Maine Not Alone

(from Maine Townsman, December 2003)
by Michael Starn, Editor

       To borrow a phrase from a sci-fi movie, “We’re not alone.”

       School funding, tax reform and not-enough-revenues to fund government are not Maine-only issues.  Across the country, governors, state legislators and citizens, through referenda, are struggling with underfunded and inequitable school funding systems, attempting to reform archaic tax structures, and looking for non-tax revenue sources.

SCHOOL FUNDING

Arkansas

       Last November, the Arkansas Supreme Court declared the state’s school funding system to be unfair, inadequate and therefore unconstitutional.

       State and local governments combined now spend about $2.7 billion annually on public education in Arkansas.  Consultants, hired by the state, have recommended that funding be increased by about $847 million (excluding school construction) in order to meet the court mandate.

       Approaching the court mandate from a different angle, the Arkansas governor and some state legislators are proposing cost cutting through school consolidation.  Gov. Mike Huckabee has a school reform plan that would consolidate high schools with fewer than 375 students. A proposal coming out of the state senate would set the minimum school district size at 500 students.  The senate plan would result in the elimination of about 100 of the state’s 308 school districts.

       Another way being considered for funding the education reforms is a broadened sales tax to include certain services.  State finance and administration officials told a legislative committee that exemptions and exclusions from the 5.125 percent sales tax amount to about $1.5 billion of lost revenue annually.

       A special legislative session was being held during the second week of December.  During that session, House leaders released a school funding formula proposal that would increase state spending for education by $807 million, phased in over four years.  The House bill also had some tight restrictions on school district spending.   The Senate has put forth its consolidation plan in the session; however, the Senate plan has fewer controls or restrictions on school districts.  A compromise will be required in order to make the necessary legislative changes to the state’s school funding system to meet the court-ordered compliance deadline of January 1, 2004.

Nevada

       Education funding has taken an unusual twist in the State of Nevada where two provisions in the state constitution are in conflict.  One of those provisions requires the state to fund education; the other requires that tax increases be passed by a two-thirds vote of each house of the legislature.

       Last spring, the legislature passed an education budget but did not fund it.  Votes to raise taxes in order to pay for the approved budget failed in the regular session and in two special sessions afterwards.

       Following the third legislative rejection, Gov. Kenny Guinn decided to take the issue to the state supreme court.  He asked the court to force the legislature to fund the approved education budget.  By a 6-1 vote, the state supreme court not only told the legislature to fund the education budget, the justices went a step further and said that the legislature could enact a tax increase to pay for it by a simple majority vote, overriding the constitutional requirement of a two-thirds vote.

       In its decision, the court reasoned that the substantive education provisions of the state constitution should be given more weight than the procedural supermajority requirement.  “To avoid an impasse harmful to public education,” the court said, “we held that the Legislature could suspend the supermajority rule in favor of a vote by simple majority. . .  in order to fulfill its obligations to fund education and balance the budget.”

       The court rejected a request to reconsider its decision.

Kansas

       State courts are also involved in deciding whether Kansas schools are getting enough money to educate students and if state funds are being fairly distributed.

       A lawsuit, filed in 1999 on behalf of two school districts, argues that the state’s contribution of $2.6 billion toward K-12 education is inadequate, that the formula used to distribute the funds is unfair, and that the 1992 school finance law is constitutionally flawed.

       The base state aid per pupil is currently $3,863.  A nominal statewide property tax that generates about $130 on each $100,000 of home value is used to level out the disparities in school district funding.

       On December 2, District Court Judge Terry Bullock ruled in favor of the school districts.  The judge gave the governor and legislature seven months to fix the problem.

       The ruling stated that the current school funding system fails to fairly distribute education funds, fails to provide enough funds, and adversely impacts the learning of the most vulnerable children.  The judge also said there were state and federal constitutional flaws in the funding related to equal protection.  One finding in the case was that per pupil spending in districts ranged from $5,656 to $16,968.

       Immediately following the ruling, Kansas Attorney General Phillip Kline said he would “continue to fight to preserve the authority of the governor and the legislature to make policy with regards to education spending.”

Oregon

       In Oregon, the governor is saying that a property tax cap for school funding has created a “broken” educational system where local control and school board accountability are now problems.  In 1990, the citizens of Oregon approved Measure 5 which limits to 5 mills the amount of property taxes that goes to fund schools.  Gov. Ted Kulongoski recently told a gathering of county officials that this property tax cap has “weakened our local governments and damaged our economy.”

       Long-time supporters of Measure 5 rebutted the governor inferences about loss of local control by saying that while more school funds now come from income taxes rather than property taxes, school boards still make the budgetary decisions for their districts.

       Before Measure 5, the state was contributing less than 30 percent of the cost of education.  Now, state resources pay about 67 percent of the cost.

New Hampshire

       Closer to home, the state of New Hampshire has some school funding problems too.

       Six years ago, the N.H. Supreme Court ruled that disparities in funding between poor and wealthy communities in New Hampshire needed to be corrected.  After rancorous political debate, the N.H. legislature enacted a statewide property tax that has been used to redistribute taxes from richer to poorer communities for funding schools.

       The school disparity problem, or what some refer to as equal educational opportunities for students, has not disappeared.  Teacher salaries were recently placed in the media limelight.  Recent newspaper articles revealed that the average statewide teacher salary is $41,909.  The high is $58,532 and the low is $26,882 – meaning that at least one school district pays its teachers, on average, about twice what another school district pays.

       To make matters worse, the New Hampshire state education commissioner is estimating a price tag of $800,000 that he says the state will need to come up with in order to meet the testing requirements under the federally-mandated “No Child Left Behind” law.

Other States

       Texas, Kentucky, Idaho and Florida also have school budget issues that are noteworthy.

In Texas key lawmakers and administration officials have been meeting privately with representatives of the business community to discuss tax options to fund education.  Business taxes and an expanded sales tax base are reported to be on the discussion table.

       A coalition of school districts in Kentucky has filed a lawsuit contending that the state legislature underfunds public education.

       Lawmakers in Florida are scrambling to find ways to fund a constitutional provision, enacted in November 2002 by voters, that requires the state to give school districts enough money to lower class sizes over the next eight years.  By 2010, maximum class sizes would be 18 for elementary school classes, 22 for middle school classes, and 25 in high schools.

       In Idaho, two school districts have gone to four-day school weeks to accommodate reduced state funding for education.

TAX REFORM

       In just about every state, tax reform is on the political agenda, but the likelihood of legislation being enacted that will implement tax reform doesn’t match up evenly with the rhetoric.  A few states, however, faced with serious financial problems, appear to be getting seriously close to tax reform.

California

       The most populated state, California may be leading the tax reform debate.  The new governor, Arnold Schwarzenegger who was elected in November when then-Governor Gray Davis was recalled, has a plan to deal with the state’s huge financial mess.

       Governor Schwarzenegger’s two-part fiscal recovery plan includes borrowing $15 billion in general obligation bonds to pay off the state’s budget deficit and putting a spending cap on state government.  Under the spending cap plan, the governor would be authorized to make mid-year spending cuts in time of fiscal emergencies that could only be overridden by a two-thirds vote of the legislature.

       The borrowing plan and spending cap are scheduled to go before California voters in March, 2004.

       During the second week of December, the California General Assembly approved a modified version of the governor's fiscal plan.  The Assembly agreed with the $15 billion bond, but the Democrats couldn't swallow the spending cap.  Instead, they got the Republicans to go along with a plan that: (1) requires that the state balance its budget every year without additional borrowing;  (2) outlines a process to get to the balanced budget during fiscal crises where the governor would propose cuts and other adjustments and the legislature would be required to approve them, or an alternative, within 45 days; and increases contributions, based on a schedule, to the Rainy Day fund.

Virginia

       Gov. Mark Warner of Virginia has proposed what is probably the boldest and most far-reaching tax reform plan among the states. 

       Warner has been governor for two years.  Since taking office, his administration and the legislature have cut 5,000 state jobs and slashed state departments’ spending by 20 percent on average.  A $1.2 billion budget shortfall remains and the governor is convinced it can only be filled by tax changes.

       His tax reform plan includes a one penny boost in the sales tax (from 4.5 to 5.5 percent), a reduction in the sales tax on food from 4 to 2.5 percent, elimination of the car tax, and a boost in state income tax exemptions and deductions.

       In addition to telling citizens and legislators there is no where else to go for the money, the Virginia governor is also touting his tax reform plan as a fairer tax system.  Under the plan, Warner says 65 percent of Virginia households would pay less taxes.

       As with all tax reform decisions, the state legislature will either go along with it, amend it or reject it.

Indiana

       A lot of partisan bickering is taking place in Indiana over a court-ordered, statewide property revaluation.  A statewide revaluation was last conducted in 1995.  Apparently, values have fluctuated wildly since 1995 prompting the court to step in and order the statewide revaluation.  The public reaction to the statewide revaluation, effective March 1, 2002, has been intense even though many of the counties have not yet mailed their tax bills for FY 03, the first year that the new assessment were to take effect. 

       Democrats wanted to provide property tax relief to those that were expected to be most adversely affected by the revaluation.  A proposal, with no state funds to pay for it, was offered by the Democrats to give $320 million of property tax relief to farmers and homeowners, particularly for those with houses that were 50 years or older.

       The Republicans offered a bill that had no state fiscal note but made procedural changes to keep local tax rates down, such as extending the deadline for various property tax deductions and credits, clarifying how to assess rental property, and putting spending restraints on local governments and libraries (which have independent budget authority in Indiana).

       As of December 3, the House Democrats were backing away from their proposals and tacitly accepting the Republicans’ proposal.

Colorado/Oregon

       In Colorado and Oregon, voters are weighing in on tax reform issues.

       A proposal to allow property taxes on residential property to rise over the current constitutionally-mandated limit, was soundly rejected by Colorado voters on November 4.

       In 1982, the Colorado State Consititution was amended to put caps on residential property taxes.  That cap limits the amount that can be raised from residential property owners to 45% of the total property taxes collected.

       In the last 20 years, as more residential property has been built and values have climbed, businesses shouldered more and more of the property tax burden.  To keep residential taxes under the 45 percent level, assessors adjust the residential values to a percentage of fair market value.  In 1982, residential values were 21 percent of fair market value; the current level is 7.96 percent of fair market value.  Commercial property, on the other hand, currently pays property taxes on 29 percent of value.

       On November 25, opponents of recently enacted income tax increases by the Oregon state legislature submitted 147,000 signature (nearly three times the number required) to get the issue before voters in hopes of repealing these new taxes.  Personal and corporate income tax increases were enacted to balance the state budget through FY 05.  Earlier this year, voters rejected, 54 percent to 46 percent, a tax increase sent to referendum by the legislature.

       The statewide election to vote on the latest citizens’ initiative will be February 3, 2004.

FINDING OTHER REVENUES

       Casinos, gambling, lotteries…. “games of chance” are on the radar screen in many states to help balance budgets and avoid tax increases.

Iowa

       Iowa has 16 casinos that are currently a $1 billion industry in the state.  Iowa also passed a five-year moratorium in 1998 on the licensing of any new casinos in the state.  A consultant, hired recently to do an economic study on the impact of more casinos, has said that there is $200 million of untapped gambling revenue available, if the state where to lift the moratorium.

       Voters in four counties have already passed resolutions in support of new riverboat casinos.  And, the governor has said he will go along with whatever the state legislature decides.

       In a related matter, Iowa lottery officials are hoping to generate an additional $20 million annually by installing 4,000 high-tech video pull-tab machines in taverns, restaurants and fraternal clubs.  State lawmakers approved the idea last year.  Even though these pull-tab machines have similar features to slot machines (which are permitted only in casinos), the state’s attorney general has opined that they are not slot machines.

Colorado

       Proponents of a referendum question in Colorado that would have allowed slot machines at the state’s five race tracks spent $6 million promoting their cause, but lost the vote by a 4-1 margin on November 4.  Opponents of the gambling expansion spent $3.4 million.

       This year’s vote against slot machines marked the seventh time in 11 years that Colorado voters have rejected the idea of expanded gambling.  Supporters of the slot machines anteed up $50 million, to be split between tourism and open space protection, to try and soften the voters towards expanded gambling, but tactic was obviously not successful.

Indiana

       By nearly a 2 to 1 margin, voters in Orange County, Indiana, supported the construction of a casino on an artificial waterway between two historic hotels in French Lick and West Baden Springs.

       Estimates are that the casino will generate $10-$20 million a year in state and local tax revenue.

       French Lick is the hometown of Boston Celtic’s basketball legend Larry Bird, who happens to be an investor in one of the five groups vying to operate the casino.

New York

       The governor of New York and state legislative leaders are discussing ways to get more gambling revenues into state coffers.  Different Indian tribes operate casinos in New York.  Legislative compacts between the state and the tribes spell out any revenue sharing arrangements.

       In 1993, the Oneida Nation and the St. Regis Mohawk Tribe agreed to a compact with the Cuomo administration, but never got legislative approval.  Both tribes are now seeking legislative ratification of those compacts.

       Gov. Pataki is working on a deal with the Mohawks to get, over time, 25 percent of slot machine revenue.  The state already has that agreement with the Seneca Nation of Indians which operates a Niagara Falls casino.  The Oneidas have 2,100 slot machines at Turning Stone, but do not share any revenues with the state.

       It’s potentially big bucks for a state with sizeable budget problems.

South Carolina

       The governor of South Carolina wants to put its sales tax on lottery tickets.  The governor’s plan is to take the lottery ticket sales tax revenue, combine it with revenues from an increase in cigarette taxes, and use them to lower the state’s income tax from 7 percent to 5.9 percent.

       The governor’s plan has its share of critics, including the lottery commission director and some legislative leaders.  The plan has several glitches that would need to addressed, including how to deal with Powerball (a contracted lottery) tickets and gauging the impact such a change would have on lottery ticket sales and education funding which gets dedicated lottery revenues.

       The only identified state currently taxing lottery ticket sale is Minnesota.