Chapter 5

Taxation Issues





Competition for
Education Dollars

Taxpayers want
lower taxes
Agencies
agendas
Parental choice
Tuition tax credits
School vouchers
Public $$$ Public Scrutiny
Most people believe
that the correct
taxation level is
somewhat less than
what they currently
pay, & the level of
service they want is
somewhat higher than
currently exists.
The More You Understand
About School Finance
The better you can explain to your
parents & community WHY they
need to support public education
with their tax dollars.
Schools & Finance
Schools do not
operate as a for-
profit company
designed to
generate dividends
& increase stock
prices for
shareholders, such
as IBM
They are not a
professional
fee for
service
organization
like a dentists
practice

Schools Are a Public Service
Schools are a public service on a
scope & scale unlike anything else
in our society.
Paying for Education
Public schools are no longer
funded by user fees or tuition
In fact, the United States Supreme Court has
repeatedly indicated that public education must be
free of tuition
Education services are not sold to consumers
based on price points derived by economists
.
A Tax Primer
The purpose of a tax is to pay for a
government function
A tax should be equalized
The government should have a formal
mechanism to calculate a lower cost to
those who can least afford the service &
have a higher cost to those who can most
afford the service.
Taxes = Operating Revenue
In a public service company like
education, taxes are the operating
revenue.

School Finance Issues
Understanding school finance
vocabulary & concepts is the first
step in understanding school
finance issues.
Understanding Tax Terms
That Underlie School Funding
Issues

Tax Equalization
Floor of
Services
Property Taxes
Historical View









Tax Categories
Stock of Wealth
Flow of
Production
Capacity & Effort
Equity v. Equality
Understanding Tax Terms
That Underlie School Funding
Issues, cont.






Stock of
Wealth
Flow of
Production
In Rem

Ad Valorum
TAXES ON:
In Personam

Ad Valorum
Tax Structures:
Proportional
Regressive
Progressive
Understanding Tax Terms
That Underlie School Funding
Issues, cont.
Tax Revenue Sources:
Property
Income
Sales
Lotteries
Severance
Corporate
Sumptuary


Tax Equalization
Tax equalization tends
to make the most
needed services more
affordable to those
who are least able to
pay
Taxes have the effect
of redistributing wealth
at the local, state, or
federal levels.




This equalization
tends to level the
playing field as we
invest in human
capital

Taxes Should be Spread Out
As Much As Possible
A federal service --
defense -- should be
spread out over the
entire country
A state service--
education -- should be
extended over the
entire state
A local service -- a city
or county park -- should
be distributed over the
entire locality

Legal & Moral Reasons
Require Equalization of Funds
Dispersing educations tax bill over the
entire state allows smaller, remote, or
economically-disadvantaged localities
with little local wealth to provide a
quality education for its citizens.
People Dont Want to
Give $$$$ Away, but

Our country holds a
moral & legislative
imperative that wealth
must be redistributed,
in part, to promote
equity of educational
opportunity and
democratic citizenship.


Without this Resource

Reallocation, poverty & ignorance would
spiral downward, reaching a critical
mass that would ultimately restructure
our society to a lower standard of living
& general well-being, increase
deprivation, & foment civil unrest.
Taxation Supports U.S.
Freedoms & Lifestyles
Taxation perpetuates our
democratic government,
permits our comfortable
lifestyles to continue, & allows
all educated individuals
regardless of race, ethnicity,
gender, age, or creed to
participate in
the good life.

Paying for the
Floor of Services
The tax burden must be spread
over as large a group as possible
Each state has established a
minimum floor of educational
services that localities must
provide
With the No Child Left Behind
Legislation of 2001, the federal
government is ratcheting up the
floor level of services
Equalizing Wealth Lets
All Meet the Standard
Wealthy localities
may have no
problem meeting
these standards
Poor localities may
be unable to meet
the required levels
of increasing
progress
The state, therefore,
has a legal
responsibility to help
redistribute monies
or equalize funding
to help less wealthy
localities meet these
educational
benchmarks

Property Taxes
In the U.S., states
rely primarily on
property tax
revenues for the
majority of their
income to operate
schools.
Brief History of Property
Taxes Funding Public Schools
Massachusetts Law
of 1647, Ye Olde
Deluder, Satan Act
Property owners
taxes were used to
hire a teacher in
towns of 100
The communitys
sons & servants
could be educated
Property was Taxed Because It was How
Most People Earned Their Living
A farmer made his living from the land
A merchant earned money from goods sold on his
property
A carpenter sold furniture made in a workshop on his
property
Not All These Transactions
Were Cash Sales
Many items were
bartered or traded
as a money
substitute.
Property Taxes Were a
Realistic Proxy for Measuring
Income

It was logical, then,
for government to
tax property
because that
property was the
basis for making
ones income.

Todays Property is NOT a
Source of Wealth

Today, for many of us,
our homes represent
more of a revenue
drain than a
revenue source
a stock rather than a
flow of accumulated
wealth.


Two Tax Categories
Taxes levied on the
flow of production or
services, i.e.


Personal income taxes
Corporate income
taxes
Retail sales taxes
Taxes levied on the
stock of wealth:



This wealth has ceased to
move in the flow of
production
It has become an asset of
the individual or the
company
Taxes Levied on the
Stock of Wealth
Property, as measured in our home
valuation, is therefore a stock of wealth.
Taxing property is taxing an individuals
or companys portion of wealth.
Ad Valorum Tax





Ad Valorum means a
portion of the value.

Property taxes are
known today as an
ad valorum tax
because a portion
of the assessed
value of the home
is taxed to support
a service.



In Rem Taxes
In rem taxes
include those that
are imposed on
things such as
machinery, cars,
and houses
These taxes are
based on the value
of the thing being
assessed
In rem taxes do not
consider whether an
individual owns the
thing free & clear
or whether the
thing is bought
entirely on credit


In Rem Taxes - DISadvantage
Individuals may pay
taxes on items they
do not really own &
cannot claim as an
asset
While they have the
taxable item, the item
may not actually be
theirs the bank may
hold the title

.

In Personam Taxes are
Imposed on People
The best example of
in personam taxes
are those imposed
on peoples earned
income
Personal income
determines the
amount of tax to be
paid

If you have
$100,000 salary,
you are WORTH
$100,000 of
tangible value ---

In Rem vs. In Personam Taxes
In Rem Taxes
$100,000 house
0 (zero) assets
$100,000 liability
0 (zero) net
worth
This is NOT a
realistic indicators
of your wealth
In Personam Taxes

$100,000 income
$100,000 net
worth
This is a better
indicator of your
wealth



Funding Education
Each of these types of taxes is used to
generate funding for public services
such as education.
It is important for educators to know
what types of taxes support their funding
& what taxes are more generally favored
by the public.
The different types of taxes can have
different effects on taxpayers.
Tax Structures
Under the proportional
taxes, each income group
has the same percentage
rate of tax to pay 10%
In the regressive tax
structure, the lower income
individuals pay a greater
percentage of their income in
taxes than do the upper
income individuals
In the progressive
scenario, the lower
income individuals pay
a lower percentage of
their income than do the
upper income. As
income increases, so
does the percentage of
taxes paid

Proportional Taxes
A proportional tax
requires the same
percentage from each
persons income
A sales tax is an example
This tax affects the less
wealthy persons more
heavily than it does the
richer ones
The amount taxed on any
item is the same dollar
amount for each, but it
represents a larger share
of the less well-off
persons financial
resources

4.5%
Sales
Tax
Proportional Sales Taxes can
be Regressive on Individuals
Poorer people tend to
spend a greater %age of
their income on basic
living cost items
Food, Clothing
Shelter, Transportation
in contrast to those at the
higher income levels.

Proportional Sales Taxes,
cont.
The spending habits of two
families with incomes of
$50,000 and $75,000 may
differ significantly.
The basic necessities of
life bread, milk, and
butter, for example differ
little in quantity purchased
by a family of four at these
income levels.
Example: Proportional Tax --
Regressive Effect
Groceries for a family of 4
(2 teenagers) might cost $200/week
A sales tax of 4.5% would be $9/wk
Over 1 year, the sales tax on
groceries would total $468
For a family with an income of
$100,000/yr. = .468% of income
For the same family (same eating
habits) earning $50,000/yr., sales tax
on groceries = .936% of income
Proportional Sales Taxes Tax
the Wealthier, Less
The family with the
higher income
level spends a
lower percentage
on the sales tax
related to these
items.
But Proportional Sales Taxes
Tax The Less Wealthy, More
The family with the
lower income
level spends a
higher
percentage on
the sales tax
related to these
items.
Regressive Taxes
A regressive tax
requires those with
higher incomes pay
lower percentages of
their income.

Social security
taxation system
At the beginning income
levels all individuals pay
7.65% of their income in
FICA tax
FICA taxes are not
collected after ones income
reaches $68,400
Regressive Taxes, cont.
FICA* is a
regressive tax.

An individual earning
$68,400 would pay
$5,232.60 each year in
FICA taxes.
An individual earning twice
that rate, or $136,800,
would pay the same FICA
tax amount or 3.825% -
1/2 the % of income
that the $68,400
earner would pay!!
*FICA - Federal Insurance Contributions Act
Progressive Taxes
Progressive taxes
are those that increase
as a percentage along
with income
Federal income taxes
are designed to be
progressive
Tax Brackets 2002 Taxable Income







$0$12,000

$0$6,000

10.0%

12,00046,700

6,00027,950

15.0

46,700112,850

27,95067,700

27.0

112,850171,950

67,700141,250

30.0

171,950307,050

141,250307,050

35.0

307,050 and up

307,050 and up

38.6

Joint Return
Single Taxpayer
Rate


Individual Taxes Paid Taxes as a
Income % of Income

Proportional Taxes
1 $10,000 $1,000 10%
2 $50,000 $5,000 10%
3 $100,000 $10,000 10%
Regressive Taxes
1 $10,000 $500 5%
2 $50,000 $2,000 4%
3 $100,000 $3,000 3%
Progressive Taxes
1 $10,000 $300 3%
2 $50,000 $2,000 4%
3 $100,000 $5,000 5%





Illustration: Proportional, Regressive, & Progressive Taxes

Examples of the 3 Tax Classifications
taxes
are generally considered to be
progressive
while taxes
are considered to be
regressive.
Property Taxes

Property taxes are the primary source of
revenue for financing education
This tax would be referred to as an ad
valorum tax because it taxes a portion or a
percentage of the propertys value
Mills are the tax rate on a certain portion of
the assessed value of a home

Property Taxes, cont.

Property taxes are supposed to be
proportional


but have the effect
of being regressive

Property is Taxed in Mills
Property taxes are
frequently expressed
in terms of mills
A mill is a unit of
monetary value equal
to 0.001 of a dollar or
one tenth of one cent
The method for
determining the tax
rate is as follows:


Rate =
Amount of Tax
Revenue to be
Raised
Tax Base or
Property Value

Taxing in Mills
According to this formula, if there is a
total value of $500,000,000 of real
estate in a locality and $5,000,000 in
taxes needed to be raised for services,
the formula would look like this:
$5,000,000
$500,000,000 = 1.0 % or 10 mills


Mills Are the Tax Rate on a
Portion of a Homes Value
Most frequently, the tax rate
is expressed as a dollar
figure based on 100% of the
assessed homes value
For example, the tax rate may
be $1.50 per each $100 of
homes assessed value
Property Taxes
Have a Down Side
1. Property taxes
are seen as a
threat to the
American Dream
of home
ownership
2. Taxing a homes value
is taxing unrealized
profits the owner
would have to sell the
home to get the
assessed monetary
value versus the price
that was paid. It is a
paper profit until the
home is sold

Property Taxes are
Costly to Administer
1
st
, locality needs a system to
inventory all the localitys property
2
nd
, personnel must make periodic
physical assessments of the property
3
rd
, locality needs a system of
appeals for contesting valuation
4
th
, tax bills must be sent out &
collected
5
th
, locality needs a system to collect
delinquent taxes


Fair Market Value is
Difficult to Calculate
Realtors use a comprehensive market
analysis to determine a homes correct
selling price
A 3 bedroom, 2 bath brick rancher on a
1/2 acre lot on one side of town may have
a greater value than the same house on
another side of town or in another
neighborhood
Comparing assessments generally brings
confusion & anger


Property Taxes Per Capita,
2002, Selected States
State Property Tax Rank
Per Capita
Alabama $ 273 50
California $ 767 31
Virginia $ 838 24
Illinois $1,163 10
New York $1,361 4
New Jersey $1,761 1

Property Taxes Incite
Public Interest
Since the majority of property taxes
support schools, it is logical for the
taxpayers to voice their frustration over
tax bills with the schools

Tax Capacity - Introduction
Capacity is the ability to pay for
goods and services
There are approximately 15,000
school systems in the United States
The variance in each
communitys wealth is great
The wealth or tax base behind each of these
school systems to finance the educational
program is known as fiscal capacity

Personal Income is a Better
Measure of Wealth
For example, an income of $100,000 per year
is a better measure of wealth than a home of
the same value
The home may or may not have a mortgage.
In some cases, individuals finance 100% of
their home through a mortgage
They have accumulated no net worth in their
home it is an unrealized asset a paper
profit not to be realized until it is sold

Capacity: Contributors to
an Areas Wealth
Personal income
Real estate taxes
Sales taxes
Corporate income
taxes
Lotteries & other
gambling
Other revenues

Capacity: Contributors to
an Areas Wealth, cont.
Capacity & cost of
living vary from
locality to locality,
state to state, region
to region & nation to
nation.


Fiscal Effort Introduction
Fiscal effort
means putting your
money where you
say your priorities
are
A state or locality can
have a great deal of
capacity to fund
education and may
elect not to do so
On the other hand, a
state or locality can
have limited capacity
and apportion a great
deal of effort into
funding education
Factors Influencing Effort
Many factors
determine the
level of fiscal
effort the public
is willing to
provide for
education
History of effort, attitudes
toward taxes
The overall taxation structure
The percentage of students
attending public versus private
schools in the area
The percentage of the
population with school-aged
children or grandchildren in the
area
Effort
Effort may be
defined as the level to
which a governmental
entity uses its capacity
to support public
education.
A simple formula for
determining fiscal
effort is:

Fiscal Effort =
Revenue Collected
for Education


Overall Tax Base
(Capacity)
Effort Equalizes for Capacity
When Comparing Expenses
It would be unfair to compare a locality,
state, or nation with others by education
expenditures, alone & draw conclusions
except how wealthy a locality, state or nation is
Effort is a vehicle to determine how much of
a priority education is within some
jurisdiction


Equity An Introduction
Equity has been at
the core of school
finance reform
efforts & court
decisions since
1976s Serrano v.
Priest decision
from the California
Supreme Court
Basically, the court found
that while Californias system
for financing education did
tend to equalize funding
among the school districts,
the system also generated
revenue proportional to the
wealth of the school and the
school district. Such
funding violated the idea
of equity.

Equity v. Equality
Equity can be defined as a fairness
issue both for students and for
taxpayers
Equity should not be confused with
equality
Equity is providing for what students
need while equality is providing the
same for all students
An Equity Scenario
Two relatively similar
school systems have
roughly the same level of
capacity to fund education
& the same number of
students, about 10,000
Both receive about the
same funding from the
locality and the state
Both school systems draw
from upper middle class
neighborhoods
School System A
School System B
An Equity Scenario, cont.
School System B School System A
10% of its students identified
as eligible to receive special
education services.
20% of its students eligible
to receive special education
services .
Equality OK financing to meet needs of these 2 schools systems
Equity NOT OK. School System Bs students needs are
greater than School System As. School System B must spend more
funds to meet the identified special education populations needs
than does School System A.
Income Taxes 2
nd
Major
Source of State Income
State Per Capita Rank
Personal Income, 2000
Mississippi $ 20,856 50
S.Carolina $ 23,952 40
Vermont $ 26,904 30
Illinois $ 31,842 10
California $ 32,225 8
New York $ 34,502 4
Connecticut $ 40,870 1

U.S. Income Taxes
Single Taxpayer
If Taxpayer Income is: Tax Rate is:
Between But Not More Than
$ 0. $6000. 10%
$ 6000. $26,250. 15%
$ 26,250. $63,550. 27%
$ 63,550. $132,600. 30%
$132,600. $288,350. 35%
$288,350. ------ 38.6%
U.S. Income Taxes
Joint/Married Taxpayer
If Taxpayer Income is: Tax Rate is:
Between But Not More Than
$ 0. $12,000. 10%
$ 12,000. $43,850. 15%
$ 43,850. $105,950. 27%
$105,950. $161,450. 30%
$161,450. $288,350. 35%
$288,350. ------ 38.6%
Sales Taxes
Sales tax revenues (from all sources,
not just retail sales) generated
approximately $290,993,000,000 in the
United States in 1999
Gasoline
Utilities
Telephone
911 services
Other
Lotteries & Legal Gambling
Government-
sponsored lotteries
are a legal form of
gambling
Sells chances to win
a prize
When a government
sponsors a lottery, it
may be considered a
voluntary tax
Lotteries & Gambling: Revenue
Sources for Education
When a lottery
winner claims the
prize, the state
and federal
governments
collect income
taxes

Lotteries & Legal Gambling
Legal gambling in the United States
grossed more than $50 billion in 2000
That amounts to $180 for every man,
woman, & child in the country
Legal Gambling Revenue
by State, 2000
State Gross Revenue $ Per Capita Rank
(in millions) Revenue
Oklahoma $ 62 $ 18 40
Rhode Island $ 298 $ 285 30
California $ 2,629 $ 78 6
Illinois $ 2,680 $ 216 5
New York $ 2,739 $ 144 3
New Jersey $ 5,451 $ 648 2
Nevada $ 9,632 $ 4820 1

Severance Taxes
The Department of
Commerce defines it as
taxes imposed distinctively
on removal of natural
products e.g. oil, gas,
other minerals, timber, fish,
etc. from land or water
and measured by value or
quantity of products
removed or sold.
Severance Taxes, cont.
This tax is quite lucrative
for some states, but
overall, accounts for less
than 1% of all states
revenue
Some states collect no
revenue from severance
sources while others
collect a substantial
amount of taxes
Per Capita Severance Tax
Revenue for Selected States
State Per Capita Revenue Rank
Alaska $ 856.33 1
Wyoming $ 604.76 2
New Mexico $ 244.71 3

Indiana $ .09 48
Illinois $ .02 49
Missouri $ .01 50

Corporate Taxes
The corporate income tax began at the
federal level in 1909
Congress levied it as an excise tax for
the privilege of doing corporate
business
Corporate income taxes once generated
approximately 1/4
th
of all federal
revenue. Today, it accounts for less
than 10% of federal revenue
Corporate Taxes, cont.
Corporate
income taxes
are calculated
on:
Sales revenue less
production costs,
interest or rent
payments
Depreciation on capital
equipment and
facilities
Any state or local
taxes paid

Corporate Taxes:
A Double Taxation?
This tax has an impact
on the price of many
stocks and pension plans

The higher the corporate taxes, the
lower the stock dividends or stock
appreciation to investors or the
higher the retail price of their goods
and services to end consumers
Corporate Taxes &
Education Funding
Where there are thriving businesses:
People are employed paying income taxes
More purchasing and maintaining homes
that generate property taxes
More buying goods and services that
generate sales taxes
This is a healthy cycle for a local economy
that will have greater capacity to fund
public education

Sumptuary Taxes
Sumptuary taxes are those imposed by
a government to help regulate or
control activities that are seen not to
be in the best interest of the public
They are sometimes referred to as sin
taxes
Sumptuary Taxes, cont.
Smoking and drinking
are deemed not to be
in the public interest
Governments then
regulate their activity
by taxing them at
varying rates above
and beyond the sales
tax
A Conundrum for Educators
We receive some of our school
operating revenue from the sale of
substances that we teach our students
are harmful to them
Without this revenue, however, our
funding (already too low) would be
further reduced
Measuring Tax Impact
Funding for education should be a
national priority
The tax impact to fund education
needs to be equitable
In a climate of high stakes testing &
high levels of accountability for
educators & students, resources are
sorely needed in our classrooms
Urgent Need
for More Resources
The No Child Left
Behind (NCLB)
legislation with
required Adequate
Yearly Progress
(AYP) goes into full
effect in 2014
Making AYP for all
students will require
additional funding for
professional
development,
supplies, remediation
for students
especially in poor
urban schools

Securing More Taxes to
Support Public Schools
Taxpayers must see
their extra tax dollars
impact with positive
results in the schools
Educators must & will
be held accountable for
results
Results include:
Higher student
achievement levels
Increased public
satisfaction with their
school system
Customer friendly
schools for students &
the community

Diminishing Marginal Utility
Utility means satisfaction
Consumers try to maximize their
satisfaction when using their income to
buy goods & services
Buying ONE unit of a novel & desired
item brings HIGH satisfaction
Buying MORE units brings LESS
satisfaction
Diminishing Marginal Utility,
cont.
Buying ONE unit of a novel & desired
item brings HIGH satisfaction



Buying MORE units brings increasingly
LESS satisfaction
Diminishing Marginal Utility,
cont.





U2


U1

1 2 3 4 5

U4
U3
U5
Quantity
Marginal Utility & Taxes
Citizens are proud
of the new roads,
new schools, &
accomplishments
of the school
district
As taxes rise, however,
and consume a larger
%age of income, the
utility or satisfaction
with paying taxes tends
to decrease unless
citizens see that the
cost brings utility for
them in some way
Marginal Utility & Taxes, cont.
People will only be willing to pay taxes
for schools as long as they see it has
utility for them
It is the job of all educators to make
certain that the tax-paying public sees
educational utility in a personal way that
makes sense to them

Indicators of a GOOD Tax
Good taxes have utility & make sense.
Fairness of the Tax System
Everyone pays something
Economic Neutrality
Adequacy of Yield
Administration Costs
Convenience of Payment
Visibility of Benefit
Fairness of the Tax System
A fair tax structure has
a greater burden on
the rich than on the
poor
Virtually all agree that
a regressive tax
system is unfair

Fairness is often in
the eye of the
beholder
Everyone Pays Something
All citizens enjoy the
benefits of government
Police protect
Teachers teach
Fire fighters fight fires
Soldiers defend
Roads transport
All citizens contribute
something to the
common good
Economic Neutrality
Ideally, taxes should
leave individuals in the
same relative position
after taxes as before
paying taxes
Everyones relative
position is maintained
in spite of taxes
As taxes are
diversified through
income, property,
sales, lottery,
sumptuary, & the
like, we lessen the
non-neutral impact
of any one tax

Adequacy of Yield
The cost of
administering a tax
should not exceed
the revenue
generated by that
tax
If a bridge were built
and a toll placed on
the bridge to pay for
the construction, the
toll should pay for
the bridge & the
means of toll
collection
Administration Costs
The cost of administering &
collecting the tax should be low
The income tax is collected with much
greater efficiency than is the property tax
Your company deducts your income tax &
sends it to the proper state authority.
Minimum personnel are involved.
Property taxes, on the other hand, require
a much more personnel-intensive
collection operation
Convenience of Payment
A good tax is one that is convenient
for the citizen to pay
If the public must stand in line for hours,
shuffle from one office to another, &
face arrogant, rude government
workers, tax utility is lost
Visibility of Benefit
People need to SEE the obvious
value their tax dollars bring.

YOUR TAX
$$$$s
At Work