Special Report
Budget & Finance

Revenue Limits

By Joetta L. Sack — January 04, 2005 5 min read
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It seemed like a good idea in 1978: In the midst of rapidly rising property taxes that forced some Californians to sell their houses or farms, voters passed a ballot initiative that severely restricted the amount of such taxes that local governments could collect.

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Elusive Answers

Their move—one of the first of its kind in the country—meant that the state of California would control most education funding under a formula designed to distribute aid more equitably between rich and poor districts.

But over the ensuing quarter-century, California educators have decried the law, known as Proposition 13. They say that state funding never reached the levels that property taxes had provided. Gradually, they say, the quality of the state’s education system has also eroded.

Traditionally, the property tax has been the foundation for education aid in communities across the country. While it tends to be a more predictable source of revenue, it also has led to wide variations in revenue across some districts.

The property tax has been the foundation for education aid in communities across the country; it also has led to wide variations in revenue across some districts.

Because of those concerns, and a general distaste for high taxes, California and 32 other states have put in place some sort of property-tax caps, or limits on the amount of such taxes that local governments can collect, according to a survey by the Education Week Research Center.

Education finance in nearly all those states has been significantly affected—usually adversely, educators say—by the caps. And while educators and others in a few places say that the tax caps have helped school funding, observers in most states with such caps say that schools are receiving less money than they would have otherwise.

When states decide to restrict property taxes—because of voter initiatives, court rulings, legislative action, or other efforts—the states must find new revenue sources to replace the lost funds. Often, those alternatives are taxes on sales and income, or other revenue sources that are also less stable than property taxes. In the economic downturn of recent years, that meant that many states saw shortfalls in projected revenue, in turn reducing the amount of funding they could provide.

“When states institute a cap and replace it with a statewide tax, those taxes become more volatile,” says Michael Griffith, a policy analyst for the Denver-based Education Commission of the States. “The property tax is a very stable, solid tax.”

Differing Approaches

The methods states use for capping property taxes vary widely, ranging from simple exemptions based on a percentage of a home’s value to complicated formulas. Nearly all those states give senior citizens and persons with disabilities who have low incomes allowances on their property taxes.

In California, for instance, the value of a property can be assessed only when it is sold. The goal of the provision is to make sure that people who have owned their homes for years do not risk losing them because they can’t afford to pay their taxes when property values escalate sharply, as those values have in recent years. Instead, the law allows for a 1 percent increase in taxes each year. Districts are not allowed to assess taxes at a rate above $10 for every $1,000 of a property’s assessed value.

Oregon, like California, has run into difficult economic times. The state has a cap of $5 per $1,000 of assessed value, with no exceptions. The state also relies on taxes from the timber industry, which has also been struggling, for a portion of its education funding.

Michigan has one of the strictest property-tax-cap laws, called Proposal A, which was approved by voters in 1994. The measure was a reaction to rapidly rising property taxes and to per-pupil expenditures that varied widely between districts.

The law stipulates that local property-tax rates and local per-pupil spending amounts are set by the state; the system allows no flexibility for districts to change the amounts.

Michigan’s law seeks to gradually even out spending between wealthy and poor districts.

Don Wotruba, the lobbyist for the Michigan School Boards Association, says Proposal A worked well in the late 1990s during the national economic boom, though the recent slowdown has meant less money from sales taxes and other revenues. “In a lot of ways, Proposal A has helped the schools in Michigan, but it’s also time that Proposal A is looked at,” he says.

Long-Term Impact

Most of the education advocates who have tried to change their state’s tax caps have run into strong resistance. Many political observers say that the public has had little appetite for tax increases in recent years, and that politicians who dare to propose increases risk losing their jobs.

The Wisconsin School Boards Association is one of several education groups in that state that want to raise Wisconsin’s 12-year-old caps on property taxes because the state has not been able to keep up its share of funding in a time of disappointing economic performance.

“We’re not very popular, because no tax increase is very popular,” says Ken Cole, the executive director of the WSBA. “But [the state tax cap] is devastating our programs, especially those that are small and losing enrollments.”

When states decide to restrict property taxes, the states must find new revenue sources to replace the lost funds.

Elsewhere, efforts to raise the caps haven’t fared much better.

Last year, proponents of a ballot initiative to amend Proposition 13 to raise taxes on commercial properties pulled the plug on the measure, largely because they knew it had little chance of passage.

California’s recent budget gaps have reached up to $38 billion out of a $90 billion state budget.

But those who have studied the state’s funding system say that schools’ fiscal problems began shortly after Proposition 13 passed in 1978. They say schools have fared somewhat better during the recent downturn than 25 years ago, when Proposition 13 took effect, because the state pumped much of its surplus in the late 1990s into education, increasing the base level of funds.

Proposition 13 “really has leveled out a lot of the higher-spending school districts,” says Michael W. Kirst, an education professor at Stanford University who was the head of the state school board when Proposition 13 passed. Yet, he added, “there’s much more state control in terms of regulation, and it’s held the whole system of education hostage to the state’s economic growth.”

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