States Scouring Landscape for New Pots of K-12 Revenue

—Illustration by Getty and Vanessa Solis/Education Week
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As state legislatures from Maryland and Virginia to Hawaii search for substantial new streams of tax revenue to shore up and overhaul school systems, the list of potential targets to tap gets longer by the day: online advertising, marijuana, corporations, and—of course—the rich.

By broadening their tax base, lawmakers think they can start paying down rising pension and other K-12 costs while sparing property taxes and the political blowback that would bring.

But it remains to be seen whether these new and sometimes novel revenue streams are sustainable, legally permissible, politically viable, or even capable of bringing in the billions of dollars generated by mainstays like income and property taxes.

Taxing and school funding experts warn that once you fasten school districts to revenues that are volatile, they are vulnerable to unexpected layoffs and the shuttering of programs, which could eventually affect school quality.

"Like any organization, you want to have stable income coming in," said Michael Griffith, a school finance consultant. "That's especially true for school districts. Your biggest expenses are your teachers. If you want to attract and retain quality teachers, you need to offer them decent salaries and give them cost-of-living increases every year."

The business community, meanwhile, has often argued that any new taxes it faces would have a detrimental impact on the local economy.

Finding the Revenue

While the taxing wars are nothing new, they are especially acute this year in many state capitals.

Legislators in Virginia and a handful of other states are grappling with how to tax—or eliminate—the blackjack, spades, and other so-called skills-based game machines that are eating into state lottery revenue for schools.

Hawaii is considering a bill that would for the first time allow for its school board to dip into property tax revenue and another bill that would increase a general excise tax.

And in Maryland last week, a subcommittee unanimously rejected a bill that would have instituted a bevy of new taxes on services in order to pay for a new K-12 funding formula that would, by 2030, cost the state more than $3.8 billion more each year.

Legislators also are coming to the sobering realization that their taxing infrastructure for K-12 schools—typically a mix of property, sales, and income taxes—is outdated, unreliable, and insufficient to keep up with K-12 costs, which have doubled in the past 30 years alone. Soaring state Medicaid costs continue to crowd out K-12 costs.

In addition, the majority of states in the last decade, in an effort to rev up the economy, capped property-tax revenue for schools, and many legislators signed no-new-taxes pledges.

"The fact of the matter is, most revenue sources are pretty well tapped out," said Dan Thatcher, a school funding expert with the National Conference of State Legislatures, which a few years ago successfully sued an internet company so states could start to collect online sales tax. "And we're operating on really outmoded systems to begin with that came to being after World War II. Property tax is hated, but the thing about it is that it's the most stable source of income for school districts."

Recent Approaches

Last year, Oregon passed a sweeping new tax on corporations that is estimated this year to bring in more than $1 billion for its school system. The state in 1990 placed a hard cap on its property taxes, sending K-12 revenue into a tailspin. Many districts now expect the new tax measure to reverse their fortunes this fall, but corporations have warned that the new tax will lead to layoffs, and many say they are considering leaving the state.

Texas last year scaled down its "Robin Hood" funding formula, which took money from wealthier districts and sent it to property-poor districts. It also cut property taxes across the board but made up for it by infusing districts with more than $11.6 billion in state revenue mostly derived from new taxes on fuel, state-owned land, and new online sales. Some experts there say the tax package isn't sustainable over a long period of time.

Colorado in 2012 became one of the first states to legalize marijuana, dedicating the majority of the tax-revenue stream to its public school system, which suffers financially from one of the hardest tax caps in the nation. But the sales-tax revenue brought in only $90 million for schools in 2018, just a fraction of the $5.6 billion its districts spent that year.

In a similar vein, a new study out of the University of Pennsylvania argues that Pennsylvania's tax on the natural-gas fracking industry barely made a dent in school districts' budget needs. In fact, a $1,500 per-student gap between districts where fracking has taken place (mostly poor and rural) and districts without fracking has barely budged since the practice began in 2012, according to the authors.

Researchers pointed out that, unlike in Texas where property values soar when oil is discovered, the property value in Pennsylvania's school districts remained stagnant. The state also failed to tax the gas extracted from fracking sites, the authors said.

"Although we found a modest increase in state and federal revenues wherever fracking occurred, these increases were not large enough to counterbalance" the environmental impact and flawed state funding formula, the researchers, Matthew Gardner Kelly and Kai Schafft, concluded.

New Territory

In states including Missouri, Nebraska, and Virginia, legislators this year are attempting to deal with a dip in lottery proceeds after gas stations and bars began installing machines offering what are billed as games of skill, such as video poker and blackjack games.

According to a presentation made to the state legislature earlier this session, Virginia's state lottery expects to lose close to $39 million in profits this year because of the new competition. The lottery fund had a record-breaking year last year, collecting more than $650 million for the state's school system.

The legislature now is considering whether to ban the new skills games outright or tax them.

"We're just looking for a level playing field," said John Hagerty, a spokesman for Virginia's state lottery. "We don't feel that it's fair that these gray machines are unregulated, untaxed, and unlicensed, and are impacting lottery profits for schools."

'Keep Fighting'

The search for new revenue could prove both groundbreaking and traditional in Hawaii, which remains today the only state without a property-tax revenue. That lack of stable and sizeable K-12 revenue stream resulted in a severe teacher shortage in some of its most isolated and poorest schools.

Now, the state is considering a comprehensive proposal that would provide $10,000 bonuses to highly-sought-after special education teachers and $8,000 for Native-Hawaiian-language-immersion teachers. In order to pay the $35 million price tag, the state is considering providing the state's school board with taxing authority or increasing a tax on manufactured goods.

"You have to keep fighting," said Corey Rosenlee, the president of the state's teachers' union who has for years been searching for new revenue for the state's unified school district. "If door one closes, you go to door number two."

In Maryland this year, Democratic lawmakers seeking revenue to pay for a sweeping education overhaul proposal proposed reworking the state's sales-tax system from one that mostly taxes only goods to a system with a blanket tax on professional services—a broad category that could include janitors, financial advisers, and a wide array of other services—with a list of exemptions including education, health care, and social services. They had also promised not to raise property or income taxes.

But last week, a bipartisan committee rejected the proposal. "Small businesses can breathe a little relief," Mike O'Halloran, the state director of the National Federation of Independent Business, told the Baltimore Sun.

As part of a separate bill, Maryland also is looking to put the first-ever tax on online sales advertising revenue, with a specific focus on large tech companies such as Google and Facebook.

Republican Gov. Larry Hogan had criticized the sweeping revenue bill from the start, calling it the largest tax hike ever and saying that it would "destroy" the state's economy.

Typically, state lawmakers around the country have tried to balance their appetite for increased revenue with ways to control costs. But this year, finding increased revenue sources seems to be driving much of the discussion.

"As a percentage of the whole economy, we're pretty flat on K-12 spending," the NCSL's Thatcher said. Given intensifying pressure from parents and lawmakers' inability to deal with growing pension costs, "there comes a point, like a slow growth in your body that's become very painful, that you have to do something."

Vol. 39, Issue 25, Pages 1, 12

Published in Print: March 11, 2020, as States Scouring Landscape for New Pots of Revenue
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