Committees

Revenue and Taxation Committee

June 10, 2004 Minutes

Committee members present included Chairman Chuck Gossett, Vice Chairman Dan Navin, John Brandt, Fred Church, Christine Hansen, David Locke, Tom Mooney, Barbara Shaner, Richard Stoff, and Tom Zaino

Other members present included Task Force Vice Chairman James Hyre, Susan Bodary and Russ Harris.

Presentation:

• Draft Recommendations (PDF*, 80 KB)

Chairman Gossett called the meeting to order at approximately 9:45 a.m.

Mr. Gossett described the components of the committee's draft recommendations. He summarized for committee members the key elements of the draft recommendations. He noted that he understands that committee members do not agree on everything in the draft recommendations, but hopes that the draft will help guide committee discussions.

He asked committee members what they think of the format of the draft recommendations and the content of the draft recommendations.

Mr. Brandt noted that the draft includes some great work and it is a clear summary of what the committee has done. He is concerned about offering two recommendations. His preference is to have the committee state its preferred recommendation.

Mr. Gossett responded that the intent is to declare preference for the 22-mill state/local partnership. The statewide property tax plan is offered as another option.

Mr. Navin added that he does not feel the draft makes that clear, possibly because we had not made a decision as to which proposal we prefer.

Mr. Gossett asked the committee about the general structure of the draft. Ms. Shaner hopes that the principal recommendation of the committee will stand out.

Mr. Navin would like more emphasis on the problem of ballot frequency. He believes that this problem needs to be fleshed out more. Specifically, he feels that the body of the report should contain discussion of what flaws ballot frequency reveals in the current system and how the recommended proposal remedies those flaws. Mr. Brandt agrees and added that the preferred option would have appeal to the taxpayer because they would not be going to the polls every three years.

Mr. Navin would like included in the report the notion that for the state as a whole, property taxes are about where they would have been had there been no H.B. 920. There was discussion of the research that reaches this conclusion – beginning with a Levin & Driscoll report.

Mr. Locke would like alternative recommendations in an appendix, or otherwise not given the same emphasis as the principal recommendation. Mr. Gossett agrees. He wanted to show deliberations to help stimulate discussion in the legislature. Ms. Shaner added that she would like the various studies that we reviewed referenced. Mr. Sobul responded that all the studies would be included in the appendices.

Mr. Navin does not feel that the recommendations need to anticipate every possible objection.

Ms. Hansen asked if the committee needs to add information that explains why the committee rejected some of the options that were presented. Mr. Gossett agrees.

Ms. Hansen does not want to clutter up the report. Perhaps some of this information could be put in the appendix. However, will the audience read that far into the report? Ms. Hansen also wondered whether the report needs a section explaining why the committee did not recommend the same reforms used by other states. Mr. Zaino agreed with Ms. Hansen that the report needs such a section in the body, not the appendices. Mr. Church suggested that the other states' reforms could be evaluated against the committee's six criteria.

Mr. Stoff asked what the cost of the proposal is. How much will the committee need to generate to cover the recommendations of the Funding for Success Committee? Mr. Gossett responded that this amount is not known, so the committee has been broad in its recommendations. The committee has deliberately tried to adopt a structure that is flexible enough to cover a range of possible spending recommendations.

Mr. Navin noted that the Funding for Success Committee is getting closer to a resolution. They have scheduled two more meetings. The committee needs to evaluate where to go after we get more information from Funding for Success.

Ms. Shaner observed that most of the Revenue and Taxation Committee's discussion has focused on local revenues, not levels of state support. Mr. Navin noted that the committee's draft recommendations are flexible enough that they can be changed once Funding for Success makes its recommendations.

Mr. Brandt noted that the 22 growing mills are an upper limit under the constitution, so there is no upward flexibility here. Mr. Navin agreed.

Mr. Zaino would like the recommendations to include more detail relative to how each of the options meet the committee's guiding principles.

Mr. Gossett then asked the committee members for their opinions regarding the content of the recommendations. Mr. Navin stated that the best option is for 22 growing mills collected locally. It is the direction that has consensus and it accomplishes the goals we set out to achieve. Ms. Shaner agreed with Mr. Navin. She likes the idea of 22 growing mills. Her concern is for the districts that are not at 22 mills currently and how they will be affected.

Mr. Gossett suggested that, since the committee is in agreement with the 22-mill growing real property millage plan, that we begin going through the details of this model to discuss open issues. Members were comfortable with this approach. He asked Mr. Sobul to walk the committee through the components of this model, which maintains the concept of a state/local partnership.

Mr. Sobul responded to Ms. Shaner's concern about districts not at 22 mills. If a district does not currently have 22 mills of real property tax to exchange for the new growing levy then their taxes would increase to 22 mills. A portion of their school district income tax (0.25%) would be replaced as part of the millage exchange for districts that have an income tax.

Components are as follows:

• Each school district would have 22 growing mills;
• The charge-off would be 22 mills;
• The charge-off for tangible property would be the lesser of 40 mills or all current-expense tangible property taxes;
• The 22-mill levy would replace existing Class 1 and Class 2 operating mills, including emergency levies;
• Effective millage above 22 mills would remain in place, fully restricted by tax reduction factors, with no floor;
• Growth on the 22-mill levy would be restricted annually by a statewide uniform reduction in the millage rate;
• Growth on the 22-mill levy would be limited to no more than the percentage growth in base cost or four percent, whichever is less;
• The charge-off on real property would be reduced annually so that the charge-off rate moves in tandem with the tax rate on the growing levy, thus eliminating phantom revenue;
• The 10 percent rollback on commercial and industrial real property would be repealed;
• The assessment rate on machinery and equipment tangible property would be reduced to provide tax relief equal in dollar amount to the elimination of the 10 percent rollback;
• A S.B.-3 type hold harmless would be put in place to reimburse schools and local governments for the tangible property assessment rate decreases;
• The Department of Taxation would work together with the business community to develop statutory definitions of patterns, jigs and dies;
• The homestead exemption program for low-income senior citizens would be doubled;
• Gap aid, the reappraisal guarantee and recognized value would be eliminated. These programs would not be needed once phantom revenue is eliminated; and
• New emergency levies could no longer be enacted; existing ones could not be renewed as emergency levies, they could only be renewed as current-expense levies.

Mr. Sobul noted that slightly less than half of districts are above 40 mills on tangible property and slightly over half are below. Mr. Zaino noted that the state would subsidize those districts that levied less than 40 mills on tangible property. He asked why 40 mills was selected. Mr. Church responded that 40 mills was selected for a couple of reasons:

1. This would represent a tax increase for very few inter-county taxpayers;
2. This was the amount of tangible property tax that was originally being considered for direct "pooling," since under the constitutional 1% limitation only 40 mills could be levied without a vote. The 40 mill charge-off does indirect pooling of roughly the same amount of revenue.

Ms. Shaner noted that going to 40 mills harms few school districts, which is good. Mr. Zaino asked whether moving to 40 mills facilitates the elimination of the tangible property tax, since it moves part of the tax to the state. Mr. Sobul responded that moving to a 40 mill charge-off holds at least 85% of the school districts at least 70% harmless (meaning that the foundation program will automatically pick up at least 70% of their revenue loss) for reductions in the tangible property tax. Mr. Church noted that this means that the state still has to come up with the money for additional reductions in the tangible property tax, but at least it is more of a state problem. This change may facilitate reducing the tangible tax.

Mr. Brandt asked if this plan still contemplated school districts having three mills for categorical programs. Mr. Sobul said that it did not. Mr. Church suggested that the state could retain gap aid for districts that do not have sufficient local resources to cover the cost of categorical programs.

Mr. Stoff expressed concern that adding too many components would increase the complexity of the committee's recommendations. Mr. Brandt agreed, stating that the simplest way to fund schools is through state funding. If local school districts still had to contribute a share he thought it should be done in the simplest way possible.

Mr. Gossett asked whether the three mills for categorical programs should come from the state or be local. He then asked what the cost would be if it were borne by the state. Mr. Church estimated that it would cost the state about $500 million annually to pay for the cost of what currently is the local share of special education, vocational education, and transportation. This cost could be higher if Disadvantaged Pupil Impact Aid were included and/or the foundation amount were higher, making the weighted costs higher also.

Ms. Shaner observed that it appears that the Funding for Success Committee will target funds to address economic disadvantage rather than increase base cost significantly.

Moving down the recommendations, the discussion turned to the 40-mill charge-off. Mr. Zaino expressed concern that with districts at 35 mills and with a 40-mill charge-off, it will not be equal tax effort in those districts. It would create a disincentive to raise property taxes. Mr. Church noted that the statewide average percentage of property value coming from tangible property is only about 15 percent, thus limiting the disincentive for levies from the 40 mill charge-off. Mr. Sobul added that some of the districts that have very high tangible valuations are unlikely to vote for additional mills anyway because the existing mills raise so much revenue. Ms. Shaner reiterated that the higher charge-off provides a hold harmless for districts where the inventory tax is going away.

Mr. Zaino added that facilitating the elimination of the inventory tax could be viewed as a strength.

Ms. Shaner asked if separating the residential and agricultural property classes was worth discussing. Mr. Sobul added that since residential valuations are growing faster than agricultural values, under current law agricultural property is benefiting from the bigger residential reduction factors. Changing that system would generally increase taxes on agricultural property. Mr. Navin inquired whether there was a willingness from the Ohio Farm Bureau to consider this. Mr. Gossett added that perhaps this would fit in with the reappraisal reform.

Mr. Gossett inquired whether Ohio's 10% rollback on commercial property taxes was unique. Mr. Sobul responded that he did not know of other states that offered this break to commercial property. Mr. Zaino opined that the current 10% rollback is a policy problem. It is one of the fastest growing line items in the state budget. Mr. Church and Mr. Sobul said that they felt that the reduction in machinery and equipment taxes would make Ohio more competitive with other states.

Mr. Brandt asked if the assessment rate would be changed once or every year. Mr. Church responded that it would be changed once. Mr. Zaino said this proposal addresses competitiveness except that we would have to make up $300 million in revenue some place else.

Mr. Sobul added that the reimbursement for the school districts due to the machinery and equipment tax cut would be frozen at the base year value, and this would ease the pressure on the state budget. Mr. Zaino agreed that this means $300 million in annual reimbursement, but no growth.

Mr. Zaino asked whether the intention of the S.B. 3-type hold harmless was to phase it out or to continue it indefinitely. Mr. Sobul noted that has not been decided, but the elimination of the business property tax rollback provides a source of funds to continue this hold harmless. Mr. Zaino would like the report to describe more fully the hold harmless.

Mr. Brandt asked what would happen to the Kilbane proposal for the business activity tax if this proposal goes forward. Mr. Sobul responded that under the Kilbane proposal the tangible property tax would go away, except for fixtures. The Kilbane proposal is not really compatible with the committee recommendation.

Mr. Navin noted that the recommendation to double the homestead exemption had not been finalized. He suggested replacing the word "double" with "enhanced." Mr. Mooney favors expanding the exemption to more individuals. Mr. Mooney also asked that the committee consider expanding the homestead exemption and reducing the 10% rollback and/or the 2.5% rollback, since those are such fast-growing items, consume so much of the budget, and are not distributed to school districts in an equalizing manner anyway. Mr. Navin suggested broadening the homestead exemption eligibility rather than increasing the amount of tax relief per homeowner. Mr. Church estimated that about seven or eight percent of homeowners are currently eligible for this exemption.

Mr. Brandt asked whether the committee was considering placing all of the recommendations on the ballot or only those items that need to be changed constitutionally. This question was not resolved.

Mr. Brandt remarked that the recommendation to eliminate gap aid, reappraisal guarantee and recognized value needs to be reviewed. One question that needs discussion is how to fund categorical programs, if three local mills are not dedicated to this purpose.

Mr. Zaino asked why emergency levies should be eliminated. Mr. Sobul stated that the main reason for elimination of emergency levies or conversion to a current expense levy is that with the 40-mill charge-off and the inventory changes, districts with emergency levies would end up getting reimbursed for losses they did not incur. Mr. Gossett added that a benefit of this change is that when districts use current expense levies they get additional revenue from new construction. They cannot do that with an emergency levy. Mr. Church added that, if the phantom revenue problem is eliminated, the strategic reason for using an emergency levy rather than a current expense levy is eliminated.

Mr. Stoff asked if staff could calculate the impact of proposed changes on individual school districts. Mr. Sobul responded that the Department of Taxation could do so.

Mr. Gossett summarized the unresolved issues: the hold harmless for the machinery and equipment tax reduction; how to expand the homestead exemption and by how much; how to pay for categorical programs since the 22 growing mills are for formula aid; and what the growth restriction on the 22 mill levy would look like. Mr. Brandt commented that parity aid still needs to be addressed. Mr. Gossett agreed that it needed to be examined.

Mr. Gossett asked whether the committee wants to recommend a Michigan-type proposal, where the status quo is not an option.

Mr. Brandt likes the general idea of this approach. The question is, what the preferred option is and what the default is.

Mr. Gossett asked whether the committee wants to make a single recommendation or offer alternatives.

Mr. Navin thought that the committee was leaning towards recommending the continuation of the state/local partnership. The statewide tax would be the ballot alternative. Mr. Brandt said that his membership no longer supported the statewide property tax plan, even as an alternative option. Mr. Mooney is concerned that both alternatives are too complicated to explain to voters.

Ms. Shaner asked whether the General Assembly would have to enact a default plan. Mr. Sobul answered that the General Assembly would have to enact a default plan, we cannot place an either/or proposal on the ballot. Mr. Brandt questioned whether there was some way to construct a proposal that would get around this issue. Both Mr. Zaino and Mr. Sobul expressed concern about this.

Mr. Mooney opined that the name of the proposal could potentially be a problem. Because there is so much politically charged discussion surrounding the state/local partnership from the other subcommittees, we might consider renaming our proposal. Mr. Zaino asked if we have to name our proposal at all.

Mr. Gossett wants one more meeting of the committee to resolve remaining issues. The next meeting of the committee will be July 8^th at 9:30 a.m.

Mr. Gossett adjourned the meeting at approximately 2:00 p.m.

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