States Fumble School-Funding Ball

LAST year, Kalkaska, Mich., became a symbol for the woes of American public education. After voters rejected property-tax increases three times in a row, school administrators said they had run out of money and closed schools for the summer in March - three months ahead of schedule.

Although it was criticized as a ``union stunt'' intended to blackmail reluctant voters into raising taxes, Kalkaska residents have voted against raising local property taxes twice more in the past year.

Now the state has stepped in and is leading the nation in a renewed debate about public-school funding. Last summer, the Michigan legislature eliminated the property tax as the main source of education funding for its 3,286 schools. That meant a loss of nearly $7 billion or 62 percent of the money used to educate Michigan's 1.6 million schoolchildren.

In a statewide referendum two weeks ago, voters approved a plan to replace those funds by increasing the sales tax and tripling the state cigarette tax. Given a choice between raising the sales tax or the income tax, Michigan residents voted overwhelming-ly to increase the sales tax from 4 percent to 6 percent. Voters had rejected five previous sales-tax increases since 1978 and had turned down seven other plans for dealing with property-tax funding for schools since 1972. But this time a vote against the sales tax was a vote for the backup plan - an automatic increase in income taxes. Republican Gov. John Engler, who faces reelection this fall, campaigned aggressively for the sales-tax option. But House Speaker Chris Hertel (D) of Detroit calls the funding mix ``risky, unstable, and cyclical.''

The Michigan Treasury Office estimates that the plan, which goes into effect May 1, will generate more than $2.1 billion a year. The 75-cent-per-pack cigarette tax is expected to raise an estimated $350 million a year, and property owners will receive about $1.9 billion in tax reductions.

The new plan promises each school district a minimum of $4,200 per pupil from the state next year. The goal is to equalize spending in rich and poor school districts. Kalkaska now spends about $3,800 per pupil while the wealthy Detroit suburb of Bloomfield Hills spends more than $10,000 per pupil.

Nationwide, property taxes have been the chief source of local school funding since the 1820s. But such funding systems have long been criticized for exacerbating financial inequities between school districts.

``If you remain dependent on the property tax you end up with larger and larger differences,'' says Alan Hickrod, director of the Center for the Study of Educational Finance at Illinois State University in Normal, Ill.

Affluent, property-rich towns take in far more revenue than property-poor communities, and that shows up in the resources and facilities available to public-school students.

Property taxes do have advantages, however. ``The property tax isn't inherently bad,'' says Mary Fulton, an education-finance expert at the Education Commission of the States in Denver. ``It's a great resource in that it's easy to collect and generates a lot of revenue.''

``The property tax is a stable, robust revenue source that's been around for many years,'' adds Allan Odden, director of the Consortium for Policy Research in Education at the University of Wisconsin in Madison.

The first challenges to property-tax funding of education came in the late 1960s. But when the United States Supreme Court turned away lawsuits challenging school funding inequities in 1973, the battle moved to the states.

Since 1989, courts have declared the financing systems in eight states inequitable and unconstitutional. ``We've seen an incredible resurgence in equity lawsuits in the last five years,'' Ms. Fulton says. Suits are still pending in 28 other states.

``When these constitutional challenges win, the result is usually to do what Michigan is doing - go away from the property tax and over to a sales or income tax,'' Mr. Hickrod says.

But Michigan's move may be the beginning of a shift toward more proactive legislation on the issue. ``Michigan just pushed this through the door,'' Fulton says. ``We're seeing a number of states following Michigan's lead and significantly reducing the reliance on property taxes for education funding.''

The move away from property-tax funding worries some educators. ``What happens if the sales tax declines one year and there isn't enough money?'' asks Doyle Disbrow, superintendent of schools in Kalkaska. ``As a superintendent, I'd like to know where revenue is coming from in the next five years, for planning purposes.''

On the other hand, taxpayers want more accountability from the schools. In the past three decades, per-pupil spending has increased 205 percent after inflation. Yet many students are graduating from high school unable to find jobs or to succeed in college.

Tax revolt

Following the 1992 election and Ross Perot's ``take back your government'' message, many voters are feeling emboldened. ``This is part of the fallout,'' Fulton says. ``The taxpayers are not sure how the education money is being spent or how that translates into quality.''

Taxes imposed by state governments nationwide are expected to ease this year for the first time since 1985, according to Steven Gold, director of the Center for the Study of the States in Albany, N.Y. Lower taxes in some form are expected in almost half the states.

The property tax has always been the least-popular tax, Mr. Odden says. States like Oregon and Nebraska have already introduced property-tax relief in the last few years.

During the past decade, as property-tax rates have increased faster than both inflation and growth in personal income, public outrage has been building. ``We're getting the 1990s version of a property-tax revolt,'' Odden says. ``There is a lot of this unrest nationally. You see the crescendo in Michigan, but at a general level it is indicative of what is happening in many other states.''

Nationwide, a volatile mixture of anger over rising property taxes and outrage about the low performance of public schools is producing a flurry of activity. A number of states are considering significant changes in how they raise funds for education, according to Terry Whitney, an education-policy specialist at the National Conference of State Legislatures. For example:

Wisconsin: Across Lake Michigan, the Wisconsin legislature has approved two proposals to limit property taxes for schools in the past month. ``It certainly has raised discussion in the state,'' says Julie Underwood, a professor of educational administration at the University of Wisconsin in Madison. She views the property tax as an ``antiquated system'' for funding education that deserves rethinking. ``It makes good sense to decouple the property tax and schools,'' Professor Underwood says.

Rhode Island: Last month, the Rhode Island Board of Regents approved a $265 million measure designed to minimize the state's reliance on property-tax funding for schools. The legislature and the governor are reviewing the proposal, which calls for a uniform tax rate for all communities.

Vermont: Last month, the House passed a plan to replace local property taxes with local income taxes and a statewide tax on nonresidential property and vacation homes.

South Carolina: Legislation has been proposed to roll back property taxes for school operations by 100 percent over four years.

New Jersey: A coalition of education advocates and interest groups will soon propose a finance reform plan to the governor and the General Assembly.

Minnesota: Last year the legislature created the Coalition for Education Reform and Accountability to rethink the financing of education. A plan is expected by the beginning of next year.

Illinois: State comptroller Dawn Clark Netsch, who won the Democratic gubernatorial primary two weeks ago, ran on a plan to change education aid. The state's share of education funding has fallen from 48 percent to 33 percent during the past 17 years. As the state contribution decreased, school districts compensated by raising property taxes. Ms. Netsch proposes increasing the personal income tax by 42 percent and lowering property-tax rates, raising $1 billion for education.

The net effect of property-tax rollbacks is an increased burden on state funding for education. This trend has been gradually taking place for several years. ``There's been a slow movement away from the property tax and over to the sales and income tax for quite a while,'' Hickrod explains.

In 1972, more than 50 percent of education funds came from local sources, with the state providing 41 percent and 8 percent coming from federal sources. Today, the national average is 46 percent from local sources, 47 percent from state sources, and 7 percent from federal sources.

New Hampshire has the highest level of local support at 89 percent and New Mexico the lowest level of local funding at 11.2 percent, according to the Education Commission of the States.

Odden sees a cycle of tax revolt in American society. ``Our trend in the United States is, we pick one level [federal, state, or local], push up revenues, people revolt, and then we switch to another level. It's like an ebb and flow. This is about the third round of property-tax revolts that I've been through. We have them about every 10 years.''

To see how this plays out over time, Odden suggests looking at California, where a 1971 school-finance ruling required the state to equalize spending among school districts, and the passage of Proposition 13 in 1978 capped property taxes. The state now pays 61 percent of education costs, and average per-pupil spending has fallen dramatically. While California once ranked among the most generous states on per-pupil spending, today it is among the lowest spenders.

``California is now equal and inadequate,'' Odden says. ``If the proposal is to get the local school districts out of the business of raising money for schools and put it all on the back of the state, it's a great recipe for lowering state [contributions to schools] over time.''

Hickrod agrees that a move away from local property taxes means that the state may not be able to provide adequate funds for schools. But, he says, ``some generalizations that hold for California may not hold at all for another state.'' He remains convinced that the only way to resolve the problem of funding inequities is to move away from the property tax.

Eroding local control

Another politically sensitive issue involves the long American tradition of local control of schools. ``What we're trying to balance here is equity - for both pupils and taxpayers - and local control over the money raised and spent on education,'' says Fulton, the Education Commission of the States expert.

In Michigan, affluent residents of Bloomfield Hills do not like the idea of lowering their per-pupil spending so that Kalkaska can raise its level of spending.

Time will tell if voter anger about losing local control takes precedence over anger about rising property taxes. ``When it comes to pocketbook issues, the property tax is awfully unpopular,'' Hickrod says. ``On a tradeoff, the voter would probably go for property tax relief and not local control.''

``Local control is put forth like a sort of theology,'' Odden says. ``But the fact of the matter is that even if they are not raising money, locals have still got a gargantuan agenda - setting standards and policy.''

Most education experts agree that there is not going to be an influx of new money for education in the short term. ``There's just too much competition out there and too much resistance,'' Fulton says. ``So part of the equation has got to be how we're using resources to improve results. School districts will have to build a better case for why they need more money, because the politicians and the public are just not willing to provide more money with no questions asked anymore. That was the 1980s; this is the 1990s, and it's a different game.''