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Study Questions Benefits of Tax 'Earmarking'

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Efforts to increase state education spending by "earmarking'' state tax revenues often fail to reap the expected financial benefits, according to a newly released study by the National Conference of State Legislatures.

In recent years, the study notes, a growing number of states have adopted earmarking plans, setting aside specific revenues, such as sales-tax collections, for the exclusive use of the schools.

These plans have proven popular in a number of states where education-reform measures have forced reluctant state legislatures to raise taxes. In 1983, for example, the Arkansas legislature approved a temporary, one-cent increase in the state sales tax to pay for a major education reform package.

Political Protection?

According to the N.C.S.L. study, 27 states have dedicated all or part of at least one tax to education spending. In Texas, for example, no less than 14 taxes are partially earmarked. South Carolina directs all of its sales-tax revenues to the schools, while Utah sets aside all of its income-tax proceeds.

The study, which was released last week, is based on a N.C.S.L. survey of state legislative fiscal officers conducted last year. It examines state revenue data from fiscal year 1984.

Advocates of earmarking contend that such plans can ensure a steady revenue base for schools by protecting them from the partisan infighting that frequently determine the outcomes of legislative budget battles.

And, the N.C.S.L. study notes, earmarking allows political leaders to take advantage of strong public support for education when they seek to justify tax increases to voters.

"The main benefit is that it seems to create the political support that allows total state revenues to be increased,'' said Steven D. Gold, a financial analyst for the N.C.S.L. and one of the authors of the study.

Full Benefit Is Rare

But while that political support can result in more money for state coffers, the full benefit is rarely enjoyed by the public schools, according to the study. Earmarking some revenues sources, it argues, allows states to divert funds to other programs, often leaving the schools no better off than they were before.

"If spending on the designated program is already more than the amount earmarked, there is no guarantee that earmarking will increase spending for that program,'' the study warns.

Because elementary and secondary education is already the largest single item in nearly every state's budget, few if any earmarking plans will bring in enough revenues to ensure higher levels of school funding, the study argues.

This situation, the study says, has led critics, including many education groups, to charge that "earmarking is a 'shell game,' fooling many citizens into believing that government is actually doing something when it really is not.''

Such criticisms, the study notes, have also been directed at state lotteries, which now exist in 32 states and the District of Columbia. Of the 22 states operating lotteries in 1984, seven earmarked some or all of the proceeds for education, according to the study.

Suspect Promises

While education advocates have sometimes obtained guarantees that earmarked revenues will be used to supplement rather than replace existing education resources, the reliability of those promises is suspect, the study contends.

"Such effort-maintenance requirements are usually ineffective,'' the study says, "because ... inflation leads to higher outlays from one year to the next, so there is no way of knowing whether spending is any higher as a result of earmarking than it otherwise would be.''

For this same reason, the study adds, states have also found it difficult to track the effect of their earmarking systems over time, making it hard to determine whether schools have gained any long-term benefit from them.

Despite these problems, the study concludes that earmarking plans can be of at least symbolic benefit, providing evidence of the high priority that officials place on educational improvement.

"Earmarking may be viewed as entailing a commitment to increase spending in a certain area, so it could strengthen the arguments of those who want more spending, even though technically it is possible to avoid such action,'' the study says.

In New Jersey, for example, the study suggests that earmarking part of a proposed state income tax for education may have been decisive in winning approval for the measure at the polls in 1975.

"This points to an important aspect of earmarking--it helps to expand total public resources, either through adoption of new taxes, increasing of existing taxes, or enactment of new revenue sources such as lotteries,'' the study concludes.

Copies of the report, "Earmarking State Taxes,'' can be obtained by writing the National Conference of State Legislatures, 1050 17th St., Suite 2100, Denver, Colo. 80265.

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