Is your school budget going up in smoke?

NEA Today, Apr 2002

New study shows that `economic development' tax breaks burn up money needed for education..

As you approach (shudder) Tax Time, you're probably scrounging for every little deduction you can find. But regrettably, the shrewdest write-offs out there-through vehicles like property tax abatements, tax increment financing, and enterprise zones-won't appear in your tax preparation guide.

These gimmicks are just a handful of the creative "incentives" offered by states and cities, now totaling more than $49 billion a year in either expenditures or fore-gone revenues, to lure economic development-often from other states and cities.

This intergovernmental competition is starting to eat into some state education budgets, erosion that has become more evident in this time of recession and steep revenue shortfalls.

Economic development incentives make perfect business sense when a company is struggling and needs a tax break to survive, thrive, and sustain local employment.

But when these incentives are simply used to lure a business from one state or city to another, "it's a lose-lose situation for education and other public services," says Ed Hurley, an education finance expert in NEA Research.

"In an ideal world, we wouldn't allow tax abatements," Hurley adds. "In the meantime, let's focus on attracting new economic investment to our communities by offering good schools and a skilled workforce."

Ironically, many state and local economic development boosters already top their lists of "business climate" features with glowing promises of a "highly-skilled labor force" and "excellent schools and training facilities," while simultaneously granting tax breaks that can undermine educational quality.

That's just one finding in a report on how tax giveaways impact school funding, recently completed for NEA Research by the Good Jobs First project of the Institute on Taxation and Economic Policy. This nonprofit, nonpartisan organization-which admits a bias towards "tax fairness"-researches the effects of tax systems on taxpayers at all income levels.

The Good Jobs First study also finds that costly tax giveaways rarely determine where companies locate jobs.

That's because state and local taxes are deductible from federal corporate taxes. And besides, the report notes, "state and local taxes represent only 2 percent to 3 percent of a typical business's costs, compared with basics such as transportation, energy, proximity to suppliers, proximity to customers, and access to critical inputs-especially sufficient skilled labor."

Regardless of these facts, state and local tax gimmicks just keep mushrooming.

In 2000, Ohio had 3,180 low-tax "enterprise zone" agreements in place, notes Ohio Education Association research consultant Andy Jewell.

And in Alabama, corporate taxbreak legislation has been simply "endless," laments Alabama Education Association research manager Bill Hanebuth, who has seen every gimmick from employee payroll tax rebates for an auto manufacturer to a recent attempt -stopped by AEA-to grant a $400 million tax break to a power company.

The Good Jobs First/NEA Research report (not yet released to the public) focuses on tax breaks that affect the largest single source of school funding: the property tax.

In Ohio alone, the study finds, property tax abatements and tax increment financing (TIF)-an "exemption of the value of real property improvements" over a set number of years-reduced or diverted school revenue by $102 million in 1999. And Montana schools lose about $16 million a year to such subsidies, the report adds.

Some Smart Solutions

How can the education community challenge tax subsidies that harm school funding-at a time when many state and local budgets have slipped into the red?

Here, from the Good Jobs First folks and NEA researchers, are some reasonable approaches to the problem:

* Shield school revenues from corporate tax subsidies. The best way to do this is to prohibit the abatement or diversion of the school portion of property taxes. A handful of states already do this.

* Give school boards a formal say in subsidy decision making. The Good Jobs First report strongly recommends that school boards be given veto power over abatements and tax increment financing and that school boards be "provided with enough advance information about subsidies to make informed decisions."

* Improve disclosure of business tax breaks. In Ohio, notes OEA staffer Jewell, "there's no central source of information on tax abatement programs, even though the state Department of Development has some oversight. They only know what local tax authorities report to them."

And in Alabama, charges AEA staffer Hanebuth, industrial development boards actually meet in secret and waive taxes.

States should measure the impact of subsidies on school revenue, the Good Jobs First report stresses. "In order to do this, reliable data on property tax abatements and TIF must be collected and aggregated by school district, county, and state."

* Ask questions and be aggressive. "I tell Association members to contact their local tax authority-at the city, county, or township level-to find out if they have entered into tax abatement agreements with companies," says OENs Jewell. "I also encourage members to talk to politicians to get a picture of abatements granted in their community."