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Public Education Embroiled In a Taxing Situation

School funding has been battered by the recession. Here's how poorly designed tax systems are making the situation worse.

Budget shortfalls and poorly planned tax strategies have combined during this recession to put increased strain on public education funding. Consider these facts:

• Combined state budget shortfalls have now soared to $40 billion--the result of a recession-related revenue decline, soaring health care costs, and the growing pricetag for homeland security. So says a recent analysis by the National Association of State Budget Officers and the National Governors Association.

• Many states have compounded their shortfalls by making big pre-recession tax cuts or by failing to create tax systems that keep apace with growing personal incomes and a growing population's need for services.

• States' use of property tax abatements to attract corporate investment is at an historic high--at a time when most other state and local taxes are linked to slow-growth aspects of economic activity, such as alcohol and gasoline sales.

• "We have a tax system instituted in the early 1900s," notes Ed Hurley, an economist in NEA Research. "It's a system focused on tax revenue from the sale of manufactured goods. But in the 21st century, we've shifted from manufacturing to services, especially electronic commerce."

• Forty-five states and the District of Columbia rely heavily on the sales tax to fund critical services, including education, according to a study recently completed by the University of Tennes-see's Center for Business and Economic Research. Yet in 2001, the report estimates, state and local governments lost an estimated $13.3 billion in sales tax revenue "due to the inability to collect taxes from remote online purchases."

  And by 2006, the revenue loss could climb to $45.2 billion.

States with Built-In Deficits
How do we extract ourselves from this taxing morass? NEA Resolution A-13(f) states: "The state and local share of education finance must be derived from a tax system that is balanced and complementary in nature, includes all broad-based taxes, reduces the excessive reliance on property taxes, and protects subsistence income." And NEA is working with state affiliates to bring tax policies in line with this ideal.

NEA Research, which provides training, publications, and consulting services for state affiliates on tax policy and school finance issues, has helped several NEA state affiliates introduce the concept of structural deficits.

Structural deficits, as opposed to cyclical deficits caused by recessions, arise when there's a mismatch between growth in spending needed to maintain current services and growth in revenues from current taxes and fees.

States hardest hit by structural deficits often have chronic fiscal problems--in good economic times or bad. They lack personal income taxes and find it hard to capture revenue from economic growth.

In Tennessee, a state with a high corporate tax but no personal income tax, a heavy reliance on sales taxes has yielded a "huge structural deficit of $500 million a year" and two downgrades of state bond ratings, notes Graham Greeson, research director for the Tennessee Education Association. This unending fiscal crisis has harmed public education and has prompted TEA to put tax reform at the top of its legislative agenda.

Two NEA state affiliates are working to create better tax systems:

• Being proactive in Nevada. In fast-growing Nevada, school funding is based almost exclusively on gaming and sales tax revenues, while corporations pay state taxes amounting to only $100 per employee a year.

  In 2000, members of the Nevada State Education Association shook up the status quo by campaigning for a ballot initiative to levy a 4 percent tax on business net profits to support public education. While this publicly popular "Let's Be Fair" initiative was halted on constitutional grounds by the state Supreme Court, NSEA built a reputation as a force for tax reform.

  The state legislature quickly created the Governor's Task Force on Tax Policy in Nevada, which was charged with focusing on broader tax policy issues and considering ways to reduce reliance on "volatile or cyclical revenue streams."

  NSEA Executive Director Ken Lange was named to this eight-member body. NSEA will be applying "Universal Guiding Principles of Fair Taxation Policy" to gauge others' recommendations--measuring for qualities like tax stability, equity, simplicity, and accountability.

  During the tax panel's deliberations, Lange adds, NSEA members will be conducting a public campaign on the pressing needs of Nevada schools. The goal: raise the state's per-pupil expenditure to the national average.

  "This increase will lead to substantial raises and better working conditions in the classroom," Lange says.

• Being aggressive in Michigan. Public schools in Michigan are heavily dependent on sales and use tax revenues.

  "But when somebody elects to make out-of-state purchases by phone, catalogue, or the Internet, the state school aid fund loses millions of dollars in uncollected revenues," says Michigan Education Association field lobbyist Dave Stafford. "If we could collect use taxes alone that are owed by consumers, Michigan schools would get an extra $65 to $70 million a year."

  That's why MEA worked with other organizations to win passage of model legislation crafted by the Streamlined Sales Tax Project, a consortium of state and local governments that is working to simplify and standardize state sales tax laws.

  The Project's model law, now adopted by Michigan and 19 other states, commits the signing states to meet in a conference this year to simplify everything from tax rates to definitions of taxable goods--and to certify software that will make it easier for all retailers, both on Main Street and on the Internet, to collect sales taxes.

  The Project's ultimate goal: prompt strong Congressional action on interstate Internet commerce.

• Making the tax issue an education issue. "If we are to continue to improve our schools," NEA President Bob Chase stresses, "we must continue to invest in research-proven reforms like small classes and better pay and professional development for teachers. Real reform requires real money."

  And in many states, real education reform may require tax reform.

  NEA affiliates "should always pay attention to and be involved in tax policy," recommends Nevada's Lange. "It's not always exciting stuff, but it's good for organizational development. As an Association, we need to look for solutions and play a leadership role in tax issues--not just be a petitioner."

For more on sales tax revenue loss to Internet commerce, go to www.statestudies.org/ecomreport.pdf.

And for more on the Streamlined Sales Tax Project, go to www.streamlinedsalestax.org.

Doing the Math

Forty-five states and the District of Columbia rely heavily on the sales tax to fund critical services, including education.

In 2001, state and local governments lost an estimated $13.3 billion in sales tax revenue from remote online purchases.

By 2006, revenue loss could climb to $45.2 billion.

Source: Center for Business and Economic Research, University of Tennessee

In Hamilton County, Great Ideas But No Money

Tennessee educators know how to boost inner-city achievement--but don't know how to get legislators to pay for it.

Want solid ideas for closing the student achievement gap? Look no further than Hamilton County, Tennessee, a large urban/suburban district where NEA members and administrators work as one through collaborative bargaining and increasingly think as one.

Ask either "side" what it takes to improve the performance of a struggling school, and you'll hear about must-haves like instructional support, adequate resources, and strong leadership--and the funding to make it all happen.

LaFrederick Thirkill, a negotiating team member for the 2,400-member Hamilton County Education Association, gives the issue of inner-city student achievement plenty of thought, both in writing his master's thesis and working as a fourth-year music teacher in Chattanooga's Howard Elementary.

Thirkill argues for stepped-up supports and resources for urban teachers. "At one point at Howard Elementary, 60 percent of our teachers had less than three years of experience," he points out. "New urban teachers don't have many strategies, are often shocked by their initial experience with cultural diversity, and are demoralized by a shortage of materials. I arrived at this school to find a limited number of textbooks and no instruments or CDs to demonstrate my lessons."

Across the bargaining table, Superintendent Jesse Register plays in near-perfect harmony. His administration has drafted a five-year strategic plan that emphasizes recruitment and retention of good teachers, especially for inner-city schools.

"Poverty schools need more to be successful," the superintendent emphasizes. "It's important to support teachers in them--incentive pay for inner-city schools will be an issue for negotiations--and we think we need instructional support staff working in them."

Register has advanced a range of thoughtful proposals, including specialized administrators for state-designated "on-notice" schools; experienced, school-based consulting teachers; and even a longer school year.

But Tennessee's a place where even popular, visionary administrators soon hit the brick wall of school finance.

And this is a wall of double thickness: an inequitable state funding formula that pays too little to districts with many special-needs kids, financed by a state tax system that never keeps up with the growing needs of all schools and students.

Hamilton County can barely fund its school budget from state sources, forcing it to seek private and foundation grants for everything from school materials to whole new buildings. "We've become champions at pursuing grants," sighs the superintendent.

And Tennessee's chronic fiscal crisis, compounded by the current recession, is undermining public education across the state, threatening pre-school programs in the inner cities and driving hundreds of teachers--especially in border counties--to cross state lines to teach for more money.

"Hamilton County sits on the Georgia border," notes UniServ Coordinator Gerry Dowler. "We're losing 60 to 90 teachers a year to Georgia schools, including some fabulous, highly experienced educators. This affects the morale of the teachers who stay behind and hang in for measly two-and-a-half percent raises, hoping legislators will fix the problem."

But Tennessee lawmakers only seem to favor a "fix" that drives shoppers as well as teachers across state lines--raising the sales tax another penny. Many Tennesseans already pay combined state and local sales taxes reaching a whopping 8.75 percent.

"We need a tax system that offers continuity, grows with the clientele of our schools, and pays teacher salaries that'll carry us to the 22nd century," argues Dowler.

"In my opinion, this state has to deal with revenue and tax reform," agrees Superintendent Register. "Anti-tax people's voices are loud, so teachers, parents, and community people have to make [an equally] loud noise for education funding."