Budgeting, Tax Trims in Conflict

Florida voters’ overwhelming approval last week of a constitutional amendment slashing their property taxes—and potentially costing schools millions of dollars in funding—illustrates the vexing trade-offs policymakers nationwide face in trying to reduce one of the most unpopular of all taxes.

While lower tax bills may make homeowners happy, they threaten a precious and typically stable source of revenue for school districts, while shifting more of the financial burden to a state government already coping with budget pressures from a slowing economy.

It’s a drama that’s playing out in a number of states this year.

In New York, Gov. Eliot Spitzer has called for a cap on property taxes used to pay for schools, and formed a commission to figure out the details. Georgia and Indiana already are looking at fundamental changes: reducing reliance on property taxes by raising other levies, such as the sales tax.

Politically, the property tax can be hard to defend. Its growth is difficult to control, retirees on fixed incomes struggle to cope with rising bills, and high property taxes can be seen as an impediment to business and housing growth.

Yet there’s one big advantage: The property tax is a substantial and reliable source of revenue for local governments and school districts.

“There are valid concerns with property taxes,” said Molly Hunter, a school finance expert who leads the new Education Justice project out of the Newark, N.J.-based Education Law Center. “But you don’t want to use a sledgehammer to swat a fly. One of the things to keep in mind is property taxes provide stability, and schools can’t deal with peaks and valleys of revenue that well.”

In fact, a report released in December by the Cambridge, Mass.-based Lincoln Institute of Land Policy, titled “The Property Tax-School Funding Dilemma,” makes the case that property taxes are the only source of revenue that can weather a recession. From 1990 to 2006, which encompasses the recession years of 1990-91 and 2001, only the property tax showed steady growth, while the sales and income taxes (in the 43 states with an income tax) showed steep dips.

Though the amount people pay in property taxes may grow when home values and assessments go up, the latest national data available show that the proportion of school funding from property taxes has held steady.

According to the National Center for Education Statistics, an arm of the U.S. Department of Education, 34.8 percent of K-12 public funding came from local property taxes in the 2003-04 school year, while 47.1 percent came from the state. The remaining support came from the federal government, or from other local sources. That breakdown has remained relatively unchanged since 1989.

Options for Relief

The U.S. Census Bureau offers a slightly different breakdown. In terms of sheer numbers, data from the 2004-05 school fiscal year show that $138.6 billion of the $488 billion total revenue for K-12 education, or 28 percent, came from property taxes.

When legislatures look at property-tax relief, members usually have two main options: quick, targeted relief, such as to senior citizens, or a more complex structural change to the tax system that reduces the reliance on property taxes, said Bert Waisanen, a fiscal analyst with the Denver-based National Conference of State Legislatures.

“We’ve been seeing significant activity in the last three years in states,” he said. He pointed to South Carolina, which in 2006 pushed through a 1-cent sales-tax increase in exchange for moving more school funding away from property-tax proceeds.

But this may be a particularly difficult year for legislatures to make big tax changes that could affect their budgets. At least 15 states are running deficits or shortfalls this year, the housing market is in a slump, and the national economy is unsettled.

On the flip side, there’s the political dynamic that could facilitate property-tax reductions: Three-quarters of state legislative seats and 11 governors’ offices are up for grabs.

Florida’s Approach

Last week, Florida took the quick route to property-tax relief.

Voters in the state, by a majority of 64 percent to 36 percent, approved a constitutional amendment on the Jan. 29 ballot that will provide an estimated $12 billion in property-tax reductions over five years to homeowners and businesses.

Though the change may end up in court, it doubles an existing property-tax exemption for homeowners, which is estimated to save them an average of $240 a year. The law also allows homeowners to carry existing tax breaks with them to a new house. Under the new amendment, their property assessments, which affect how much their tax bills are, can’t grow by more than 3 percent a year.

The amendment “gives the people of Florida a tax cut, guaranteed by law, and will help reignite Florida’s economy,” Gov. Charlie Crist, a Republican, said in a statement following the vote. He had traveled the state campaigning for the amendment, in the hope that its passage would jolt the languishing real estate market and spur related industries, such as construction.

The legislature didn’t pass any other tax increases to make up for the property-tax relief. However, Gov. Crist in his fiscal 2009 budget plan still proposed an additional $138 million for schools to make up for any lost property-tax revenue. Overall, his pre-K-12 budget proposal is $23 billion, an increase of $1 billion over current spending.

But Florida teachers’ unions don’t see such a rosy outcome.

More tax relief for homeowners means less money for schools, which have gotten anywhere from 40 percent to 60 percent of their funding from local property taxes over the past several years. The state pays the remaining school tab, and will now be paying a greater share, although it’s unclear just how much schools will lose, said Mark Pudlow, a spokesman for the Florida Education Association, an affiliate of the National Education Association and the American Federation of Teachers.

The state has no income tax, so it relies on sales tax for most of its revenue. With an economic downturn looming, the union leaders fear this is a particularly bad time for the tax change.

“We’re now going to rely even more on these very, very volatile revenue sources,” Mr. Pudlow said. “When the economy’s flying, and people are traveling, and the real estate market is booming, we have just enough to get a little bit of an increase each year. But now it’s a really trying time in our economy.”

States Weigh Changes

Other states, including Georgia, Indiana, and New York, are trying to address the root causes of property-tax increases.

Upset with rising tax bills and increased school spending, Georgia Speaker of the House Glenn Richardson, a Republican, wants to make school funding entirely a state responsibility by increasing the sales tax.

Indiana Gov. Mitch Daniels, a Republican, who is facing re-election this year along with the entire House and some of the Senate in that state, has made property-tax relief his top priority this legislative year and wants to remove funding for schools’ general operating budgets from the property-tax rolls.

That plan, coupled with a legislative proposal to fund the costs of student transportation—except the purchase of school buses—with state dollars and not property taxes, would mean a $1.3 billion annual shift of school costs to the state. The state, in turn, would raise the 6 percent sales tax by a percentage point, and use other money set aside for property-tax relief to make up the lost funding to schools.

In addition, a separate Indiana proposal would require schools that wanted to build non-instruction-related facilities, such as swimming pools and sports stadiums, to get voter approval. Gov. Daniels had wanted a voter referendum on all school and local government projects over $7 million.

“This issue of property taxes has just enveloped the Statehouse, and legislators are saying, ‘We gotta do something,’ ” said Dennis Costerison, the executive director of the Indiana Association of School Business Officials. His group doesn’t oppose the property-tax changes as long as one provision is included: a separate “rainy day” fund for schools when sales-tax revenue slumps.

In New York state this month, Gov. Spitzer, a Democrat, created a commission—which even has subpoena powers—to recommend an effective way to cap school property-tax growth. The commission is also charged with studying the underlying reasons for school spending increases, particularly “unfunded mandates.”

“Our efforts to address this crisis—including unprecedented increases in state education aid and more than $5 billion in school tax relief—have not slowed the growth in local property taxes,” Gov. Spitzer said Jan. 23 in announcing the seven-member commission. “We need to explore new approaches, including reducing unfunded mandates and placing a cap on the growth of school property taxes.”

At the same time, the governor has proposed increasing state education spending by $1.46 billion, or 7.4 percent, for fiscal 2009.

A little more than half of school funding in New York comes from property taxes.

“We believe the focus should be on capping costs and not capping taxes,” said David Albert, the director of communications and research for the New York State School Boards Association.

He pointed to the rising costs of health insurance for employees and fuel for buses.

“We need to look at the funding drivers that are out of the control of school boards,” Mr. Albert said.