Will Tax Shifting Help Public Schools?

As I pointed out yesterday in a chart and blog post, Pennsylvania spends significantly more per student on public schools than the national average. Moreover, increased spending has not resulted in improvement in academic performance.

Calls for increased education spending tend to ignore these basic facts. At the same time, many readers have asked about our position on a dollar-for-dollar tax shift, which would redistribute the school tax burden in Pennsylvania.

To be clear, CF opposes tax shifting schemes that result in net tax hikes, such as those found in Gov. Wolf’s budget. Other tax shifting proposals are revenue neutral, or dollar-for-dollar. Typically, these proposals ask the state to contribute more, or all, to public school funding in exchange for property tax reduction or elimination.

We believe that tax shifting—even of the dollar-for-dollar variety—will not solve structural problems with school financing. Here are our primary concerns: 

1. Tax shifting does not address overspending in public schools, which is driven by pensions, mandates, union contracts and lobbying, and a government monopoly over the school system.
2. Tax shifting creates winners and losers. This is true among individuals who would be forced to pay higher sales or income tax rates (and in the case of expansion, some families would face exorbitant increases on nursing care, day care, or other items). Indeed, while the property tax is highly unpopular, it is less detrimental toward state economic growth than is the income tax, which affects workers and small business owners.
3. Winners and losers will also emerge at the school district level. Tax shifting effectively forces residents in District A to pay more in state taxes, while District B would get more in “relief.” Districts with high property taxes will get less relief than districts that have responsibly kept taxes low. 
4. Tax shifting fails to provide a student-based funding formula.
5. Tax shifting does not necessary prevent property taxes from coming back, and it can become a vehicle for increasing our overall tax burden on families and businesses.

Without other reforms, tax shifting will not resolve the larger problem of overspending and unaffordable taxes. As I pointed out in my testimony on property tax reform, there are other solutions that address the spending problem in education, of which high property taxes are just a symptom. Here are five recommendations:

Weighted Student Funding

While Pennsylvania spends more per student than the rest of the country, and provides about the national average in state funding per student, that support isn’t driven out to schools that need it the most. A broken funding formula, in which school districts have been “held harmless” regardless of changes in enrollment for more than 20 years, fails our students.

Moving to a student-based funding system would ensure state dollars go to the schools that need it most—based on student enrollment and student need. We should fund children, not buildings. This reform would better allocate the $26 billion we already spend.

Collective Bargaining Reform

Employee benefit cost growth has greatly exceeded salary growth in public schools. These costs are driven by unaffordable union contracts.

Reforming the collective bargaining process—providing taxpayers and voters with more information about the terms and costs of contracts—could result in major savings for public schools, money that could go back into the classroom.

Mandate relief, including prevailing wage reform and seniority reform

School districts across the state have complained about unfunded and unaffordable mandates. Among the largest of these is the prevailing wage mandate, which requires school districts to pay more for construction projects than the private sector pays for the same work. Prevailing wage mandates increase the cost of construction by 10 to 30 percent, which for Pennsylvania school districts results in $160 to $480 million in additional annual costs.

Likewise, state law that limits when school districts furlough employees, and requires furloughs be done solely on the basis of seniority, deny schools the flexibility to manage costs. Reform that values teacher performance above seniority would improve the quality of education across Pennsylvania, while giving schools the tools they need.

Pension reform

Over the past six years, pension payments from school districts have increased by $2 billion. This amounts to a $600 tax increase per Pennsylvania homeowner, or the salary of 20,000 teachers. Rising pension costs were the justification for 98% of school districts recently seeking exemptions to raise property taxes above inflation.  

We need pension reform that moves the state out of the defined benefit business. Establishing a defined contribution retirement plan for new hires provides costs that are predictable and affordable. Responsible pension reform removes politics from pension management and prevent future crises from threatening our public schools.

School Choice

Lawmakers should expand school choice programs, such as the Educational Improvement Tax Credit (EITC) and the Opportunity Scholarship Tax Credit (OSTC). These programs allow low and middle income families to attend better, safer schools. 

Moreover, the EITC and OSTC save Pennsylvania taxpayers money. The average EITC scholarship is less than $2,000, while the average OSTC scholarship is approximately $4,000. These scholarships are significantly less than the average per-pupil spending in traditional public schools.