Governor's Blue Ribbon Task Force -- Revenue and Taxation Committee May 13, 2004 Minutes

Committees

Revenue and Taxation Committee

May 13, 2004 Minutes

In attendance were Chairman Chuck Gossett, Vice Chairman Dan Navin, Ted Adams, John Brandt, Representative Chuck Calvert, Fred Church, Christine Hansen, Barbara Shaner and Tom Zaino. Other Task Force members in attendance were Task Force Vice Chairman Jim Hyre, Russ Harris and Paolo DeMaria. Mr. Gossett called the meeting to order at approximately 12:40 p.m. Mr. Arthur Flesch facilitated the meeting. He called on Mr. Sobul to offer materials on some of the open questions facing the committee.

Presentations:

Mr. Sobul referenced a document entitled, "School Districts Where 22 Mill Levy Generates More Per Pupil Than $5,750." There are 18 school districts in this group. The total revenue from these districts in excess of $5,750 per pupil is $72.3 million.

Mr. Navin asked how many more school districts there would be if the per-pupil amount were the current law amount. Mr. Church and Mr. Sobul pointed out that FY 2006 had no specific current law amount, but they have been assuming $5,283 per pupil, using the current 2.2% legislated growth rate. Mr. Sobul did not know, but opined that there would be more. Mr. Church estimated that there might be 40 school districts in this group based on looking at FY 2004 current law numbers (Mr. Church later looked this up and told Mr. Navin that under current law in FY 2004 there were still only 20 districts).

The second document described by Mr. Sobul was the Bureau of Labor Statistics' Summary of Employment Cost Index. Mr. Church and Mr. Sobul appended to this report historical comparisons of cost indicators, including the Gross Domestic Product Deflator, the Consumer Price Index (CPI) and the Employment Cost Index (ECI). The document also provides forecasts for 2004 through 2008. Mr. Navin asked if there were a way to make the data specific to Ohio. Mr. Church suggested that this could be done, but would require some data manipulation. For example, one could take the difference between the regional CPI and the national CPI and use that same adjustment factor on the national ECI. Mr. Sobul noted that there are no state-level CPI data, although, as Mr. Church said, there are regional index numbers. Mr. Gossett noted that he had asked for these data because employment costs are separately identified and education costs are so heavily personnel related. The purpose in looking at this is to think about what appropriate caps might be for allowable increases in local revenues.

Mr. Navin is not ready to endorse this approach but does not want to dismiss it, either.

The third document discussed was entitled "Simulation of the FY 2006 SF3 State Aid Elements Under a 22 Mill Real Property Chargeoff and a 40 Mill Tangible Property Chargeoff: Transitional Aid Hold Harmless from FY06 at $5,283 to FY06 at $5,385." Mr. Church described the contents of the document for other committee members. He noted that the cost of transitional aid would be $188.2 million above current law. The net impact of additions and deductions would be a $34.9 million increase in state funding. Under this option, because the chargeoff is bigger, foundation aid would decline by $142.3 million. Other elements of weighted funding would decline as well. Districts would be compensated for these changes through the transitional aid. As an alternative, if districts were held harmless against fiscal year 2005 spending levels it would cost about $9.4 million above current law. Under this alternative, the foundation level could go up to $5,405 instead of $5,385.

The final document described by Mr. Sobul was entitled, "Impact of Inventory Loss at 23 and 40 Mill Charge-off." Mr. Sobul noted that the document generally showed that school districts would be protected against much more of the revenue loss from the eventual phase-out of the inventory tax by the proposed 40 mill tangible charge-off than by the current 23 mill chargeoff. Mr. Sobul emphasized that the estimates in the document were for when the inventory tax was completely eliminated, which will not be until tax year 2017 or 2018.

Mr. Sobul then explained an oddity in the data, where some school districts actually see a net gain under the 40 mill tangible charge-off. This stems from the fact that school districts do not lose local tax revenue from emergency levies when inventory is removed from the tax base — instead, rates rise on other property to ensure that the levy raises a constant dollar amount. Mr. Sobul offered as an example Bath Local School District, which currently raises almost $289,000 from inventory property through its emergency levies.

Mr. Sobul noted that the document does not address school districts that are on the guarantee, so the estimates are rough.

Mr. Sobul opined that, if tangible property stays local, this proposal would require a constitutional amendment. He described for the committee the concept of districts replacing current levies with 22 growing (inside) mills. Mr. Church gave an example of why the exchange of existing millage for new inside millage was not practical without a constitutional change: the necessary repeal of entire local levies would sharply reduce local tangible tax collections.

Mr. Gossett reviewed the options that are still under consideration by the committee. The options currently on the table are: the Calvert proposal, the Ohio Department of Taxation's (ODT) proposal, the Ohio School Board Association's (OSBA) proposal, and the state/local partnership proposal. How specific do we want the report to be?

Mr. Zaino suggested that the final report would include principles and a discussion of major options that the committee considered, including pros and cons of each. Ms. Shaner concurred with Mr. Zaino.

Mr. Brandt would like to offer preferred options, including information on how the committee reached its conclusions.

Ms. Hansen cautioned that the executive summary of the report needs to be carefully crafted since many readers will not go beyond that.

Mr. Calvert stated that careful crafting is a necessity and the committee needs to restate the problems that were addressed, and then offer possible solutions to them for the General Assembly to consider.

Mr. Navin thinks that the committee's final product needs to delineate the process followed by the committee in identifying problems and possible solutions, the options considered and then recommendations on the best way to solve the problems identified. Mr. Gossett feels that the report needs to be something that a member of the general public can read and understand.

Mr. Calvert asked if we might need two reports — one for the Governor and General Assembly and one for the general public.

Mr. Brandt opined that some readers will want to see how the recommendations would affect specific school districts. Mr. Gossett stated that this might be a subsequent step, following completion of the report.

Ms. Hansen cautioned that any printouts would need to reflect the impact of the entire Task Force's recommendations, not just the Revenue and Taxation Committee.

Mr. Gossett redirected the committee's attention to the options currently on the table.

Mr. Navin stated that the Ohio Chamber is not at the point where they can endorse any kind of factor tax or even a statewide property tax. If he had to declare a preference, it would be towards the state and local mix with a differential charge-off. It deals with Phantom Revenue, a constant revenue stream, reduces the need to go to the ballot — it fixes quite a few problems completely.

Mr. Church questioned if we do have a statewide tax plan as one of the options, would it be more acceptable if the statewide plan were a mix of a statewide tangible tax at 40 mills (a rate that comes close to ensuring no tax increases for multi-county taxpayers) and some type of statewide business activity/factor tax to make up the difference from the reduction of the tangible tax.

Mr. Navin responded that, conceptually it would be preferable, but he would need more details.

Ms. Shaner asked Mr. Navin to clarify his concern about a statewide tax. Is there more of a problem with the ODT plan or the OSBA plan?

Mr. Navin responded that his concern was more about the ODT plan.

Mr. Brandt questioned basing a plan on the tangible tax. If the legislature is moving toward removing the tangible tax completely, a plan that relies on the tangible tax as a revenue source might be unwise.

Mr. Zaino opined that we should focus on the principles that we are trying to address. If a plan required a constitutional amendment to fix all of the problems then that is the path we should take. Mr. Navin added that a vote by the people is something that we need to consider. Mr. Zaino responded that it is up to the legislature to say whether they want to go after a constitutional amendment.

Mr. Navin expressed concern that we should be sure that we could get the minimum amount of votes necessary from the public and that should be taken into consideration when determining what we put into our report. Mr. Zaino responded that we should take it into consideration, but at the end of the day we should just do what is best for school funding.

Mr. Brandt commented that if the legislature agrees with the plan and puts it forward, then the committee members should be proponents, but the need for a constitutional amendment should not be an automatic reason to reject a plan.

Mr. Zaino asked if we could use a factor tax as a way to replace another type of tax. Or should that be a legislative issue?

Mr. Calvert responded to the issue of inequity. We can only fix one unequal thing by making something else unequal. Redistribution has not been addressed in any of these plans. We cannot hold everybody harmless and meet the court's demand.

Mr. Church countered that there is some redistribution in these plans. The ODT plan brings the tangible tax to the state and then gradually phases out the hold-harmless replacement money. Mr. Zaino added that the hold harmless is strictly "a political thing" to keep some districts from opposing the plan.

Mr. Brandt stated that he did not think the court said what Mr. Calvert conveyed. He opined that the court ordered adequacy, not redistribution. Once everyone is adequate, if locals want to supplement the adequate level with additional money then that is a local decision.

Mr. Calvert responded that the courts said to eliminate the over reliance on property taxes to fund schools, which means that you have to go another revenue source for funding. He opined that we have to address the redistribution to get to an answer and neither the ODT nor OSBA plans do that.

Ms. Shaner explained that she did not consider redistribution to be on a priority list, but that her understanding was that equity means ensuring that all students get the same amount of money for the same purpose. On the tax side, the ODT and OSBA plans have everyone giving the same tax effort to pay for the adequate amount.

Mr. Calvert agreed, except with the hold-harmless piece. If everyone gets what they had gotten at the beginning when we started this, we have not done anything. Ms. Shaner clarified that the hold harmless does phase out. Mr. Zaino explained that the hold harmless is temporary and should be thought of as a way to phase in the new system. It is really a form of transitional aid. Furthermore, over time, the ODT plan is equalizing. Mr. Calvert observed that the court rejected his "parity plan" because it took eight years.

Mr. Brandt observed that Representative Kilbane prefers not to mix the business tax reform with school funding. It would bring people to the table who would otherwise not be involved.

Ms. Shaner commented that the H.B. 920 issue is a problem but is there some modification that would give us a balance on a state and local partnership? Is that a good place to start talking?

Mr. Navin opined that the committee is looking at the wrong question. For many districts, Ohio would be going from 20 to 22 mills, which would raise a lot of money. Mr. Sobul responded that if the charge-off gets tied to the floor, there is a big difference between 20 and 22 mills. Mr. Church pointed out that with a 100% state-aid program there is no difference (except how much backfilling would need to happen). Mr. Church further believes that it is unrealistic to backfill too much without specifying how the state would come up with the additional money.

Ms. Shaner responded that the OSBA is not married to 22 mills. Mr. Brandt opined that if we cannot approve a plan that says the state has to come up with a lot of money, then we have been wasting our time. We can phase in changes and other things, but if we discard a plan that costs a lot of money, what are we doing? Mr. Church responded that we need to identify a revenue source that could pay for the system.

Mr. Zaino stated that with any remaining gap, we could turn it over to the legislature to decide how it should be fixed either with new or increased taxes, cuts, or some combination of additional revenues and cuts. He emphasized that cuts in other state services are also a possible source of new revenue.

Mr. Gossett opined that it would be irresponsible for us to say there is a $500 million gap in our proposal and we do not have a clue how it should be funded. He expressed concern about the direction the discussion has taken. Major ideas and proposals that have been agreed upon are now being criticized and taken off the table.

Mr. Brandt stated that he was concerned that people are saying that one scenario is too "daunting" to deal with.

Mr. Calvert commented that he does not necessarily think we need to put more money in education, it might be what we end up with but he does not want to make that assumption at this time. We should be making the system simpler and more understandable, eliminate Phantom Revenue, but we should not be assuming that we are moving the foundation amount up or down. Mr. Brandt responded that we are moving the amount to make the system adequate.

Mr. Gossett added that we need to make sure that we do not go back to the voters every three or so years. The issue of whether we are going to do more tangible tax reductions have long-term ramifications and we need to make sure that we build something into our plan that takes that into consideration.

Mr. Gossett expressed concerned about the negativity he is picking up toward the statewide plan. He asked for direction as to what the committee needs to bring our recommendation to fruition.

Mr. Brandt suggested a possible hybrid of the ODT and OSBA plans. The state would fund 100% of state aid and categorical grants, leave tangible the way it is and let the legislature deal with it. Allow 22 or 23 growing mills and leave them at the local level.

Mr. Zaino asked for clarification on the charge-off. Mr. Brandt responded that there would be a charge-off, but those mills would be kept local. The charge-off would be based on the growing mills.

Mr. Gossett stated that we have agreed that the charge-off should match the amount of growing mills.

Mr. Navin commented that there is still a gap for the state to fill. Would a 40-mill charge-off on tangible property be how the state fills that gap?

Ms. Shaner listed items that she needed additional information on, such as how a 40-mill charge-off affects school districts. Also, raising real property taxes to 22 or 23 mills has an effect on the 40-mill charge-off as was discussed earlier. How can we legally get to 23 mills for the school districts that are not there yet?

Mr. Sobul responded that the constitutional amendment, or whatever the legislature decides to do, would enforce the idea that school districts have to contribute a minimum of 23 mills, which would be set by law. The new law will make all of those mills (23 or 22) growing mills. We do not want to raise taxes where we do not have to. However, if school districts are currently below 22 mills, it has to be done.

Mr. Calvert asked if we would have to worry about the local levies if we ask voters to amend the constitution. Mr. Sobul stated that we could do whatever we wanted to do, including changing the 1% of true value limitation on inside millage. Mr. Navin asked if that was desired. Mr. Sobul said no. It could be done, but he did not advocate it. Mr. Sobul stated that we would go to the constitution for the swap of existing mills to growing mills. That is the only reason we would seek an amendment, to keep local tax revenue neutral in the transition year.

Mr. Navin questioned whether the 22 mills stipulated as the charge-off and the floor could go back as well as being reduced as a way of capping revenue growth due to increases in property values. Mr. Sobul answered that if the state determined that local revenues needed to grow faster, the inside millage could be raised, but not above 22 mills. What must be done is to keep the inside mills and the charge-off together to prevent the reappearance of Phantom Revenue.

Mr. Zaino asked for a document providing the ODT, OSBA and all other proposals on the table with the pros and cons for each, including what we have just gone over for our next scheduled meeting.

Mr. Gossett added that he would like to see a document with all of the basic concepts that we agree on (equal charge-off and growing mills) and concepts we did not agree on. At that point we could determine what is staying on the table or what to take off. We need to move forward. Perhaps we could narrow this to three or four pieces of paper with which we start our discussions.

The next committee meeting will be on June 10 from 9:30 to 3:00 in the 23^rd floor hearing room of the Rhodes Tower.

Mr. Gossett adjourned the meeting at approximately 3:35 p.m.

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