Taxing Times for State Governments

As the economy grows, state deficits persist. NEA suggests ways to tap more revenues from those who can most afford to pay.

Photo by Mike Riggs

In 1996, a Delaware-based business reporter discovered more than 700 company headquarters miraculously squeezed into five floors of a "slender" office tower in Wilmington. Some 500 claimed the 13th floor alone.

What kind of magic was this, the inquiring sleuth wanted to know. "Frankly," the building manager snapped, "it's none of your business."

Well, frankly, the identities of those so-called "passive investment companies" (PICs) in the building are the business of every taxpaying school employee. PICs, the subsidiaries of prominent corporations, help their corporate offices evade the very state business taxes that help fund public education.

How? Each PIC "charges" its corporate parent a "royalty" for the use of its own trademark or patent, and that fee becomes a tax-deductible expense for the corporation.

How dare they, you ask, when your school board is pleading poverty and class sizes are increasing? Welcome to the hot topic of tax reform—business loopholes.

According to U.S. Census Bureau statistics, corporate income taxes provided 10.2 percent of revenue in the states levying them in 1979, but just 6.3 percent in 2000. That's because corporations are getting more sophisticated and aggressive in exploiting legal loopholes such as PICs, says Michael Mazerov, a tax system analyst for the nonpartisan Center on Budget and Policy Priorities.

Mazerov, who has studied the most common state loopholes points out that such loopholes are easy to close and "can generate income fairly quickly."

That's income sorely needed by states still facing huge budget deficits. "Just because the economy is finally improving doesn't mean basic tax structures are," points out Michael Kahn, an NEA Research Department manager. "State revenue lags by at least 18 months after a recession ends, even as the economy grows."

States can't expect to tap much more revenue from average taxpayers. According to the U.S. Bureau of Economic Analysis, the nation's median income actually declined by $500 in the last economic quarter of 2003.

But America's super-rich and its corporations are, yes, getting richer and can chip in more during these tough times, says Kahn. To that end, NEA Research recommends that NEA state affiliates lobby to close corporate tax loopholes, pass a temporary income tax surcharge on the wealthiest 2 percent of taxpayers, and "decouple" state tax codes from the federal estate tax formula—which drains state coffers.

These are pages right from the playbook of the New Jersey Education Association. NJEA helped Governor Jim McGreevey pass the Business Tax Reform Act of 2002, which closed the three most common loopholes studied by Michael Mazerov (including PICs) and yielded an immediate payoff. Corporate tax revenues, which had shrunk to $1.17 billion in Fiscal Year 2002, shot up to $2.5 billion in FY 2003.

The bottom line: At a time when many other states are slashing education funding, deficit-battered New Jersey can at least afford "level state aid to schools, the same as in previous years," says NJEA staffer Ed Richardson. "However, there have been some layoffs—although nothing widespread—and multiple years of state-mandated district spending caps are taking their toll, so we're not out of the woods yet."

Not by a long shot. That's why NJEA, through the broad-based Fairness Alliance coalition, campaigned hard last year for a temporary, incremental personal income tax increase on New Jersey's top 2 percent of earners—dubbed the "Millionaire's Tax" by the press—to raise another $1 billion and restore the worst of the state's budget cuts. State lawmakers said "no, thank you" to that one, but this year they're facing another huge deficit and running out of quick fiscal fixes.

"We're working to reinvigorate our coalition and update our plan for the upcoming budget debate," says Richardson. The new proposal may be somewhat different, he says, but it will rely "on the same principles of 'recapturing the windfall' from the wealthiest New Jerseyans, who reaped the greatest tax cuts in the boom years."

NEA's Kahn says activism like that is critical. "If current trends in tax policy continue," he notes, "we won't be able to maintain the quality of life that we are used to as Americans, let alone create great public schools for all children."

—Dave Winans

For more on tax issues, visit the Center on Budget and Policy Priorities.

Alabama

Instead of insisting that out-of-state corporations pay their fair share of taxes, the Business Council of Alabama (BCA) recommended to lawmakers that school employees and retirees pay the cost of the financial crisis facing schools—through cuts in health benefits and alterations in the retirement system. The Alabama Education Association (AEA) called on its members to "fight back" through mass lobbying.

"The unfair burden that the BCA wants to put on your back is based on greed and fueled by the misguided belief that what's good for big business is good for all," AEA Executive Secretary Paul Hubbert told educators. "Over the years, tax loopholes have allowed the big boys to rob us blind and shortchange the Education Trust Fund."

Maryland

As the state legislature met in February, Maryland State Teachers Association (MSTA) members rallied en masse with partners in the Coalition for Public School Funding against lawmakers' threat to dilute school aid in the next budget. "Our teachers, education support professionals, and other partners in education understand the grave ramifications of limited resources in our public schools," said MSTA President Patricia Foerster. "We don't want to see students cheated or compromised."

Iowa

In a show of unity, the state's leading education groups—the Iowa State Education Association (ISEA), the state PTA, and the organizations of school boards and administrators—launched a major grassroots organizing effort to convince Iowans that the school funding crisis is real and that it will affect education quality for years unless something is done soon.

At the heart of the campaign: informational meetings and forums across the state to create awareness of the problem and to mobilize citizens to lobby for a solution.

California

The California Teachers Association (CTA) led discussions with Governor Arnold Schwarzenegger to shape a state budget proposal that protects base funding for schools. The spending plan protects campuses from dangerous cuts this school year and increases education funding by $2 billion next year, including cost-of-living adjustments for all K–12 schools and community colleges.

CTA President Barbara Kerr thanked Schwarzenegger for working with teachers in difficult budgetary times. "The way he involved us in the process is a first and we appreciate that," said Kerr. "We will continue to work with the governor and legislature to implement this agreement."

Wisconsin

Governor Jim Doyle, who has consistently opposed expansion of the Milwaukee district voucher program, vetoed bills to extend the state's voucher program. Any changes to that program, he explained, "must be part of an overall package that improves education for everyone and addresses serious concerns that have been raised about accountability within that program."

"Governor Doyle recognizes that these bills would inflict severe damage on public education," said Wisconsin Education Association Council President Stan Johnson. "If true accountability is to exist, standards for voucher schools and public schools must be identical."

Utah

The Utah Education Association (UEA) filed a suit in federal district court charging that the state legislature, in amendments to the 2001 Voluntary Contributions Act (VCAI), is unconstitutionally infringing on UEA's rights of "protected speech and association."

The new law, VCAII, prohibits UEA and other public sector unions from using dues to communicate positions on political candidates to their members—or to communicate to the public about ballot initiatives and other issues of public importance. Incredibly, the law does not impose similar restrictions on private sector unions or businesses.

Maine

The Maine Education Association (MEA) is cooperating with the Maine state Department of Education in an anonymous survey of teachers' workloads. Survey data are needed to support a legislative study on the issue, and MEA has urged members to participate.

"The higher the participation by teachers, the more powerful the data will be," the MEA membership magazine urged readers. "The information is vital to demonstrate MEA's contention that educators are overburdened by mandates and in need of a greater voice in educational policy decisions."

Oregon

When the Dalles and Chenowith school districts merge this July, the Oregon Education Association (OEA) will gain 68 new ESP members in addition to the 100-plus members currently represented by the Dalles Association of Education Support Professionals.

The reason: In a recent representation election conducted for ESPs in the merged district, OEA beat a competing organization by more than two to one.