Committees

Revenue and Taxation Committee

April 8, 2004 Minutes

In attendance were Chairman Chuck Gossett, Vice Chairman Dan Navin, John Brandt, Representative Chuck Calvert, Fred Church, Christine Hansen, Barbara Shaner, and Tom Zaino. Other Task Force members in attendance were Task Force Chairman William W. Wilkins, Russ Harris and Paolo DeMaria. Mr. Gossett called the meeting to order at approximately 9:45 a.m.

Presentations:

• Comparison of Growth of Expenditures and Revenues Under ODT Plan (PDF*, 7 KB)
• Impact of 40 MILL Statewide Rate on Inter-County Companies Operating in Taxing Districts with Current Rates Below 40 MILLS (PDF*, 8 KB)
• Broad-Based Tax (PDF*, 11 KB)

Mr. Gossett observed that the Revenue and Taxation Committee needed to begin making some decisions. The committee needs a framework to consider. For example, what does the committee want to recommend relative to the tangible personal property tax? He would like to reach some consensus on major issues at the day's meeting. He expressed concern about the timeframe, since once a recommendation is made the committee will need some time to work out the details of that recommendation.

Mr. Gossett then turned to Mr. Mike Sobul who reviewed briefly the impacts of the two major proposals being considered by the committee, as well as the hold-harmless provisions in the Ohio Department of Taxation's (ODT) proposal.

Mr. Gossett interjected that he had asked Mr. Sobul to share with the committee how these hold-harmless amounts were calculated and what the impacts would be.

Mr. Sobul noted that he held enrollments constant for his analysis. The net gain in resources to school districts is about two percent, which would be expected given the planned increases in the foundation level. The hold-harmless calculation for FY 2006 is based on the planned 2.2% increase in the foundation level in FY 2005 being extended to FY 2006. There are an estimated 280 hold-harmless districts in FY 2006. Mr. Sobul noted that 510 school districts received increases in total funding from FY 2005 to FY 2006, with the increase amount being about $260 million.

Mr. Zaino asked if the $260 million is the total amount of the increased funding for the 510 school districts that receive funding increases. Mr. Sobul responded that he was correct. No districts would receive less funding than under current law and many would receive more. Mr. Gossett observed that a school district could receive less in FY 2006 than it did in FY 2005, yet still receive more than it would have under current law. In essence, all districts are at least as well off under the ODT proposal as they would have been under current law.

Mr. Brandt cautioned the committee to be careful that we do not assume that it does not matter if a school district loses money under the ODT plan just because they would have lost money anyway under current law. Mr. Church noted that the ODT plan could be modified to contain a "double guarantee," where school districts received no less than either their FY 2006 current law amount, or their FY 2005 current law amount.

Mr. Brandt asked if there was an identifiable set of reasons that 103 school districts lost funding from FY 2005 to FY 2006. Was it a drop in Average Daily Membership (enrollment)? Are other factors at work?

Representative Calvert asked why we are using a foundation level of $5,750 per pupil for this analysis, when we do not yet have a recommendation from the Funding for Success Committee. Mr. Gossett responded that this amount was just a placeholder to use for purpose of analysis of the impacts of the Ohio School Boards Association (OSBA) and ODT plans. Representative Calvert opined that the Funding for Success Committee could recommend a different structure for the funding formula. Mr. Gossett stated that he recognized that the two committees will need to get together before the recommendations are completed. He is concerned right now with developing a methodology that works for a variety of possible foundation levels.

Ms. Shaner asked Representative Calvert to clarify his concern. He replied that he is concerned that some of the possible recommendations of the Funding for Success Committee might have an impact on the work of the Revenue and Taxation Committee.

Mr. Gossett stated that it is his assumption that the committee needs to recommend ways to change tax policy to allow for the allocation of funds in an equitable and adequate manner. We might not have all of the information we need before we make our recommendations. He thinks that the committee might offer alternative approaches to address the fundamental principles that are important to the work of the committee. He is more concerned about approaches right now. He further commented that his opinion would be to have a specified amount of money and a few different approaches that move that money to the districts. Ideally, the new funding system would be simple, fix phantom revenue, and fix the tangible personal property taxation issues regardless of how the formula or inputs change. We can address specifics (formula/inputs) later.

Mr. Navin opined that there are four different options for conceptualizing the committee's ultimate recommendations.

1. Collecting what are now local property taxes at the state level is one possibility.
2. Another option is to increase the charge-off on tangible property to accomplish many of the same purposes as state collection of property taxes, without some of the problems.
3. A third option is to adopt recommendations along the lines of Mr. Mottley's recommendations to:
• Give school districts additional inside millage;
• Allow voted growth levies;
• Address the tangible personal property tax through eliminating exemptions and reducing assessment rates, and other measures; and
4. A fourth option would be a more comprehensive approach that would look more broadly at Ohio's tax structure.

Mr. Navin further suggested that the committee get more information on some of the other options under consideration, beyond the OSBA and ODT plans.

Representative Calvert does not want to get caught up in looking at how many school districts are winners and how many are losers. He feels that doing this clouds the question. He wants the committee to consider appropriate policies.

Mr. Gossett agrees with Representative Calvert. He views the district-by-district analysis as a vehicle for examining the potential impact of various policy options. Would changes cause unintentional negative impacts on a "group" of districts? For example, if a possible change might have a negative impact on low-wealth school districts the committee would need to know that.

Mr. Zaino observed that the committee is at a point where we might need to revisit its goals.

Mr. Brandt agreed that the committee does not yet need to know which school districts lose and which win, but we need to know that information eventually. He went on to question how far we could go with a plan that would cause the districts to lose money. He feels that other legislators might want to see a printout that shows the financial impact on school districts. Ms. Shaner noted that we need to know what districts might be hurt or benefit from any recommendations that come from the committee so that we could defend our final recommendations.

Representative Calvert commented that the interplay between the Funding for Success Committee and the Revenue and Taxation Committee is crucial. These two committees could be working toward opposite ends of the Task Force's charge. He also listed three things that he felt it was imperative for the committee to resolve : dealing with Phantom Revenue, providing a growing revenue stream, and finding some resolution of the tangible personal property tax issue.

Mr. Navin asked the committee if there are any other concerns about the tangible personal property tax other than what has already been discussed in the committee. Mr. Brandt stated that this tax is anti-competitive and needs to be repealed. The question is how to replace the lost revenues that this repeal causes.

Mr. Wilkins observed that another issue with the tangible personal property tax is that the revenue from this tax is not distributed throughout the state in proportion to student need. Allocation is inequitable, which leads to funding problems.

Mr. Navin noted that entities other than schools also receive funding from this tax. Mr. Wilkins added that for political subdivisions there is a closer relationship between asset values and need.

Mr. Brandt asked whether Mr. Navin would prefer to keep this tax with some tweaks rather than eliminate it entirely. Mr. Navin responded that all he is trying to do is get at the various concerns related to the tangible personal property tax. But he would like to see it go away.

Mr. Gossett stated that the issues are replacement of the tangible personal property tax and how this revenue is replaced; should this tax remain local or should it be collected at the state level.

Mr. Navin commented that if a statewide property tax is a big exchange of winners and losers, he would have a problem with that. If there is a reasonable distribution of money to schools and it does not cause a high number of losers, he could endorse such a plan. However, we need to determine who wins and who loses before that could happen.

Mr. Gossett added that the only places to get the replacement money would be from 20 mills of growth in property tax or an income or sales tax. Schools should not have to make abatement deals with local businesses for payments in lieu of taxes in order to adequately educate their students.

Mr. Navin asked whether we are talking about a purely state-funded system or a state/local partnership. Mr. Gossett answered that there are things that needed to be addressed before that question could be answered, such as the replacement revenue for the tangible personal property tax.

Mr. Brandt disagreed, saying that he feels that the issue of the tangible personal property tax needs to be addressed, but he is not convinced that it is the first issue that needs to be resolved. He is concerned that the way ODT's plan relies on the revenues from this tax complicates the current system and could cause problems with the committee's principle of stability, given that this tax may be eliminated.

Following up on these comments, Mr. Church outlined a graphic for the committee that illustrates the options currently on the table. The graphic shows a decision tree for school funding. One path represents a 100% state-funded system and the second path shows a state/local partnership system of funding. Under each path are the various implementations discussed thus far. (The graph is located on the last page of the meeting minutes)

Mr. Brandt commented that if we go down the state/local path we have not met our charge. Mr. Church responded that following the state/local path could still achieve the committee's goals.

Mr. Gossett likes the idea of 100% state funding of an adequate level of school support, but recognizes that it is difficult to implement and has perceptual issues as well. He asked whether the committee wants to offer alternative ways to satisfy the committee's principles. He is concerned that if the committee only offers one choice that could be a problem.

Mr. Navin noted that it is important to understand why local levies are being defeated and what role local voters should play. Mr. Gossett restated the current Phantom Revenue problem, how amounts that voters approve for programs above the basic adequacy level end up being shifted to pay for a growing local share of adequacy (to make up for a declining state share), and so voters have to re-approve millage for the same programs. A solution to Phantom Revenue would make it clear that additional votes for levies would be for expansions of programs, not simply maintaining what a district has. Under the ODT or OSBA plans, the local voters would contribute 20 mills through a statewide tax and then vote for any local additional programs above adequacy.

Mr. Wilkins thinks that we should pursue one option that calls for total state funding of an adequate foundation level and another that continues a state-local partnership. We need to present options to the Governor and the General Assembly. Mr. Navin agrees. Mr. Brandt disagrees. He feels that the responsibility of the committee is to narrow the decision. Provide one good way to fund schools, not recommend several good ways and then have the legislature decide.

Mr. DeMaria observed that the committee could ultimately offer one recommendation, which would result from considering other options generated from an open process. Mr. Gossett feels that there is much interest in continuing to look at a state/local partnership, even though he personally prefers an adequate funding level that is provided by the state.

Mr. Gossett asked what the next steps are. What information does the committee need to have to move forward? Mr. Navin suggested that the committee needs to look at information that already exists. Mr. Sobul and Mr. Church agreed. Mr. Church added that there is a limit to how much additional work can be done until we have more information regarding any formula changes that might be proposed by the Funding for Success Committee. Mr. Brandt reminded the committee that in the beginning of our meetings several problems were identified and used to create criteria from which our committee would be working to solve the funding problems. If a recommendation does not solve the identified problems then we cannot move forward with that specific recommendation.

Mr. Brandt asked whether there are any workable options relative to the tangible personal property tax in Mr. Navin's view. Mr. Navin replied that there are some ways to mitigate the impact of changes to the structure of the tangible personal property tax that might be acceptable. Mr. Brandt asked if it is worth pursuing Taxation's treatment of this tax if there is no practical way to implement taking it statewide. Mr. Gossett asked if there are any other ways to deal with the tangible personal property tax other than what Taxation had proposed earlier, reducing the 73 mills to 40 mills? How much money would we need to replace those 33 mills and where do we get it? Mr. Gossett inquired as to whether the Tax Department had looked at different charge-off levels.

Mr. Church answered that the Tax Department had looked at higher charge-offs but not extensively. He reminded the committee that this idea only worked under a state/local partnership, since under a 100% state funding solution there is no charge-off.

Mr. Gossett commented that, while the OSBA plan is simple and equitable, he questioned the ability to fill the revenue gap that is present under this plan. Are there any other revenue sources we could go to, either traditional or nontraditional? Do we leave the tangible personal property tax alone or change it for the business community?

Mr. Brandt feels that it is premature to determine how to fill gaps in funding until the Revenue and Taxation Committee knows what funding levels the Funding for Success Committee recommends. Mr. Gossett noted that there is a gap to fill regardless of the foundation level that is recommended, so it is appropriate to begin looking at options, while recognizing that any proposal will need to be amended. Mr. Brandt responded that the gap is still dependent upon what the Funding for Success Committee decides.

Representative Calvert offered a funding idea that would use three components. He envisioned dividing the school districts into three categories of wealth per pupil: low, medium, and high. First, every district in all three classes would receive an equal amount per student from a new broad-based business tax with a base of payroll and sales. The amount of this tax is not yet defined, but it could replace 40 mills of the existing tangible property tax. The tangible property tax would be repealed. Second, a millage rate on real property would be calculated. For the middle-wealth districts, that would produce whatever was needed to fund the amount of the foundation level (say $5,750) that was not covered by the new business tax.

This real property millage (not to exceed the amount allowed under the Constitutional limit of 1% on property's true value) would then be levied by every district as growing, inside millage. Third, and finally, state "parity aid" would be used to make up the difference between the foundation level and the sum of the real property tax and the state business tax per-pupil allocation in the low-wealth districts. In the high-wealth districts, the real property millage plus the statewide business tax per pupil would presumably exceed the foundation amount, in which case the state would actually recapture some real property taxes that are being raised locally.

Mr. Navin asked if the high-wealth districts could be held to the foundation level by reducing the business tax allocation for those districts, rather than recapturing the property tax. Mr. Calvert said perhaps, but recapturing local real property taxes in those districts was how he envisioned the system working.

Representative Calvert further commented that he feels that it is all right for now to consider two paths, but he would ultimately like the committee to make one recommendation. Mr. Sobul and Mr. Church agreed to run some numbers using Representative Calvert's suggestion.

Mr. Brandt asked if the two charts offered during this meeting (Mr. Church's and Representative Calvert's), could be made into documents to be distributed to the committee members. Mr. Church agreed to prepare these documents.

Mr. Gossett asked staff to put together some information for the committee to consider at its next meeting on what a revised state-local partnership might look like, while addressing the principles that the committee has already adopted. At the meeting on April 26^th the committee will schedule future meetings.

Mr. Gossett adjourned the meeting at approximately 12:15 p.m.

* To view PDF files, download Adobe's free Acrobat Reader.

• Building a Better School Funding System
  (PDF*, 1 MB)