PAYING FOR PUBLIC EDUCATIONChapter 7 in Guthrie

DR. LEN ELOVITZ

TLWDTAT;

DESCRIBE THE CHARACTERISTICS OF TAXES AND DISCUSS THEIR USE TO FUND PUBLIC EDUCATION

WHERE DO SCHOOL DISTRICTS GET THE MONEY THEY NEED TO OPERATE? FEDERAL AID

WHERE DO THEY GET THE MONEY? STATE AID

WHERE DO THEY GET THE MONEY? GRANTS

FROM WHOM? PROPERTY TAXES OTHER?

HOW DO YOU DETERMINE THE AMOUNT TO BE RAISED BY DISTRICT TAXES? A = B – OI

AMOUNT TO BE RAISE = BUDGET – OTHER INCOME

POWER TO TAX FIRST PUBLIC SCHOOL LAW

MASSACHUSETTS BAY COLONY YE OLDE DELUDER SATAN ACT (1647)

US CONSTITUTION Section 8 of Article 1 “The Congress shall have the power to collect and lay

taxes… provide for the common defense and general welfare of the United States.”

US Supreme Court Shaffer v. Carter States have taxing power “… in order to defray

government expenses.” Local Government is given power to tax by the state

Foundation of Government Taxation

Ability to Pay Use of Services

Primary tax bases Wealth Income Consumption Privilege

WHAT IS TAXED? WEALTH – REAL PROPERTY, PERSONAL PROPERTY, ESTATE 

INCOME – A PORTION OF THE MONEY EARNED BY AN INDIVIDUAL OR BUSINESS OVER APERIOD OF TIMR

CONSUMPTION - APPLIES TO COMMODITIES PURCHASED 

A. SALES TAX – GENERAL (exemptions i.e. Food) B. IF IT APPLIES TO A CLASS OF ITEMS, IT IS AN

EXCISE TAX - GASOLINE , CIGARETTESC. GAMBLING

PRIVILEGE – PERMIT INDIVIDUALS OR BUSINESSES TO

ENGAGE IN CERTAIN ACTIVITIES OR USE PUBLIC FACILITIES - LICENSES, FEES, REGISTRATIONS

Criteria for Evaluating Taxes

YIELD EQUITY NEUTRALITY ELASTICITY ADMINISTRATIVE BURDEN

YIELD 1. EQUALS BASE TIMES RATE - Y=B X R  YIELD = BASE TIMES RATE $10,000 = $100,000 X 10% 2. VOLUME A. IF SMALL, HIGH RATE NEEDED TO YIELD MORE $ B. IF LARGE, HIGH RATE YIELDS MANY $   C. COMPARE - EXCISE TAX ON CIGARETTES

WITH BROAD BASED INCOME TAX

EQUITY FAIRNESS

ALL SHOULDCONTRIBUTE TO SOCIETY AND BE TREATED IN A UNIFORM WAY

EQUITY - BENEFIT RECEIVED PRINCIPLE TAXES BASED ONUSAGE   A. POLICE COST?   B. EDUCATION?

GASOLINE TAXES FOR HIGHWAY REPAIRS – TOLLS?  

TOBACCO TAX FOR CANCER RESEARCH  

SHOULD ALL TAXES BE THIS WAY?    

ABILITY TO PAY PRINCIPLE

1. TAXPAYERS PAY IN ACCORDANCE WITH THEIR ECONOMIC CAPACITY TO SUPPORT SERVICES

  2. INCOME HAS BECOME THE BEST MEASURE

OF ABILITY

EQUAL-SACRIFICE PRINCIPLE

1. PEOPLE WITH HIGHER INCOME ARE EXPECTED TO NOT ONLY PAY MORE BUT A HIGHER PROPORTION OF THEIR INCOME IN TAXES

  2. THE REDUCTION OF INCOME BY A GIVEN

TAX CREATES A GREATER BURDEN ON PEOPLE WITH LESS MONEY

HORIZONTAL – EQUITY PRINCIPLE TREAT EQUALS EQUALLY  

A. SAME AMOUNT OF INCOME PAYS THE SAME - IS THIS WHAT HAPPENS?

  B. SAME AMOUNT OF PROPERTY PAYS THE SAME -

IS THIS WHAT HAPPENS?

VERTICAL – EQUITY PRINCIPLE DIFFERING AMOUNTS OF TAXES FROM

INDIVIDUALS WHO HAVE DIFFERING ABILITIES TO PAY

TAXPAYERS WITH HIGHER INCOMES PAY MORE TAXES

MORE IN TAXES AND A HIGHER PROPORTION OF INCOME

NEUTRALITY   1. DOES NOT ALTER AN INDIVIDUAL’S OR BUSINESS’S BEHAVIOR IN

RESPONSE TO THE TAX

2. AN EXCISE TAX THAT RAISES THE COST OF PRODUCTS MAY CAUSE A SHIFT IN CONSUMER PREFERENCE.   A. NY SALES TAX   B. SIN TAXES   C. BUSINESS LOCATIONS   D. TARIFFS ON IMPORTS 3. ABANDONED PROPERTY IF TAXES GET TOO HIGH

ELASTICITY STABILITY OR FLEXABILITY OF A TAX’S YIELD IN RELATION

TO MOVEMENTS IN THE ECONOMY

1. ELASTIC - A TAX WHOSE YIELD INCREASES AT A FASTER RATE THAN ECONOMIC GROWTH - SAY THERE IS AN EXCISE TAX ON CARS – ECONOMY GROWTH LEADS TO AN INCREASE IN PURCHASING MORE AND MORE EXPENSIVE CARS THEREBY INCREASING THE YIELD

  2. INELASTIC - - A TAX WHOSE YIELD INCREASES AT A

SLOWER RATE THAN ECONOMIC GROWTH - SAY THERE IS AN EXCISE TAX ON SOAP – ECONOMY GROWTH DOES NOT LEAD TO AN INCREASE IN PURCHASING OF SOAP AND THERE IS NO INCREASE IN THE YIELD

ADMINISTRATIVE BURDEN THE COST OF TAX ADMINISTRATION AND

COMPLIANCE

1. HOW MUCH DOES ADMINISTRATION EAT INTO

YIELD? TOLLS   2. HOW MUCH DOES IT COST TO COMPLY –

ACCOUNTANTS.

IMPACT V INCIDENCE

1. IMPACT – THE ACTUAL TAXPAYER – INDIVIDUAL OR BUSINESS

  2. INCIDENCE - THOSE INDIVIDUALS WHO ULTIMATELY

BARE THE BRUNT   3. EXAMPLE - TAX ON MANUFACTURE OF CIGARS  

A. SHIFT FORWARD TO PURCHASER AS HIGHER PRICE  

B. SHIFT SIDEWAYS IN THE FORM OF LOWER WAGES TO EMPLOYEES, ETC

  C. SHIFT BACKWARDS AS LOWER DIVIDENDS TO STOCKHOLDERS.

PROGRESSIVE V REGRESSIVE A. TAXES ARE MOSTLY PAID OUT OF INCOME   B. SHOULD TAXES BE CONSISTENT WITH THE ABILITY TO PAY IN

ORDER TO PROVIDE FOR EQUITY?   C. PROPORTIONAL TAX (Flat Tax)   1. INCOME = $10,000 TAX = $100     2. INCOME = $20,000 TAX = $200   3. TAX IS 1%   4. DOES THIS MEET THE ABILITY TO PAY STANDARD?   5. IS IT EQUITABLE?    

REGRESSIVE - THE PROPORTION OF TAXES PAID TO THE GOVERNMENT DECREASES AS INCOME RISES

  1. INCOME = $10,000 TAX = $100 1%     2. INCOME = $20,000 TAX = $150 0.75%   3. $20,OOO PAYS MORE BUT LOWER PERCENTAGE –

PROPORTION DECREASES AS INCOME RISES   4. FAMILY OF FOUR SPENDS $5,000 A YEAR ON FOOD WHICH IS

TAXED AT 5% = $250 – IF INCOME IS $25,000 THEN PERCENT OF TAX ON FOOD IS 250/25,000= 1% , IF INCOME IS $50,000 THEN PERCENT OF TAX ON FOOD IS 250/50,000= 0.5%

PROGRESSIVE – THE PROPORTION OF TAXES PAID TO THE GOVERNMENT INCREASES AS INCOME RISES

  1. INCOME = $10,000 TAX = $100 1%     2. INCOME = $20,000 TAX = $400 2%   3. HIGHER INCOME PAYS A HIGHER PROPORTION   4. . FAMILY OF FOUR IS TAXED AT RATE OF 2% ON A HOUSE

ASSESSED AT $100,000 FOR AN AMOUNT OF $2,000 WHICH IS 2,000/25,000= 8%

  FAMILY OF FOUR IS TAXED AT RATE OF 4% ON A HOUSE

ASSESSED AT $100,000 FOR AN AMOUNT OF $4,000 WHICH IS 4,000/50,000= 8%

WHICH IS THE MOST EQUAL? – MINIMUM STANDARD OF LIVING TEST

SIMULATIONS 4.1 & 4.2 A. WHAT WAS THE BIGGEST SOURCE OF REVENUE TO THE

STATES IN 2000, WHAT WAS SECOND, ETC.   B. WHAT CHANGES WERE APPARENT FROM 1970 TO 2000?   C. WHAT WAS THE BIGGEST SOURCE OF REVENUE TO CA IN 2000, WHAT WAS SECOND, ETC.   D. . WHAT WAS THE BIGGEST SOURCE OF REVENUE TO NJ IN 2000, WHAT WAS SECOND, ETC   E. HOW DOES NJ COMPARE WITH FL & CA

SOURCES OF REVENUE – PROPERTY TAX A. FED. – NONE

B. STATES NEGLIGIBLE

C. PRIMARY FOR SCHOOL DISTRICTS

INCOME TAX

A. FED. PRIMARY

B. STATES – GROWING   C. LOCAL – VERY LITTLE AND GOING DOWN

CONSUMPTION TAXES

A. FED SMALL AND FALLING   B. STATES- IMPORTANT BUT FALLING   C. LOCAL – SMALL BUT GROWING

PROPERTY TAX   A. ALL STATES BUT HAWAII – EDUCATION

B. TYPES OF PROPERTY  

1. REAL – LAND & IMPROVEMENTS  

2. PERSONAL – TANGIBLE ITEMS  

3. INTANGIBLE – BANK DEPOSITS, STOCKS, BONDS, LOANS, ETC.

  C. PROVIDES THE BULK OF LOCAL FUNDS

D. MOST VISIBLE AND LEAST POPULAR   1. TAXPAYERS SHOULD BE ABLE TO SEE

DIRECT BENEFITS - SCHOOLS, POLICE FIRE   2. TAXPAYERS SHOULD BE WILLING TO PAY

MORE FOR BETTER SERVICES   3. SOMETIMES TAX PAYERS DON’T LIVE IN

COMMUNITY – DON’T GET BENEFITS  

ASSESSMENT A. PROPERTY IS IDENTIFIED AND LABELED

B. OWNER IS IDENTIFIED   C. VALUE IS ASSIGNED1. FAIR MARKET VALUE – USUAL FOR

RESIDENCES AND EMPTY LAND   2. BUSINESSES – INCOME EARNING POTENTIAL OR

REPLACEMENT COST IS USUAL   3. DIFFICULTY – SUBJECTIVITY – TAX APPEALS   4. PROPERTY – HIGHEST AND BEST USE  

FRACTIONAL ASSESSMENT 1. PUBLIC ACCEPTANCE  

A. PSYCHOLOGICAL – PEOPLE THINK THEY ARE GETTING A DEAL

  B. BUSINESSES MAY GET A LOWER ASSESSMENT

TO ATTRACT OR KEEP THEM IN A MUNICIPALITY   2. VALUE INCREASES – ASSESSMENT DOES

NOT CHANGE

ASSESSMENT CYCLE 1. EVERY TEN TEARS

 2. ASSESSOR MUST REEVALUATE EACH PARCEL   3. MARKET VALUE X PERCENT OF VALUATION = ASSESSMENT   4. $100,000 HOUSE X .85 = $85,000   5. 120,000 HOUSE X .75 = $90,000

EQUALIZATION NECESSITY – COMPARISON PURPOSES   A. AVERAGE EQUALIZE ASSESSED VALUATION   B. EQUALIZED TAX RATE   2. ASSESSED VALUATION/ EQUALIZATION RATIO =

EQUALIZED VALUE   3. Av/Er = Ev   4. $85,000/ .85 = $100,000

EXEMPTION

LOCAL TAX BASES ARE REDUCED BY EXEMPTIONS SCHOOLS RELIGIOUS GOVERNMENT , ETC. –

FOR COMMUNITY BENEFITS

TAX BREAKS A. SENIOR CITIZENS   B. VETERANS   C. DISABLED   D. POOR   E. HOMESTEAD REBATES   F. CIRCUIT BREAKERS ACT AS A CREDIT

AGAINST STATE INCOME TAXES

CALCULATING THE TAX RATE

THE BUDGET OF A GOVERNMENTAL UNIT LESS ITS INCOME FROM OTHER SOURCES EQUALS THE AMOUNT TO BE RAISED BY TAXES. -

Taxes = Budget – Other income T = B-Oi   B. THIS AMOUNT DIVIDED BY THE ASSESSED

VALUATION GIVES YOU THE TAX RATE –   Tax Rate = Budget – Other Income/ Assessed

Valuation Tr = (B-Oi)/Av

EXAMPLE 1. SCHOOL DISTRICT HAS A BUDGET OF

$10,000,000, OTHER INCOME IS $5,000,000, ASSESSED VALUATION IS $250,000,000 WHAT IS THE TAX RATE

  2. Tr = (10,000,000 – 5,000,000)/250,000,000   Tr = 5,000,00 / 250,000,000   Tr = 0.020   3. 0.020 X 100 = $2 per 100

CALCULATING TAXES OWED A. TAX RATE TIMES ASSESSED VALUATION B. To = Tr x Av   C. EXAMPLE   1. HOUSE ASSESSED AT $100,000   2. TAX RATE IS $2.00 PER 100   3. To = Tr x Av To = .02 X 100,000 To = $2,000

YIELD A. HIGH

B. DEPENDENCE SHOULD BE DECREASING AS STATES ASSUME MORE OF A BURDEN

ELASTICITY INELASTIC   A. ASSESSED VALUES DO NOT INCREASE AS

RAPIDLY AS INCOME   B. PROPERTY TAXES ARE NOT LINKED TO

INCOME

EQUITY

A. VIOLATES HORIZONTAL EQUITY - INDIVIDUALS WITH THE SAME INCOME DO NOT NECESSARILY PAY THE SAME TAX

  B. REGRESSIVE – HIGHER PORTION OF INCOME IS

SPENT BY LOW INCOME FAMILIES ON HOUSING COSTS   RENTERS   A. IMPACT ON OWNER   B. INCIDENCE ON RENTERS

NEUTRALITY NOT NEUTRAL   A. DISCOURAGE MAXIMIZATION OF

POTENTIAL PROPERTY USE – CONTRIBUTES TO THE DETERIORATION OF URBAN AREAS

  B. INFLUENCE HOUSING DECISIONS   C. CAUSE DISPARITIES IN EDUCATIONAL

OFFERINGS

COMPLIANCE

ADMINISTRATION & COMPLIANCE – LOW  

SHOULD PROPERTY TAXES BE ELIMINATED?