Calling Michigan's action bold on one hand, Odden commented that he knew of no other time in the country's history that a state eliminated property tax as a fiscal support for schools without creating a strategy for revenue replacement at the same time.
"I think it's a bold action if your goal is to cut revenues for government or schools," he said. "It may not be a bold action if you're concerned about the funding of schools and the quality of schools and the level of revenues."
Michigan has been working on the issue of reducing the property tax and replacing it with greater state taxes for 20 years without success. This history includes 11 referendums, all promising to reduce one tax by raising one or two others. People generally believed that such a move would result in a net increase in taxes, so they voted the referendum down.
The perplexing thing about Michigan, Odden said, is that the state and local taxes, per capita, are about the same as the national average. Property taxes are about 31 percent above the national average, but sales taxes are about 31 percent below, so the total tax burden is normal for the national average. Property taxes as a percentage of personal income (4.7%) are the highest of Michigan's neighboring states, but not among the country's top ten. (Michigan is 11th.) There are other states, such as New York and Connecticut, where the property tax poses a greater burden on its residents.
It has been shown that if you cut the revenue source down, you must either watch the system decline or come up with some new strategies that will, even with stable or declining resources, make the system better.
A protective factor in Michigan is the "circuit breaker," which is the most generous program of its type in the country. The state spends approximately $800 million to shield people with incomes just above $82,000 from some degree of property tax overburden. The Headlee Amendment also functions to protect people from inordinate increases in assessments, except for those that were voted in by the people. Nevertheless, Michigan has tried again and again to reduce the property tax and replace it with higher state taxes.
Odden proposed that a reasonable approach is to cut the property tax by some level and replace it with a sales tax higher than the current 4 percent. But that's difficult because the sales tax is written into the state constitution.
What generally happens when reform efforts are required on a short timeline is that revenues never get fully replaced and the function ends up with less money.
What generally happens when reform efforts are required on a short timeline is that revenues never get fully replaced and the function ends up with less money. For example, Oregon took such an approach, although not as drastic as Michigan's. Their proposal was to reduce the property tax by some substantial amount over five years. They cut the revenue by 20 percent a year for five years. A state surplus in the first year covered the lost property tax revenue. However, there was no state surplus the next year and no new taxes were enacted, so the education budgets have been cut. Unless something happens, it is likely that the education budgets will be cut again next year and the year after.
California took a similar route but for a different reason. Proposition 13 was enacted in 1978. The California Legislature, too, had a history of wrestling with rapidly rising property taxes and never agreeing on how to control them. Because the state had a large surplus at the time of the referendum, one could reasonably argue that it was a rational decision to cut property taxes.
The state immediately took the surplus and bailed out the system, providing short-term relief. They did not, however, cut expenditures in the high-spending school districts by 30 to 50 percent to equalize spending across districts. So when school finance equity was not obtained, the state had to fund and set the spending level for all districts. When the state is obligated to provide the bulk if school funding from the state budget, Odden said, you find over time that the state can't afford it.
California's sales tax and income tax are twice as high as Michigan's, and even with several other state taxes, they still can't fund schools adequately. With the schools subject to the vagaries of the state national economies, California is in terrible shape right now. Furthermore, the schools have been even-funded for three years (the same dollars per child each year), so inflation is decreasing the value of the dollar.
Real education spending per pupil relative to other states has decreased in California; in the '60s California was in the top 25 percent of the country; now they are in the bottom 25 percent, lower than Michigan. In addition, the quality of the system has declined. It has been shown that if you cut the revenue source down, you must either watch the system decline or come up with some new strategies that will, even with stable or declining resources, make the system better.
Because the revenues have been cut out in Michigan, the optimistic scenario is to replace those revenues on a dollar-for-dollar basis. That probably would include or assume the people voting in an increase in sales tax. But Odden suspects that a more reasonable scenario is that the money allocated to schools is going to decline, even though probably more is needed to make it a world-class education system. The issue, then, is finding strategies to improve the quality with stable or declining resources, which is the thematic issue, not only for schools in Michigan, but for government agencies across the country and for all private sector organizations.
Concerning revenue sources, Odden offered three comments:
In order to develop a new finance system and program quality, we need to look back at whether or not spending has increased in the past. Whether you look at Michigan or national numbers, spending actually has gone up substantially on an average per-pupil basis. From 1960-1990 it went up about 210 percent in real terms, while achievement remained the same nationally. That tends to negate the statement, "We just need more money for schools," said Odden.
During this same time period, we served more students with disabilities and more poor and needy students, but the overall achievement level remained the same. Therefore, we have a productivity problem. Regardless of the revenue situation, quality and student achievement need to improve. The reform strategy that seems to be getting a consensus around the country has the following characteristics:
Translating all of this to a finance system, Odden offered the following strategy:
With regard to the specific structure of funds that should go to the schools, Odden offered three components: (1) a high base of dollars for all students on a per-pupil basis, (2) extra dollars for low-income students, and (3) an adjustment to reflect regional prices.
URL: http://www.ncrel.org/sdrs/areas/issues/envrnmnt/go/94-wodd.htm