8.4 Local Funding and Parcel Taxes
In the abstract, there is consistent, strong support in California for public school funding. The Public Policy Institute of California (PPIC) has tracked public opinion regarding education funding for years. These surveys consistently find that there is no major area of funding that California voters say they care about more.
Support in principle, however, does not translate into actual political will to fund California’s schools through state taxes. About six in ten California voters favor raising income taxes to pay for public schools… but only if the taxes will be levied on the wealthy. At least six in ten say they would oppose taxes if they affect overall taxpayers. The surveys also show that most Californians are blissfully clueless about the big picture. “Just one in four… know that both student test scores and spending per pupil are below average compared to other states.”
The survey results show much more positive attitudes when taxes are local, in support of local schools. Solid majorities (roughly six in ten) say they would support a local parcel tax to support schools in their community. In this case, however, the will of the majority is not enough: in 1978 California’s voters passed Proposition 13, which amended the California constitution so that it requires a 2/3 vote to pass any tax measure.
When times are tough, communities don’t just rail at Sacramento’s intractability. People who care pull together to raise whatever money they can for their students, an amount that can vary from tamale sales to million-dollar funding drives. Increasingly, schools are working to make a significant annual donation to the school an expectation of parents.
Voluntary donations cannot match the funding power of a tax. Some of the wealthiest schools and school districts have established foundations to support the schools, but even in those rare places donations can cover at most the cost of one or two salaries per school.
In order to avoid major cuts, a small but increasing number of districts turned to parcel taxes, despite the considerable difficulty of mustering a 2/3 vote to pass them.
Proposition 13 made it illegal for school districts to raise property taxes based on the value of property (“ad valorem” taxes), but left the window open a crack: parcel taxes are levied on the basis of ownership of a parcel of land, independent of its value. This is clearly a work-around solution; the value of a parcel can vary substantially, but the tax generally does not, which makes it regressive by its very definition. Some districts have added provisions to their parcel tax measures that causes taxes to vary, but usually this is used to avoid taxing parcels owned by senior citizens who might otherwise vote no.
Relatively few districts have attempted to pass a parcel tax because the 2/3 vote requirement is so difficult to achieve. Two “yes” votes are needed to counteract every “no” vote. Even in the peak year of 2008-09, the districts that passed such a tax represented only 5% of the student population of California. In the economic downturn of the 2010 election, virtually all such measures failed.
Based on thirty years of California history, it is safe to say that the political will to support schools is strongest at the local level and weakest at the state level. The only sustainable way to reverse California’s downward drift in education investment is to allow local political will to be expressed.
If the passage rate for local parcel taxes for schools were simply lowered, many communities would pass them. PPIC polls suggest Californians routinely divide about evenly on the question of making it easier to pass these taxes. Proposition 39 reduced the pass threshold to 55% for facilities bonds, and if the PPIC poll is accurate the same could potentially be done for parcel taxes. One reason for reticence is concern for equity: if it were easier for communities to solve their own school funding needs, higher-income communities would certainly do so, but lower-income communities would be at a disadvantage.
The challenge ahead for California education funding is to empower local school funding, but do so in a way that directly addresses the issue of equity. In 2008, the Governor’s Committee on Education Excellence proposed a way to square this circle in Appendix E of its report: create a state “variable matching fund” for local school aid. In this proposal, communities would be allowed to levy taxes on themselves in support of their schools. If the local tax measure meets certain requirements, the taxes raised locally would be matched by state funds allocated with a high priority from the general fund. The amount of state funds provided would vary according to the assessed property value per student in the district. High-wealth communities would not receive matching funds from the state, but low-wealth communities would receive matching funds in order to ensure equitable funding. This approach would preserve equity in effective local funding power, as state matching funds would augment local revenues in inverse relationship to local assessed property values.
Unfortunately, consideration of this proposal was substantially dropped when the bottom fell out of the market in 2008. It is a solid proposal, and should be picked up again.
Next: 8.5 Where Does the Money Go?
Ease in adoption of local funding has long been a dream. And the dream is not likely to change soon.
Two issues: tax selection and the need for a state wide vote to amend Proposition 13.
Tax Selection:
There are no legitimate options for local funding other than a “parcel tax”, a tax add on to local property taxes. First, a local option school sales tax, tried a couple of times in California, is impossible to administer except on a county wide basis. As a result, all schools in the area have to be on board and have a common understanding of how the funds are to be distributed—a sometimes daunting political task. Second, California already has one of the highest sales taxes in the nation and it is not likely to change soon. Sales taxes are generally committed to police, fire, parks, social services and the encroachment by schools into city and county territory is not likely to be accepted easily. Third, the differential in sales tax income per ADA is huge—think of Butte County vs. Alameda County—one would have a very small income level per student while the other would be very high.
A local option income tax also does not work. The yield per ADA is very small in comparison to the tax level and the administrative costs of collection are enormous. A number of years ago I was chair of a special committee appointed by the Legislature to make Master Plan recommendations for Finance and Facilities for K-12 agencies. The Franchise Tax Board representative, who met with us to consider a local option income tax idea, almost fell off his chair as we proposed the idea. As he described it, the jurisdictional problems are enormous. As the committee went further, our investigation reflected that even a 5% PIT add on yielded less than $400 per ADA. It does not seem likely that a super majority in a community would approve a high income tax level for a low student return.
A parcel tax imposes costs on property parcels only and property tax increases are never popular. The tax does not grow with the economy but instead will only grow if the number of parcels in a community increases. For many California communities, the small number of new parcels created by “community fill in” keeps the tax static with no growth. The tax provisions themselves have to have an annual escalator to keep up with school’s cost of living and the electorate becomes even more concerned if the vote approval will lead to annual increases.
Be aware of the policy difficulties in trying to provide an equalization characteristic to parcel tax issues—that is, providing added state aid to those communities with few parcels per ADA. Yes, note the equalization issues. To equalize the yield per ADA, the added state aid would be distributed based on parcels/ADA not on income per resident. Income per resident does not bear a relationship to the income per parcel owner and no relationship to yield per ADA.
Constitutional Amendment
Any change in local income options requires an amendment to California’s constitution and specifically to the provisions added by Proposition 13/1978. While PPIC polls show some acceptance of the idea recognize these are before any “no” campaign.
Consider some of the political issues.
First, recognize there is a high voter protection of local property taxes and Proposition 13. It is easy to envision the campaign against an idea of making it easier to increase property taxes especially if there is a wealth equalization characteristic. An equalization feature has the net result of state aid being allocated to communities who increase their tax rates. Said in a more political way, “under this Proposition, the state will be using your taxes to bribe your community into an even further increase in taxes.” Writing the negative campaign takes only a little bit of imagination.
Second, amending the Constitution for any other tax will surely lead to other public entities wanting to join the effort. Why, as an example, should tax payers approve a 55% tax threshold for sales taxes for schools unless it is also doing so for police, fire, parks or dozens of other high priority public needs.
It is easy to advocate for lower threshold local option education taxes. But, moving the idea from a dream to reality is a long reach.
While Ken’s pessimism regarding local options is well-grounded based on past experience in California, he also points the way to a change more and more organizations in California are interested in pursuing, some amendment of Proposition 13. At a public meeting last week at DeAnza College attendees heard from three different experts who are talking seriously about that sort of change.
Fred Silva told the group that California Forward has folded the question of local school revenues into its larger vision of state fiscal reform. They are presenting their ideas in a series of public forums throughout the state, including one this Saturday in San Jose.
At http://www.closetheloophole.com you can find out more about an idea to change the way commercial properties are taxed. Phil Ting made a compelling presentation about the extent to which the uneven way that property taxes affect businesses can actually create obstacles for new commercial ventures that want to bring jobs to California. All thanks to the reassessment mechanisms on commercial property that were part of Prop 13.
And finally Lenny Goldberg of the California Tax Reform Association gave the audience a laundry list of tax options that California could consider, some of which would require some adjustment in Prop 13 and others that would not. And some of which could be locally levied and controlled.
The fourth speaker on the panel at DeAnza was perhaps the most insightful and went straight to Ken’s point about the long reach. Cindy Chavez, a former San Jose city council member, was reflecting on her own political experience as well as her new work with an organization called Working Partnerships when she asked the audience: “How do you enable voters to connect the value of the services with the money they are being asked to pay?” Given Californians current distrust of Sacramento and belief in the importance of education, the answer to Cindy’s question has to include greater transparency in regard to where the money is going and how it’s spent. Sending more dollars to Sacramento does not get you there.
It seems like a local revenue option has to at least be on the table for debate, as does Prop 13. Maybe things have changed in California.
I’d like to respond to the question posed by former San Jose City Council member Cindy Chavez. She asked: “How do you enable voters to connect the value of services with the money they are being asked to pay?” First, let me note that I am a (former) career local government official and that experience colors my viewpoint.
In my view there will be no change in the public’s ability to “connect” service value with taxes paid until we undo a particularly pernicious aspect of Prop 13. Prior to the passage of that amendment local government officials were required to publicly adopt a local property tax rate each year. These taxes paid for the cost of general civic services. Under current law local government officials do not set a local property tax rate and have not done so since 1978. Since 1978 the property tax rate has been fixed by operation of law and apportioned out to local governments by means of a formula. Seen another way–local officials are responsible for providing services but not responsible for raising the money to pay for them. We have broken the link between spending the money (i.e. adopting a budget) and raising the money (i.e levying taxes). Those two tasks should be done by the same officials because that is the only way to hold them responsible for their actions. By relieving local officials of the responsibility to raise revenue for general civic services we make it almost impossible for the elctorate to hold any one of them directly respnsible for the “connection” Ms. Chavezx so properly ientifies. Try asking your friends two simple questions. First, specifically, who determines the budget of your local government? Second, specifically, who determines the amount of taxes you pay for those services? You will likely receive some answers for the first question ; the responses to the second question may surprise you. Now ask yourself the question raised by Ms. Chavez.
Transparancy in government means the ability to hold officals responsible for what they do (and don’t do). Our present system works against that principle because it breaks the connection between spending money and raising money. Those two functions need to be accomplished by the same officals—then the electorate can see who is responsible and judge those officals at the next election.