News
Is Your School Budget Going Up in Smoke?

New study shows that "economic development" tax breaks burn up money needed for education.

As you approach (shudder) Tax Time, you're probably scrounging for every little deduction you can find. But regrettably, the shrewdest write-offs out there--through vehicles like property tax abatements, tax increment financing, and enterprise zones--won't appear in your tax preparation guide.

These gimmicks are just a handful of the creative "incentives" offered by states and cities, now totaling more than $49 billion a year in either expenditures or foregone revenues, to lure economic development--often from other states and cities.

This intergovernmental competition is starting to eat into some state education budgets, erosion that has become more evident in this time of recession and steep revenue shortfalls.

Economic development incentives make perfect business sense when a company is struggling and needs a tax break to survive, thrive, and sustain local employment.

But when these incentives are simply used to lure a business from one state or city to another, "it's a lose-lose situation for education and other public services," says Ed Hurley, an education finance expert in NEA Research.

"In an ideal world, we wouldn't allow tax abatements," Hurley adds. "In the meantime, let's focus on attracting new economic investment to our communities by offering good schools and a skilled workforce."

Ironically, many state and local economic development boosters already top their lists of "business climate" features with glowing promises of a "highly-skilled labor force" and "excellent schools and training facilities," while simultaneously granting tax breaks that can undermine educational quality.

That's just one finding in a report on how tax giveaways impact school funding, recently completed for NEA Research by the Good Jobs First project of the Institute on Taxation and Economic Policy. This nonprofit, nonpartisan organization--which admits a bias towards "tax fairness"--researches the effects of tax systems on taxpayers at all income levels.

The Good Jobs First study also finds that costly tax giveaways rarely determine where companies locate jobs.

That's because state and local taxes are deductible from federal corporate taxes. And besides, the report notes, "state and local taxes represent only 2 percent to 3 percent of a typical business's costs, compared with basics such as transportation, energy, proximity to suppliers, proximity to customers, and access to critical inputs--especially sufficient skilled labor."

Regardless of these facts, state and local tax gimmicks just keep mushrooming.

In 2000, Ohio had 3,180 low-tax "enterprise zone" agreements in place, notes Ohio Education Association research consultant Andy Jewell.

And in Alabama, corporate tax-break legislation has been simply "endless," laments Alabama Education Association research manager Bill Hanebuth, who has seen every gimmick from employee payroll tax rebates for an auto manufacturer to a recent attempt --stopped by AEA--to grant a $400 million tax break to a power company.

The Good Jobs First/NEA Research report (not yet released to the public) focuses on tax breaks that affect the largest single source of school funding, the property tax.

In Ohio alone, the study finds, property tax abatements and tax increment financing (TIF)--an "exemption of the value of real property improvements" over a set number of years--reduced or diverted school revenue by $102 million in 1999. And Montana schools lose about $16 million a year to such subsidies, the report adds.

Some Smart Solutions
How can the education community challenge tax subsidies that harm school funding--at a time when many state and local budgets have slipped into the red?

Here, from the Good Jobs First folks and NEA researchers, are some reasonable approaches to the problem:

• Shield school revenues from corporate tax subsidies. The best way to do this is to prohibit the abatement or diversion of the school portion of property taxes. A handful of states already do this.

• Give school boards a formal say in subsidy decision making. The Good Jobs First report strongly recommends that school boards be given veto power over abatements and tax increment financing and that school boards be "provided with enough advance information about subsidies to make informed decisions."

• Improve disclosure of business tax breaks. In Ohio, notes OEA staffer Jewell, "there's no central source of information on tax abatement programs, even though the state Department of Development has some oversight. They only know what local tax authorities report to them."

  And in Alabama, charges AEA staffer Hanebuth, industrial development boards actually meet in secret and waive taxes.

  States should measure the impact of subsidies on school revenue, the Good Jobs First report stresses. "In order to do this, reliable data on property tax abatements and TIF must be collected and aggregated by school district, county, and state."

• Ask questions and be aggressive. "I tell Association members to contact their local tax authority--at the city, county, or township level--to find out if they have entered into tax abatement agreements with companies," says OEA's Jewell. "I also encourage members to talk to politicians to get a picture of abatements granted in their community."

  AEA's Hanebuth thinks it's important to be tougher yet, and for a good reason: Corporate tax breaks have helped punch a multimillion dollar hole in Alabama's $4.5 billion education budget.

  "We have full-time AEA staff--including our own staff tax attorney--tracking tax legislation all the time," Hanebuth points out. "We're usually the only group from the education community that testifies when these bills come to committee, and we read each and every bill."

• Point out that somebody has to pay for the pressures of economic growth. "If new companies don't pay their property tax for 20 years, who is paying for new public costs--like streets, sewers, and schools--generated by the population growth?" asks Good Jobs First project director Greg LeRoy. "It's just homeowners and small businesspeople, and that's not fair."

• Speak out for education as an economic development tool. Education unions also have a role to play in this debate, the Good Jobs First report emphasizes. It concludes: "As the front-line workers who see the impact of overcrowding and other effects of underfunded schools, teachers and classified employees can articulate the direct impact subsidies have on tomorrow's workforce."

  Greg LeRoy says it even better than his report: "Teachers and other public education advocates should stand up and declare that they are 'business climate crusaders,' because they are the ones who help build the skilled labor force that so many employers desire."

Greg LeRoy will be a workshop speaker at NEA's "Conference on Quality Schools and Education Funding: Merging the Agendas," to be held May 8-10 in Denver, Colorado. For info, call NEA Research at 202/822-7763 or E-mail Smanalaysay@nea.org.

In Their Own Words
Education: A Tool of Economic Development

"Investment in public education has also been one of the tools of economic development and should be recognized as such. Thus, funding public education and education development packages should be complements, not competitors, in this effort.

"What is needed is a more careful evaluation of the growing number of incentive packages in a true public cost/benefit framework so that the opportunity costs of forgone revenues and the additional demands on public infrastructure (including schools) are given appropriate weight in the decision process."

--From a March 2000 report completed for the
South Carolina School Boards Association

Your Dues Did It
NEA Argues Against Vouchers In Supreme Court

Outside, voucher supporters and opponents jostled for position in front of the cameras. Inside, attorneys for the two sides threw sharp jabs at each other--while answering a rapid-fire barrage of pointed questions from the Justices.

It was a high-profile, high-stakes case before the United States Supreme Court. And on February 20, the issue was the six-year-old private school tuition voucher plan in Cleveland, Ohio.

"It's a mathematical certainty that almost all of the students [who receive vouchers] will end up going to religious schools," argued Bob Chanin, NEA general counsel and lead attorney for the anti-voucher Cleveland parents.

Justice David Souter echoed that idea, asking, "Doesn't it suggest that there is something specious about this notion that it's a matter of wide-open choice?"

The case came down to intent versus effect. Attorneys for the State of Ohio, the Bush administration, and pro-voucher parents argued that the purpose of vouchers is to improve education. The anti-voucher legal argument was that the effect of the plan is to divert resources to religious instruction and worship.

Chanin argued that parents play a "ritualistic role" in moving money from the state to religious schools. The voucher program is distinct from other choice options in Cleveland, including magnet and charter schools, because they do not charge tuition.

A ruling in the case is expected in June.

--Michael Pons