Committees
Revenue and Taxation Committee
March 15, 2004 Minutes
In attendance were Chairman Chuck Gossett, Vice Chairman Dan Navin, Ted Adams, John Brandt, Representative Charles Calvert, Fred Church, Christine Hansen, Barbara Shaner and Tom Zaino. Other Task Force members present included Task Force Chairman William W. Wilkins, Paolo DeMaria, Russ Harris and Dennis Woods.
Presentations:
- Quartile Analyses for Non-Hold Harmless Districts (PDF*, 8 KB)
- Hold Harmless Quartile Analyses (PDF*, 8 KB)
- Estimated Revenues from Statewide Property Taxes (PDF*, 8 KB)
- Summary Results of FY 2006 Simulations of ODT Plan at Five Foundation Levels (PDF*, 12 KB)
- FY 2010 Hold Harmless Districts Under ODT Plan (PDF*, 10 KB)
Chairman Gossett called the meeting to order at approximately 10:15 a.m. Art Flesch served as facilitator. Chairman Gossett called on Mr. Michael Sobul who presented additional information on the Department of Taxation's proposal for a new school revenue plan.
The first document reviewed by Mr. Sobul was entitled "Summary Results of FY 2006 Simulations of ODT Plan at Four Foundation Levels." He noted that these estimates assume that Taxation's plan would take effect in FY 2006. Mr. Gossett asked if there was something on this spreadsheet that showed additional state aid. Mr. Sobul stated that line 8 provides the additional state aid. Representative Calvert opined that the state aid increases exponentially as the foundation level rises.
The second document reviewed by Mr. Sobul was entitled "Estimated Revenues from Statewide Property Taxes." Mr. Sobul noted that there was no replacement mechanism in these numbers to offset the planned decline in public utility assessment rates to 25% in 2006. The revenues anticipate a three percent cap on growth, which would be applied to real property taxes only. Another assumption in the chart is that inventory assessment rates will continue to be phased down by two percentage points per year beginning in FY 2006.
Mr. Navin asked how the annual tax rate on real property would be implemented. Mr. Sobul responded that the legislature would set the rate.
Mr. Brandt commented that the rate would then be subject to the political process and possibly change every two years. Mr. Brandt reminded the committee that we are trying to attain something stable.
The third document summarized by Mr. Sobul was entitled "Hold Harmless Quartile Analysis." He noted that a district's size does matter relative to the hold harmless amount. Many more of the largest school districts would be on the hold harmless. Also, many more of the wealthiest school districts would be on the hold harmless as well. The cost of the hold harmless for the wealthiest 25% of school districts would be approximately twice the total cost for the other three quartiles. There would be a total of 280 hold-harmless school districts.
Mr. Zaino asked whether the amount shown for the hold-harmless payments was additional funding. Mr. Sobul responded no to this question. These are amounts that they would have received in FY 2006 under current state law. Further discussion between Mr. Sobul and Mr. Zaino clarified that in many cases these would be increases from FY 2005.
For the non-hold-harmless school districts, poorer districts are less likely to be on the hold harmless. Smaller school districts are also less likely to be on the hold harmless.
The fourth chart reviewed by Mr. Sobul was entitled "23 Low Wealth Districts on Hold Harmless under ODT Plan." He noted that there did not appear to be any common reason for the low-wealth districts being on the hold harmless. In some districts the explanation appears to be the large differences between the Class 1 (residential and agricultural property) and Class 2 (commercial and industrial property) current expense tax rates. Mr. Church noted that because there is not one single reason for these districts being on the hold harmless, there is not one thing that will be able to fix it either.
Valley Local is probably on the list because of the large payment that the district receives as a result of Lucasville State Penitentiary being in the district. Mr. Sobul observed that Trumbull County had more than 25% of the total low-wealth hold-harmless districts, but he could not offer a reason for this disproportionality. He added that he was surprised that no school districts from southeast Ohio were on the list.
The fifth table discussed by Mr. Sobul was entitled "FY 2004 Basic Aid Guarantee Districts." This table compared the FY 2004 Base Cost to the FY 2004 Guarantee.
The sixth table was entitled "Fiscal Year 2010 Hold Harmless Districts under ODT Plan, $5,750 Foundation Level in FY 06 and Five Percent Annual Growth." This chart shows which districts are still on the hold harmless in 2010 and by how much. It also examined the overlap between the FY 2004 basic aid guarantee districts and the FY 2010 ODT plan hold harmless districts. About half the FY 2010 ODT plan hold harmless districts were also FY 2004 basic aid guarantee districts.
Mr. Gossett went back to the first chart discussed by Mr. Sobul. He asked if the hold-harmless level was constant. Mr. Sobul responded that this hold-harmless payment level decreased over time. The hold-harmless percentage is differential, with the poorest school districts having the highest retention of foundation aid growth and the wealthiest school districts having the lowest retention of foundation aid growth. The poorest school districts would also come off the hold harmless at a slower rate. Mr. Zaino observed that under Taxation's plan, no school district would receive less in FY 2006 than it would have under current law.
Mr. Adams observed that this is really not a hold harmless, since school districts will receive increases after the initial hold-harmless guarantee. Mr. Church said that you could call it transitional aid, as the state changes to a new system. Mr. Church further noted that the differences in how much annual foundation aid growth districts received caused some convergence in aid levels among the poor and wealthy districts. Mr. Zaino said that the ODT plan was thus a plan that equalized aid levels.
Mr. Brandt observed that after the transition aid is gone the wealthier school districts would be at a disadvantage in replacing these revenues locally. Ms. Shaner agreed that the tangible base would be gone to pay for spending above basic aid. The schools would be taking a risk that by bringing the tangible property tax to the state they could be losing growth.
Mr. Gossett commented that the stumbling block is the treatment of the tangible personal property tax. He inquired was there a way to implement a plan, keep the state and local partnership and still get the result we are looking to achieve.
Mr. Navin noted that ODT proposal to bring the tangible property tax to the state at the 73-mill rate is problematic for his members. He understands that two-thirds of businesses would see a rate decline, but one-third would see a rate increase. Most of the one-third who would experience the increase are in the southeast Ohio region, which is already struggling to attract new business. Mr. Brandt observed that the amount paid by the one-third is by definition about equal to the amount decreased in the two-thirds group, since the overall amount is revenue neutral.
Mr. Gossett noted that the current tangible tax revenue could go down over time due to legislative action. He called the current revenue a high-water mark. Treatment of the tangible personal property tax is the principal difference between Taxation's proposal and the one of the Ohio School Boards Association (OSBA). Mr. Gossett noted that there are implementation issues to discuss as the Revenue and Taxation Committee contemplates its possible recommendations. He asked whether the committee should get opinions on the constitutionality of some possible recommendations or, instead, offer options and leave the determinations of constitutionality to a later date. The committee needs to decide how to treat the personal tangible property tax before it proceeds farther.
Mr. Adams suggested that the committee needs to prioritize those aspects of the committee's recommendations that are the most important. He is worried that the committee is contemplating making the formula even more complicated than it is now. Mr. Gossett opined that the mechanics of the formula might be more complicated, but it would be easier to understand the concepts of the school funding system. Mr. Church observed that, if the committee decides to adopt the OSBA plan, then the committee needs to have a discussion on how to fill the gap caused by not taking the tangible property tax to the state.
Mr. Church commented that giving the districts additional inside mills to eliminate Phantom Revenue might solve some of the same problems that the ODT and OSBA plans are trying to solve. Mr. Adams commented that he wanted to know if there was support for looking further at that option.
Mr. Zaino asked Mr. Brandt how OSBA might suggest replacing the tangible personal property tax — through a new state tax or through some other tax. Representative Calvert noted that local school districts would want the state to replace lost tangible personal property tax revenues, which is currently spent on those things that are above a basic education.
Mr. Adams opined that school districts might have a different conception of what is "basic" than what is meant by others. Mr. Brandt observed that we all agree that we need to define adequate. Mr. Sobul agreed with Mr. Adams, who opined that this would vary from district to district.
Mr. Zaino asked if there was a way to determine how much of the tangible personal property tax goes to "basic" as opposed to "extra" educational programs - premium spending. Currently the tangible personal property tax pays for beyond-basic spending as well as a part of basic spending. When the plan is implemented they will be held harmless at their current rate, plus growth. When comparing the two proposals that are on the table (ODT and OSBA) we are not comparing like numbers. Is there a way to compare these two plans so that it is a more equalized comparison?
Mr. Gossett feels that the committee's recommendations need to address tangible property taxes in some fashion. He feels that this revenue stream is, at best, not going to grow over the next 10 years. Representative Calvert feels that the business tax base might grow if the state phases out the tangible personal property tax. It cannot be quantified, but it would improve the business climate.
Mr. Zaino feels that there needs to be a discussion regarding whether there is a state-local partnership. Representative Calvert noted that he believes that it is all local money, in the sense that it is paid by local taxpayers, even if it first goes to the state. Ms. Shaner feels that any recommendation from the committee should include a reform of the tangible personal property tax. Mr. Gossett asked how much total tangible personal property tax revenues are currently generated. Mr. Sobul responded that, for schools and other entities, annual revenues are $2.4 to $2.5 billion.
Ms. Shaner asked how much it would cost to fund categorical grants and how much of that is offset in the ODT plan by the 3 mill charge-off. Mr. Church responded that the cost would be about $1.35 billion, with the three-mill charge-off paying for about $550 million. Mr. Gossett asked what the lowest tangible personal property tax is in Ohio. Mr. Sobul responded that it is about 33 mills. Mr. Gossett asked if there is some way that the committee can deal with the tangible personal property tax in a way that is equitable and palatable to both school districts and the business community.
Mr. Navin stated that the fundamental problem that the business community has with Taxation's proposal is that it raises tangible personal property taxes on businesses that are located primarily in poor areas in southeastern Ohio and then shifted that money to wealthier areas of the state through the hold-harmless payments.
Mr. Brandt noted that the inventory component of the tangible personal property tax is going away under current law. He asked Mr. Navin if that fact also makes it more difficult to deal with this issue.
Mr. Zaino commented that you could provide tax credits to mitigate the impact on taxpayers whose tangible tax would increase.
Mr. Navin feels that the differential impact geographically is the problem. Mr. Navin stated that one of the current criticisms of the corporate franchise tax is that there are so many credits, and that adding more credits would be seen as a problem by some. Mr. Navin suggested that by eliminating or reducing tax abatements through such programs as the enterprise zone program that the state might be able to pick up enough revenue to reduce the tangible tax rate below 73 mills. Mr. Zaino asked whether this could be done for existing enterprise zone abatements or only for new ones.
Mr. Church asked Mr. Navin about reducing the 73-mill statewide tax to 40 mills and using an additional broad-based tax, perhaps something that is based on payroll or sales, in exchange for a lower tangible personal property tax rate. Mr. Navin noted that such a proposal was similar to the "factor tax" that was considered last year. Mr. Navin stated that the Ohio Chamber of Commerce would be open to that, but the devil is in the details.
Mr. Zaino asked if Mr. Church could offer some options for this replacement tax, showing rates, so that the committee could evaluate their impact.
Mr. Gossett asked Mr. Brandt if he had any ideas on how to deal with the tangible personal property tax. Mr. Brandt repeated that his association's position is that this tax should go away. Mr. Brandt stated that, in a perfect world, the state would fund an adequate education and the tangible personal property tax could go away.
Mr. Gossett noted that the committee is attempting to address structural flaws in the current system. The key question that needs to be addressed first is how to deal with the tangible personal property tax. He likes the notion of the state funding all of the cost of a basic education. Mr. Zaino noted that the advantage of the state collecting the tangible personal property tax is that it transfers this problem from local school districts to the state.
Mr. Adams observed that moving the charge-off to the state (the state paying 100% of base cost) could potentially make the issue even bigger, because there is already a revenue shortfall at the state. Mr. Zaino responded that the tangible personal property tax base is declining wherever you place it, but it is the cheapest way to eliminate Phantom Revenue, aside from repealing H.B. 920.
Commenting on Mr. Navin's concerns, Mr. Zaino opined that because there is one-third of the state that would not benefit from moving the tangible personal property tax to the state, does that mean that whole proposal should be discarded? Can we reduce to 40-mills or some other compromise?
Mr. Navin questioned how the 20 growing mills affected the hold-harmless calculation. Mr. Church answered that it does not affect it.
Mr. Gossett observed that basic aid should be dependent upon the 20 inside mills and this creates equal tax effort for equal funding. Mr. Adams added that the declining tangible personal property tax base affects the funding from either direction. Representative Calvert summarized by saying we could leave the 20 growing mills local, bring the tangible personal property tax to the state and have the state make up for declines in the tangible property tax. Mr. Zaino wondered if 20 local growing mills could be combined with a 73-mill statewide tax on tangible property. Mr. Navin then brought up the idea of increasing the charge-off on tangible property rather than bringing the tangible property tax to the state. Mr. Church noted that Mr. Mottley had brought up this idea and that the Department of Taxation would examine it further.
Ms. Shaner commented that whether we leave the tangible tax locally or bring it to the state we still have to fix it. Mr. Zaino added that by bringing it to the state it pays for basic education while the hold harmless payments would pay for the premium spending.
Mr. Gossett asked whether the committee should offer specific recommendations or more general ones. Mr. Brandt opined that the recommendations should be specific. Mr. Church asked whether the committee intends to offer a single recommendation. Mr. Gossett responded in the negative. Ms. Shaner agrees that the committee should not offer a "take it or leave it" recommendation, but the committee's best thoughts on how funding problems might be addressed.
Mr. Brandt reviewed for the committee a document that an OSBA working group put together that looked at both the OSBA and Taxation proposals and offered options based on selecting from these plans and, in some cases, selecting a third option. The document was entitled "Combined Proposal Based on Plans Developed by ODT and the OSBA Study Committee." Mr. Brandt offered the committee this document for its consideration.
Mr. Gossett expressed his concern that the committee is not ready to report to the full Task Force on April 1. He suggested having another meeting to consider what to say on April 1. What other information do committee members want to have? Mr. Zaino would find it valuable for staff to evaluate some of the options that were presented at today's meeting, listing pros and cons. This includes the options presented by Mr. Brandt. Ms. Shaner noted that the committee had still not decided what to do about the tangible personal property tax.
Mr. Navin feels that the Department of Taxation's proposal to collect 73 mills in tangible personal property tax statewide is unworkable, unless there is some way to change that to make it less onerous that has not yet been presented. Mr. Navin suggested that Mr. Gossett, Mr. Sobul and he draft some possible recommendations to share with the rest of the committee in anticipation of the April 1 meeting of the full Task Force.
Mr. Gossett asked committee members for possible meeting dates in April. The next meetings of the Revenue and Taxation Committee will be April 8th and April 26th from 9:30 a.m. to 2:30 p.m in the training room on the 23rd floor of the Rhodes Tower.
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