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Published in Print: May 8, 2002, as Report Finds Tax Policy Takes Toll On State Aid for Michigan Schools

Report Finds Tax Policy Takes Toll On State Aid for Michigan Schools

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Citing a new report, educators in Michigan say that adjustments to dozens of state tax laws since 1994 have added up to nearly $2 billion in lost revenue for schools—nearly $550 million in fiscal 2002 alone.

Critics of the analysis, however, say that it fails to paint a balanced picture of the state's efforts to finance its public schools and to create a more stable funding system.

Commissioned by three education groups, the report shows that even before the country's economy fell into recession last year, Michigan schools were losing significant revenue from what had seemed like minor changes to state taxes on income, sales, property, and other areas.

Justin P. King

The report also raises questions about the state's 1994 school finance overhaul, which sought to ensure a fairer distribution of education funds across Michigan by ending the state's heavy reliance on local property taxes to pay for schools.

Written by a former top state budget official, the report concludes that the tax changes as well as the school finance changes were well- intentioned and made "good common sense and good economic sense." But it adds that legislators did not know the full impact of the tax cuts when they approved the changes.

"I was surprised," said the report's author, Douglas C. Drake, in an interview last week. Mr. Drake is a consultant in Lansing, Mich., and is a former director of the state office of revenue and tax analysis. "Everybody had been looking at individual pieces of the tax breaks, but didn't know how they would add up."

The $2 billion in lost revenue would have gone either directly to schools or to localities to cover education- related expenses. Because of earmarks in the state budget for education, it could not have been spent any other way, Mr. Drake said.

Michigan's fiscal picture is not unique. From 1995 until last year, Michigan was like most states: Flush with revenues, lawmakers cut taxes.

But now, as states tighten spending in the face of an economic downturn, schools across the country are worried that the earlier tax cuts could further squeeze state education budgets.

"Anything that affects the overall state-revenue collection can and will have some impact on schools," said Arturo Perez, a policy analyst with the Denver-based National Conference of State Legislatures. Given the complexity and variety of tax breaks put in place, however, he added that it's impossible to generalize about how they will affect schools nationally.

One-Sided Report?

The three Michigan education groups that sponsored the recent study say that policymakers need to talk about ways to soften the impact of state tax breaks on school funding. To be sure, those groups—the Michigan Association of School Administrators, the Michigan Association of School Business Officials, and the Michigan Association of School Boards—don't necessarily want the current school finance laws revoked. But they do want to start a dialogue among legislators, other state leaders, business officials, and educators about how to maintain school funding and provide increases as needed.

"It's good public policy to take a look at laws that impact public education funding over the long term," said Justin P. King, the executive director of the MASB. "The thrust of [the report] really is to get people to the table and have a discussion."

Joanne G. Emmons

Critics of the report are quick to point out, however, that, in spite of its findings, a multiyear state-budget plan has ensured that Michigan schools have received more per-pupil funding in recent years. During the 2000 legislative session, lawmakers approved a three-year budget that set a minimum state grant to school districts of $6,000 per pupil in fiscal 2001, $6,500 in fiscal 2002, and $6,700 in fiscal 2003.

Sen. Joanne G. Emmons, the chairwoman of the state's Senate finance committee and a chief author of the 1994 school finance overhaul, calls the report one-sided. The Republican didn't disagree with the numbers, however, because her committee has been keeping track of the impact of the changes as well as the increases schools have received under the school finance changes.

What the report did not point out, she continued, are the benefits that the school finance plan and subsequent tax cuts have brought to the state's economy and to its schools. For instance, she said, more people are building homes in the state, and the state's population had risen slightly after several years of decline.

"I don't know how the schools can say they're getting cut," Ms. Emmons added. "The taxpayers feel quite differently."

Further, with the multiyear budget, the state has given record increases to schools, she argued: "Even with an economic downturn, ... we in Michigan have made a priority of K-12 schools."

But making promises is not the same as living up to them, warned Mr. King of the school boards' association.

In order to meet the goal of providing $6,700 per student for this coming academic year, the state had to tap its rainy-day fund, he said. Facing an uncertain budget climate, school officials now worry that their share of the state budget could decrease.

And for some schools, the $6,700 in per- pupil funding is still not enough. Declining enrollment in rural areas, inner cities, and places with charter schools "is the biggest budget problem," Mr. Drake added.

Vol. 21, Issue 34, Page 15

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