Committees
Revenue and Taxation Committee
April 26, 2004 Minutes
In attendance were Vice Chairman Dan Navin, Ted Adams, John Brandt, Representative Chuck Calvert, Fred Church, Christine Hansen, Barbara Shaner and Tom Zaino. The other Task Force member in attendance was Russ Harris. Mr. Navin called the meeting to order at approximately 9:40 a.m. Mr. Arthur Flesch facilitated the meeting. Mr. Flesch asked each committee member to list one thing that they hoped to have accomplished by the end of the meeting.
Presentations:
- Representative Calvert's Option (PDF*, 20 KB)
- Option – Maintaining a Local Share (PDF*, 19 KB)
- Option – Replacing a Portion of the Tangible Property Tax (PDF*, 19 KB)
Mr. Adams would like to see some consensus around one plan. Ms. Shaner would like to weed out plans that the committee members do not want. Mr. Brandt would like to see some agreement on the common elements of the Ohio School Board Association's plan and the Department of Taxation's plan. Ms. Hansen would like to look at the new plans being considered to identify common elements that committee members can agree on. Mr. Church would like to see a state-local partnership on the table as well as continue to work on a state-only plan. Mr. Navin noted that the committee has a deadline of June 30 and would like to work on what is possible, while continuing to work on both a state-only plan and the continuation of the state-local partnership. Representative Calvert would like to see the committee spend some time on the state-local partnership plans to see if some agreement can be reached on them.
Mr. Sobul reviewed three options for committee members. The first option considered by the committee was a proposal put forward by Representative Calvert at the April 4, 2004 Revenue and Taxation meeting. Mr. Church summarized the plan.
Representative Calvert's Proposal
Mr. Church stated that he had taken Representative Calvert's concept and experimented with it in order to derive numbers that worked, and that Representative Calvert had agreed to him presenting the Tax Department's formulation of the plan.
Key elements of the plan include:
- Repeal of the tangible property tax;
- A statewide business tax that will generate the equivalent of 40 mills of tax on tangible property (about $1.3 billion), with the same amount of dollars per Average Daily Membership (ADM) going to every district;
- Inside millage on real property sufficient to generate, on average, $2,500 per pupil;
- Enough state aid to every district so that the sum of the statewide business tax, the inside millage, and state aid adds up to $5,750 per pupil;
- The elimination of the gap aid, reappraisal guarantee and recognized value programs.
The average millage statewide necessary to generate an average of $2,500 per pupil is 22.92 mills. Going to 22.92 inside mills would increase property taxes in 280 school districts, with the average increase being 2.4 mills. If current school district income taxes are included in the millage that would be replaced by the new inside mills, this would be a tax increase for approximately 195 school districts. One advantage of the plan is that there is no longer any reappraisal Phantom Revenue. As with other proposals that repeal all or part of the tangible property tax, this approach would impact the school facilities program as it would change school districts' wealth.
Using tax year 2002 and fiscal year 2004 data, the plan would provide state aid of $2,500 per pupil to middle-wealth districts, $3,291 per pupil to districts in the bottom third of wealth, and $1,012 per pupil to districts in the upper third of wealth.
Mr. Church stated that configured this way, the plan would spend about $3.494 billion in state formula aid in fiscal year 2004, or about $380 million less than the $3.877 billion currently being spent on formula aid.
Evaluation Against Criteria
This proposal would reduce the school funding formula's complexity. Some existing programs would be eliminated: i.e. gap aid, reappraisal guarantee, and recognized value. The proposal would also reduce complexity by eliminating reappraisal Phantom Revenue. Because Phantom Revenue is eliminated, the funding system would be easier to explain to taxpayers. Districts would no longer be using emergency levies to get to the 20-mill floor, and generally the challenge of choosing what kind of mills to levy should be substantially reduced. Districts would not need to return to voters as often under the proposal. On the business side, the business activity tax should be easier to comply with than the tangible property tax.
The state share of funding should increase as the replacement of the tangible property tax with a state business activity outweighs the local increase in real property taxes due to the 22.92 growing mills. Over time, the relative shares would be dependent on how revenue growth from the 22.92 mill inside millage compares to the increases in the state portion of base cost.
The predictability and reliability of the revenue would improve dramatically by the elimination of Phantom Revenue. This would lessen (not eliminate) the need for districts to go to the ballot.
Ms. Shaner asked how the plan impacts special education funding. Representative Calvert responded that the $380 million saved under his proposal is not slated for anything yet. This could be used for categoricals.
Mr. Navin noted that any local levies would not impact tangible personal property, only real property, since the tangible property tax would be repealed. Mr. Navin went on to question the risk of bigger/more frequent levies on the operating side. Mr. Sobul commented that the districts would have to go to the ballot less frequently for operating levies. Debt levies might need to be larger because they would now be levied only on real property.
Mr. Adams asked about the reduced role of local property taxes. Mr. Church replied that replacing the tangible property tax with a statewide business activity tax reduces local reliance on property taxes. This may not be true for some very wealthy (and low effort) school districts where 22.9 mills on real property would actually raise more than their current levies on real and tangible property.
Second Option — Maintaining a Local Share
Mr. Sobul noted that each school district would receive 22 inside mills under this proposal. Twenty-two mills was selected instead of 23 because there are so many school districts that would have to take inside mills away from other jurisdictions in order to get to 23 mills (fitting under the constitutional limit of 28.57 mills at 1 percent of true value).
The growth on the inside millage would be subject to limitations set by the General Assembly. Millage above 22 would be retained by school districts, subject to tax reduction factors, but with no floor. The formula charge-off would be 22 mills, adjusted downward to match the inside millage reductions.
The formula charge-off for tangible personal property would be raised to the lesser of 40 mills or all current expense tangible property taxes. The need for gap aid would be eliminated. The 10 percent rollback on commercial and industrial real property would be eliminated, with the savings used to lower assessment rates on tangible machinery and equipment. The definitions of patterns, jigs, and dies would be cleaned up to mitigate litigation and possibly raise more money to lower the assessment rate as well. This would free up millions of dollars for the state, which could be used to increase the foundation amount.
This proposal continues the use of property taxes in funding schools. Local taxes will go up where the current rate is below 22 mills. In 20-mill floor districts, the rate of growth will be restricted compared to current law. The state will have more revenue available to raise the foundation level and equalize aid because of the net increase in the charge-off.
Evaluation Against Criteria
This proposal reduces complexity because it eliminates many separate funding programs, such as gap aid, recognized value and the reappraisal guarantee.
Over time, state spending will increase because the state absorbs some of the cost of eliminating Phantom Revenue and of reducing taxes on tangible property (for example through the inventory tax phase-out).
Predictability and reliability are improved due to the elimination of Phantom Revenue (because the charge-off on real property equals the inside millage), which will lessen the need for school districts to go to the ballot. It should also improve competitiveness due to the lowering of taxes on machinery and equipment. Another advantage is that this approach does not impact the state's school facilities program.
Ms. Shaner needed clarification on the charge-off being tied to the inside millage which eliminates phantom revenue, but going to 40 mills on tangible property. What happens to low-wealth districts?
Mr. Sobul responded that the increase in the tangible charge-off will have a negative impact on districts immediately but it does protect them in the long run from reductions in the tangible tax, because as the tangible value drops the reduction in the charge-off and the increase in state aid is greater.
Mr. Zaino asked what would happen if the state chose not to roll back the rate. Mr. Sobul responded that it would reduce the state's obligation and increase the local obligation.
Third Option — Replace a Portion of the Tangible Property Tax
Mr. Sobul noted that this is only a partial plan and could be used in conjunction with the Department of Taxation's (ODT) and Ohio School Board Association's (OSBA) proposals, or with a state and local partnership proposal. It reduces the personal property tax and makes it a statewide tax. The rate would be 40 mills. The assessment rate on public utility property would be reduced from 88 percent to 25 percent.
The lost revenue ($1.1 billion) from the reduction in the tangible tax from 76 mills (statewide average) would be replaced with a two-factor tax on payroll and sales, which could be weighted. This factor tax would apply to all businesses, regardless of whether the business was originally subject to the tangible property tax. Abatements could be granted only by the state.
Evaluation Against Criteria
This proposal would reduce reliance on the property tax. It does not impact complexity for school districts or voters. It makes compliance with the tangible property tax simpler for businesses because it becomes a statewide tax and eliminates the need to track tax rates in many jurisdictions but on the other hand it adds a new tax that must be complied with.
The proposal shifts burden to the state for school funding because it removes $1.7 billion of local property taxes and replaces it with state dollars (state tangible tax and state factor tax). Predictability and reliability should be improved because the tangible tax, which is unstable and unpredictable, is removed from the local tax base.
By itself, the proposal does not address the issue of Phantom Revenue. It could actually exacerbate the Phantom Revenue problem because it is removing a potentially growing property tax source from the local tax base.
Replacement of tangible property taxes with a broader-based lower-rate factor tax should improve competitiveness. This shifts the business tax burden since some businesses do not currently pay tangible property taxes, but would now pay the factor tax.
Ms. Shaner asked about the weighting factor. Mr. Sobul responded that the ratio of 75% sales and 25% payroll would be an example, but you could weight the two taxes however you would like.
Mr. Zaino questioned under the recent House proposal for a factor tax or business activity tax (BAT) whether non-Ohio companies who have sales to related member companies in Ohio would have those sales counted as part of the factor tax base.
Mr. Church answered that sales between related corporations are an open question since the House plan details are not all worked out yet. When Taxation estimated factor tax proposal impacts in 2003 they assumed that the base would use net sales.
Further Discussion of Options
Mr. Sobul turned to Mr. Flesch who led a discussion of the options. Ms. Shaner observed that the third option is really just tax reform. Mr. Sobul agreed.
Mr. Adams observed that the biggest difference between the first and second proposals was in the treatment of the tangible property tax. He asked what would happen if the tangible property tax was not changed. Mr. Sobul responded that from a revenue standpoint there would be no impact because the proposals assumed that lost tangible tax revenue would be made up elsewhere. Obviously there are other impacts from leaving the tangible property tax in place, which the second proposal does. It just raises the charge-off to achieve some of the goals of pooling.
Mr. Sobul noted that the first proposal would eliminate the tangible property tax and partially replace it with a factor tax, and the third proposal would move the tangible property tax to the state.
Mr. Zaino liked the second plan's treatment of the tangible property tax. The tangible property tax is essentially being "pooled" in the ODT and OSBA plans. The second plan is doing the same thing but the money stays local by charging off 40 mills.
Mr. Zaino further stated that it is difficult to say what is more competitive than the tangible personal property tax. He does not see how this committee can know enough detail to recommend replacing it with a two- or three-factor tax. Mr. Brandt questioned whether we should leave tangible personal property tax alone because of that. Mr. Zaino further commented that he believes pulling it out of the local contribution to school funding is smart, because it buys time for the state to figure out how to replace it. That is why the ODT plan made it a statewide tax.
Mr. Brandt opined (with regards to the second plan) that predictability and reliability is a concern because districts will be dependent on the General Assembly during planning. Will the public perceive the involvement of the legislature as better or not?
Representative Calvert commented that pure predictability would require a constitutional change and the General Assembly would have to put it on the ballot. The legislature would be leery about putting something on the ballot without a growth cap. He noted that the system needs to have some level of growing inside millage or the state's share of school funding becomes unaffordable.
Mr. Navin referred to the provision of the second proposal that recommends that the growth on the inside mills be restricted by the General Assembly. Representative Calvert expressed his concern that, if the General Assembly did not approve a limit, the voting public might feel that they had been misled, since they expect a reduction in property taxes as a result of DeRolph. Mr. Brandt asked whether it might be preferable to put some growth limit in law, without requiring the General Assembly to approve a new limit on a regular basis.
Representative Calvert is concerned that the general populace is looking for a reduction in property taxes, and nothing being considered by the committee currently does that.
Ms. Shaner observed that property taxes are already going up already for many taxpayers, even under the H.B. 920 system. If the growth were more predictable if might be easier for taxpayers to accept.
Mr. Brandt agreed with Representative Calvert, but opined that the biggest problem is the need to return to the voters too often. Getting school districts off the ballot might alleviate much of voters' concern with property taxes.
Mr. Church stated that he recently responded to a research request about how the state taps into growth in property wealth through the tax system. He said that because of the operation of H.B. 920 and the capital gains exemption for principal residences, the state has limited avenues to tap into real estate wealth gains, so the state and local tax system is currently missing out on one of the fastest growing sectors of the economy.
Mr. Brandt responded that the state does tap into property wealth through Phantom Revenue. Mr. Church agreed. Representative Calvert commented that Phantom Revenue does not increase state revenues. It reduces the state's obligation to local school districts.
Mr. Brandt opined that it is not good policy to restrict school district revenues as much as they are under current law.
Mr. Navin asked committee members if there is some level of agreement among members that there must be provision for growing millage in any proposal put forth by the committee, perhaps within limits. No member expressed dissent with this position.
Mr. Navin asked if there had been any analysis to determine the impact of what various limits on local revenue growth would be. How much would property taxes increase at limits of three, four or five percent? How would these limits be imposed, on an average basis or on an individual taxpayer basis? Mr. Church observed that there are severe logistical problems with calculating separate tax rates for individual taxpayers.
Mr. Navin asked if the constitution would need to be amended if taxes were limited for each property parcel. Mr. Church compared this to a Michigan-style tax structure where taxable values differ from market values and that an amendment would be necessary.
Mr. Zaino asked how much the 20-mill floor districts' property values were increasing each year. Mr. Church responded that these districts tend to be poorer than average, with smaller than average increases, but if statewide increases were in the in the five to six percent range annually then the 20-mill floor districts would probably be growing four to five percent annually.
Mr. Brandt feels that it would be preferable to limit growth on a taxing-district basis rather than on an individual-parcel basis.
Mr. Navin asked if members were comfortable with growing mills with H.B. 920-type limitations of some percentage set by the General Assembly. No dissent was expressed with this general notion.
Mr. Navin asked what the merits were of these mills being state or local. Mr. Zaino opined that it would be simpler to leave the mills as a local revenue source. If you make it a statewide 20 mills, reappraisal would have to occur every year. Mr. Brandt would prefer a model where the state funds the entire cost of adequacy.
Mr. Navin stated that he feels that expanded local inside millage (e.g. 22 mills) will be a problem if the mechanism to roll the mills back in order to limit growth is left too loose. The proposal needs something firmer than a commitment to a legislative vote — a hard cap of some kind. Mr. Navin asked Mr. Church how a 3% or 4% annual growth cap would compare to the current situation.
Mr. Church answered that since there are already 350 school districts at the 20-mill floor, most of those districts are already seeing property tax growth faster than 3% or 4% per year on average, even without new levies. So, for most of those districts, a growth cap of 3% or 4% annually would actually provide some protection for taxpayers. Some of the poorer and slower growing districts might conceivably not be affected by a 4% growth cap. For the districts not at the 20-mill floor, the additional inside mills with a cap would provide faster revenue growth than current law. Finally, giving everyone 22 or 23 inside mills that grew, even with a cap, should be fairer than the current system where the experience of 20-mill floor districts and non-floor districts is very different.
Mr. Zaino asked what would happen if you followed Mr. Brandt's suggestion and capped growth on a district basis. Would that cause a problem? Mr. Sobul answered that if you keep the charge-off equal to the inside millage, which is necessary to eliminate Phantom Revenue, and let the inside millage adjust on the local level, every district would have their own charge-off rate. This would create a problem with complexity.
Mr. Church added that this would drift away from the uniform tax rate on the local share that was discussed at the committee's April 8 meeting. He understood that everyone wanted voters in every district to make the same tax effort.
Mr. Brandt asked if the problems with limiting property tax growth on a per-parcel or per-district basis did not suggest that the real property tax should be a statewide tax. Mr. Church responded that the expanded inside mills could be levied locally but that the discussions suggested that the rate would need to be uniform across the state. Representative Calvert concurred.
Mr. Zaino observed that he thinks there is a lot of interest in the General Assembly for local school districts to share the burden.
Mr. Brandt opined that he thinks this is "passing the buck." If it is a shared responsibility then no one is responsible.
Representative Calvert feels that it is valuable to retain property taxes locally. He noted that the committee has not yet discussed the concept of revenue recapture.
Mr. Adams commented that there is a relationship between inside millage and basic education and outside millage and add-ons. We cannot ignore the link between these two relationships.
Mr. Brandt added that there is no guarantee that districts will accept what the state says is adequate.
Mr. Navin feels that the committee needs to have more discussion regarding the plans under consideration. Mr. Zaino stated that he feels an emerging consensus among committee members for a locally collected property tax whose rates are controlled by the General Assembly. Ms. Shaner stated that the committee needs to look at the components of the various plans, since there are similarities among them.
Mr. Navin feels that two things need to be resolved at the next meeting. Should the committee recommend one or more plans? Is it better to have a statewide 22-mill levy or keep the millage local, but at a uniform rate, and allow limited growth? The committee needs a summary document that addresses these questions.
The next committee meeting will be Thursday, May 13th from 12:30 p.m. to 3:30 p.m. on the 23rd floor hearing room of the Rhodes Tower.
Mr. Navin adjourned the meeting at approximately 2:30 p.m.
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