Committees
Revenue and Taxation Committee
July 8, 2004 Minutes
Committee members in attendance included Vice Chairman Dan Navin, Ted Adams, John Brandt, Representative Chuck Calvert, Fred Church, Christine Hansen, David Locke, Tom Schmida (for Tom Mooney), Barbara Shaner, and Tom Zaino. Other Task Force members in attendance were Task Force Chairman William W. Wilkins, Vice Chairman Jim Hyre, Susan Bodary, Paolo DeMaria and Russ Harris.
Presentation:
- Options to Pay for Supplemental (Categorical) Costs (PDF*, 9 KB)
- Estimated Impact of Alternate Tax Bases for Growth Caps on the Charge-off/Inside Millage Rate (PDF*, 7 KB)
- Additional Property Tax Relief (PDF*, 8 KB)
Vice Chairman Navin called the meeting to order at approximately 9:45 a.m.
Mr. Navin reviewed for committee members the June 28th meeting of the Funding for Success Committee meeting, where he presented a draft of the Revenue and Taxation Committee's recommendations. Mr. Navin's presentation was later distributed to members of the Revenue and Taxation Committee.
He shared with the Funding for Success Committee the six goals of the plan and how the plan focused on solving phantom revenue. He also summarized some of the approaches that had been considered by the committee but rejected. The Revenue and Taxation Committee's draft recommendations call for a 22-mill charge-off for real property and up to 40 mills for tangible property.
Mr. Navin noted that, at last month's Funding for Success Committee meeting, Senator Jacobson expressed concern relative to moving from triennial valuation updates to annual updates. Senator Jacobson observed that making this change results in smaller property tax increases every year, instead of a big jump every three years as happens under the current method. His concern is that over a three-year period property owners would pay higher taxes overall because of the cumulative effect of paying taxes in early years that would not have been paid under the current system.
Mr. Brandt agreed that the Revenue and Taxation Committee's proposal would result in an increase in property taxes compared to current law. He noted, however, that property owners in districts that are currently at the 20-mill floor would see smaller increases than those described by Senator Jacobson.
Ms. Shaner opined that the Revenue and Taxation Committee's draft proposal seems to be a reasonable way of doing things. It would be a very logical way to go if we were starting a system from scratch. It is only when compared to the current system that it looks like an increase in taxes.
Mr. Navin stated that the recommendation to move to annual property value updates consumed a significant portion of the Funding for Success Committee's discussion of the Revenue and Taxation Committee's draft proposal.
Mr. Church added that Senator Jacobson also had a number of questions regarding the proposal to fix phantom revenue. All things being equal, limiting growth on the 22 mills would send more money to the richer districts.
Mr. Brandt asked whether the Funding for Success Committee had considered the impact of the 40-mill tangible charge-off. This is a total package and all aspects need to be considered at the same time. The tangible property tax changes will have an offsetting effect that might lessen the amount of extra money that wealthy districts would receive through the phantom revenue fix.
Ms. Shaner suggested that Senator Jacobson is open to discussing phantom revenue solutions. Her interpretation of Senator Jacobson's questions was that they were more for his understanding. Ms. Shaner's view is that Senator Jacobson is not necessarily opposed to the plan. He just wants to make sure that everyone is aware of all the effects that this plan would have.
Mr. Navin observed that, generally speaking, the Funding for Success Committee discussion went as expected. He added that there is still quite a bit of confusion regarding the net impact of the Revenue and Taxation Committee's plan. There are still a lot of details that the committee has to work out, but the Funding for Success Committee did receive a fair representation of the direction that the Revenue and Taxation Committee is heading.
Ms. Hansen asked Mr. Navin if he knew what direction the Funding for Success Committee is going. Mr. Navin responded that he did not. The Funding for Success Committee mostly talked about Revenue and Taxation's draft plan. They did not get into much detail about the issues that they have been discussing. They are focusing more and more on finding different ways to direct more aid to districts with high concentrations of poverty. He added that he really did not have any more specifics about how they are doing that.
Mr. Brandt noted that the Funding for Success Committee has spent a lot of time looking at the 26 excellent or effective Gap-Aid districts.
Mr. Hyre stated that the Funding for Success Committee is not as far along as the Revenue and Taxation Committee, but their focus is how to help children who need help. He noted that the entire Task Force will meet in early August and at that time can focus on how to tie pieces together. He added that the Funding for Success Committee still has a ways to go before that can happen.
The Revenue and Taxation Committee then moved on to talk about its outstanding issues. Mike Sobul of the Ohio Department of Taxation shared that there are five areas that still need resolution: supplemental costs, further property tax relief, measuring the index for a rollback, Parity Aid and how hold-harmless provisions might work. Three of five will be discussed today.
Supplemental Costs
Mr. Sobul noted that the committee has considered several ways to deal with supplemental costs. He referred committee members to the four options suggested by staff for dealing with supplemental costs. Mr. Sobul added that these four possibilities were not an exhaustive list.
The first option suggested by staff would be to start using a gap aid concept initially similar to the way it is used now. If a school district does not have the extra 2.5 mills, they would get gap aid to cover it. As the 22 mills are rolled back, initially, the rollback would become a supplemental cost levy that would not be rolled back. This supplemental cost levy would be changed over time to a segregated supplemental cost levy. Mr. Sobul added that the first time the state rolled back the 22 mills, to 21.5, for example, the 0.5 mill rollback would then become a levy for supplemental costs. Eventually, school districts would have the full 2.5 mills.
Ms. Shaner asked if this option would mean that all districts would receive gap aid initially. Mr. Church replied that districts that have more than 22 mills could still receive an excess cost supplement. If a district's 2.0 to 2.5 categorical program levy does not raise enough to cover the state's assumed local share of categorical programs the state would give that district the difference through an excess cost supplement.
Mr. Zaino opined that, in ten or twenty years, the ability to change the two components is really restricted as the total of the two cannot exceed 22 mills without another constitutional amendment.
Mr. Sobul replied that, once staff has a firmer sense of where the committee is headed, staff will have a better idea of what simulations to run. The options staff presented are simply ideas intended to stimulate discussion.
Representative Calvert stated his opinion that the state is not ready to pay for 100% of the cost of categorical programs. Ms. Shaner noted that there are some school districts that do not have sufficient millage available to pay for categorical programs. She would like all school districts to have the resources necessary for good schools.
Mr. Brandt asked how long it might take for districts to achieve the 2.0 to 2.5 mills for categorical programs through reducing the 22-mill charge-off. Mr. Church replied that six or seven years was a reasonable guess but it would depend on the limit placed on growth.
Mr. Sobul reviewed the next option for dealing with supplemental costs, which would be to have as part of the constitutional amendment 2.0 or 2.5 mills outside of the one percent constitutional limit earmarked for categorical programs. He cautioned that the wording of the constitutional amendment would need to be done carefully, because if the categorical programs change over time, the constitution might not allow the use of these resources for the new programs.
Mr. Brandt observed that the Disadvantaged Pupil Impact Aid (DPIA) program, which is very large, is not currently listed as a categorical program. He asked if the Revenue and Taxation Committee is waiting to address this program until the Funding for Success Committee addresses DPIA.
Mr. Sobul stated that a third option for dealing with supplemental costs would be to make permanent the temporary penny increase in the sales tax. Of the approximately $1.4 billion generated by this penny, $560 million (40%) would be used to pay for supplemental costs, 40% would be used to provide income tax relief and 20% would fund property tax relief for low-income individuals. Mr. Sobul noted that the 60% that would be dedicated to individuals' tax relief is proportional to individuals' share of the sales tax. This option would provide about the same amount of tax relief for individuals as eliminating the temporary penny sales tax. Also, the income tax is where Ohio is the most out of line with other states and this would help correct that. There would be tax relief throughout the brackets, but reductions would be concentrated at the lowest and highest levels of income.
Mr. Zaino asked what the effect would be if the $560 million for income tax relief were used to reduce the top bracket (7.5%) Mr. Sobul replied that doing this would probably eliminate the top bracket and reduce significantly the next highest bracket, which is 6.9%
Focusing income tax relief on only the top brackets would return the income tax structure to pre-1993 levels.
Mr. Sobul noted that a fourth option for dealing with supplemental costs would be to reallocate some of the state revenue that Ohio shares with libraries and local governments. To compensate for this lost revenue, these local entities would be given additional taxing authority. This option would have as part of the constitutional amendment an allowance of up to one inside mill that libraries could levy outside the one percent limitation. Counties would be given the authority to impose a sales tax of up to 1.5% without a vote of the electorate, which is half a percentage point higher than the current limit.
Mr. Locke asked if these options meet the expectations of taxpayers. He opined that taxpayers expect the Task Force's recommendations to reduce the reliance on property taxes and none of the options propose easing this reliance.
Representative Calvert responded that people think this only because the press misconstrued what the Ohio Supreme Court said. Mr. Brandt agreed that the Supreme Court did not say to reduce property taxes.
Mr. Locke stated that the general public believes that whatever formula comes out of the Task Force is going to be less dependent on local property taxes. The committee needs to think about that and deal with it.
Mr. Brandt said that the level of dependence on property taxes and lower property taxes are not the same things. School quality should not depend on where a student lives, but that does not mean that property taxes will not be a source for funding schools.
Representative Calvert added that he has two school districts that have not been on the ballot for over 10 years and they still believe that they are on the ballot all the time. We cannot fix that perception.
Mr. Hyre observed that the third option seems to address some of the issues that the committee is trying to resolve.
Mr. Brandt added that there has been a lot of heat relative to the temporary penny sales tax, but most of the heat has come from one particular office holder. He is not convinced that the "people" are all that bothered by the tax. If there were a reasonable case made about what was going to be done with the proceeds of that penny, including some tax relief, he believes that the state might retain the penny.
Mr. Navin stated that the committee has discussed the possibility of the state paying 100% of supplemental costs, as opposed to a state/local partnership. He asked if the third option refers to a local levy or a state levy. Mr. Church replied that the proposal suggests that state money be used for the state picking up 100% of the supplemental costs.
Ms. Shaner opined that, even if there is a local share for supplemental costs, the identification of more children as having disabilities simply means that the state is going to have to pay more money. She believes there will be a lot of pressure from numerous groups to over-identify children, which will be a burden on the state.
Mr. Church responded that this may be true if a district's costs are over two mills: below two mills there is a strong incentive for under-identification.
Mr. Brandt suggested that the Ohio Department of Education needs to have a better process for identifying children with disabilities, but this is not a problem this committee should be trying to resolve.
Ms. Shaner observed that the committee has not had enough conversation relative to how Ohio transitions from where we are now to a new system. The current budget does not have enough money to support much of a phase-in of any system that costs a significant amount of money. There will be a state cost for the "gap aid" necessary for supplemental costs, whichever system gets implemented. There will be a cost for some type of hold-harmless provision. The committee needs to determine how the state is going to pay for these costs.
Mr. Church replied that if the state pays for 100% of the supplemental costs that takes the place of most of the need for hold-harmless funding. He added that phase-ins delay relief to the taxpayer. They do not see any relief until the two mills (or whatever millage this is) for categorical costs is achieved.
Mr. Brandt interjected that the entire committee is struggling with paying for the supplemental costs, but there seems to be a consensus that we need to be looking at the total cost of education and not just the foundation portion of it. If it is the state's responsibility to educate children at an adequate level, this is true for all children regardless of level or background.
Mr. Adams opined that the categories that have been set out are very different. Does it make sense to have vocational and special education as part of the base cost and deal with transportation separately? From a school district's perspective they are all costs and need to be funded. If we deal with it in one box or two it is still the same concept.
Representative Calvert responded that vocational education and transportation could be considered separately from special education because the student and the parents make the decision on vocational education, and transportation is based strictly on where the student lives. He added that special education is seeing huge changes. If it is going to be funded by the state something has to be done. Identification is growing by leaps and bounds and needs to be looked at by someone.
Mr. Brandt noted that the committee also needs to include economically disadvantaged students, for which the Funding for Success Committee seems to be considering some sort of weight. Mr. Brandt believes that these children are the state's most urgent concern.
Mr. Adams observed that, if the categorical programs (supplemental costs) are imbedded in the base, it becomes impossible to determine which dollars are going where.
Mr. Brandt replied that there is still an interest in making sure that the money for special education goes to special education. This is also true for the other categorical programs.
Mr. Adams stated that he likes the fact that the committee is not adding another complicated feature to the system. This will help make it simpler and easier to understand.
Ms. Shaner said that it does make more sense to target spending instead of just raising the foundation amount for every child, since the state does have limited resources. It is unlikely that the Task Force will recommend a large increase in the basic aid amount, but if we can get a system that focuses money where it is needed the most that would be a great improvement.
Representative Calvert suggested that over-identification of special education students would not be a problem if the state reimbursed actual costs. He added that the only reason to over-identify is to bring in money that you do not necessarily spend on special education students.
Mr. Church opined that the second option is the cleanest. It does not penalize local levies. Its major negative is that it creates a special exception to the constitutional one percent limit on real property, which might set a precedent that should not be set. Mr. Church noted that a negative aspect of the first option is that it delays protection for taxpayers. Not until foundation millage is reduced from 22 to 19 or 20 mills can the total 22 mills begin to be reduced. On the plus side, this option does not require continuation of the temporary penny sales tax or additional growing millage beyond 22 mills.
Mr. Zaino expressed concern that some time in the future all of the rollbacks of the levies are going to create a problem for a future legislature, which will be required to find money to pay for the artificial limitations on growth.
Mr. Church replied that the gravity of this issue depends on where you set the growth caps. If the General Assembly set high limits it will not have to deal with it for a long time.
Mr. Zaino asked whether at some future date - perhaps in 25 years - the tax rate could be 15%. He opined that property tax growth limited by caps just delays problems, it does not address them.
Mr. Church stated that a negative aspect of the third option is that it would be politically difficult to retain the penny sales tax. On the positive side, the sales tax is a good revenue source since the sales tax is where Ohio is the lowest in comparison to other states. This option also solves some other tax-related items, as well as provides tax relief. Mr. Church added that the sales tax is not as stable as the property tax or as volatile as the income tax.
The fourth option is more complex than the others and also creates some additional property and sales tax burden at the local level. Compared to other states, Ohio's state taxes are not high, but our local taxes are. Increasing local tax burden is not necessarily something we want to encourage. On the plus side, option four stays within the constitutional one percent limitation on real property taxes and simply reallocates state money. This option reduces the state's revenue sharing with the local entities, but does not lower state spending on state programs.
Mr. Hyre suggested that the committee should eliminate the fourth option. Mr. Brandt requested that the second option be eliminated because it opens too many doors that should stay shut.
Relative to the fourth option, Mr. Church observed that Ohio has high local taxes relative to other states, in combination with generous sharing by the state of state revenue with local governments. He opined that, with such widespread local taxing authority, the state should not need to share nearly as much state revenue with local entities as it does currently.
Representative Calvert asked why the committee is concerned about the categorical programs. Why do we need to address this issue?
Mr. Brandt responded that, if the committee recommends a 22-mill charge-off for real property and a 40-mill charge-off for tangible property, some school districts do not have any other way to pay the costs of the categorical programs. Mr. Church added that, if the cost of categorical programs is not addressed, a new type of phantom revenue is created.
Representative Calvert stated that the constitutional amendment should provide for 22 inside (growing) mills and three outside mills. If a school district's voters approve additional millage that is all right. The three mills would be for anything that a district wanted to use it for, since the state would pick up any additional costs for categorical programs.
Measuring the index for a Rollback
After taking a lunch break, the committee discussed the document entitled Estimated Impact of Alternate Tax Bases for Growth Caps on the Charge-off/Inside Millage Rate. Mr. Sobul reviewed this page for the committee. It provides a six-year history of changes in real property values since fiscal year 1999, identifying separately total increases in real property values from increases due solely to reappraisals or triennial updates.
The next-to-last column of the table shows the impact of limiting millage growth to three percent of the total valuation change (new construction plus reappraisals) and the last column illustrates the impact on 22 mills over time if the three percent cap is applied only to the reappraisal component of real property valuation increases. Mr. Sobul noted that the committee needs to decide whether it wants to recommend limiting all growth or only growth attributable to reappraisal.
Mr. Church stated that a low cap helps the taxpayer more quickly, but it also quickens the pace at which richer school districts benefit from a lower charge-off. (Lower charge-offs mean more state aid. Richer districts benefit more from lower charge-offs than less-wealthy school districts since they have more wealth to be charged off.)
Mr. Sobul told the committee that staff looked at the impact of annual changes in valuations in place of the current triennial changes. This change provides a smoother curve but you end up at about the same place.
Mr. Zaino asked whether the millage will approach a zero charge-off after 25 years or so. Mr. Church responded that the rate of change never reach zero. The same percentage reduction will occur every year, but that means the change in the charge-off will get smaller and smaller since it is applied against a declining base.
Property Tax Relief
The committee next turned to Options for Additional Property Tax Relief, which provides four choices.
Mr. Zaino noted that these options of tax relief were discussed before for the purpose of reducing frequency of school districts on the ballot. He does not believe that adopting any of these options will make it easier for schools to pass levies, so why are they still being discussed?
Representative Calvert opined that the options address the perception that property taxes should be lowered. He believes that giving a property tax breaks to all homeowners over the age of 65 will make it much easier to pass a constitutional change.
Mr. Navin stated that the mere fact that the committee is considering a constitutional change means that it needs advocates for this plan. If the committee can point out specific areas where it is reducing property taxes it makes it easier to attract support.
Mr. Zaino said that makes perfect sense: he was not thinking of that advantage. However, he asked whether this is enough to make the package attractive to voters. He cautioned that the committee should make sure it does not take from those who will vote and give to those who do not vote.
Representative Calvert asked what the impact would be if Ohio limited senior citizens' property tax increases to some specified level, regardless of the actual change in value. He noted that California and Florida do this.
Mr. Brandt responded that this policy results in people living in the same basic house but paying different levels of taxes.
Mr. Schmida would like to see some tie to income instead of across-the-board relief. The constitutional amendment should provide more relief to poorer homeowners than richer ones.
Ms. Shaner added that age is an important factor. Younger homeowners have an easier time moving from one location to another.
Representative Calvert suggested that expanding the number of people who receive the homestead exemption probably would not be enough of an incentive to get enough people to support the committee's plan. Increasing the size of the credit would probably need to happen as well.
Mr. Brandt asked whether reducing the levy frequency would also help these same people. Mr. Sobul responded that it would.
Mr. Navin recommended targeting taxpayers who have annual incomes of less than $100,000, which is about 90% of homeowners. Perhaps the committee can discuss more specific options at the next meeting.
Mr. Sobul noted that $40 of tax relief for these 2.4 million homeowners would cost about $100 million. Mr. Navin replied that he was not suggesting that all of those homeowners would get the same amount of relief, but they would get some.
Representative Calvert stated that limiting property tax relief to the elderly makes it much more affordable.
Mr. Navin would not want relief so limited that over half of the homeowners would receive no relief.
Mr. Church noted that median household income for a family of four is about $60,000 in Ohio. Raising the income limit to $75,000 would be significantly over the median.
Mr. Navin stated that for the next committee meeting staff will have some options to consider as far as providing property tax relief. There will be some connection to income.
Representative Calvert asked if it would be easy to determine how many people in Ohio are aged 70 or older and own their home.
Staff responded that there might be a break point at age 75, but they were not certain. They obtained their data from the Ohio Department of Development, who got it from census data.
Mr. Navin suggested that the committee needs to reflect more on the material outlined in today's meeting. He recommended holding another meeting before the full Task Force meeting so the committee has a better sense of where it is heading relative to recommendations.
Mr. Sobul asked if the committee wants to roll back rates on all real property valuation increases (which includes increases caused by new construction) or only on increases attributable to reappraisal (which currently excludes rolling back rates on new construction). The consensus was to limit only growth that is attributable to reappraisals.
The next meeting of the Revenue and Taxation Committee will be July 29th.
Mr. Navin adjourned the committee at 2:00 p.m.
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