers, Michigan schools would get an extra $65 to $70 million a year."