Unintended Consequences: The Serious Budget Gaps Created in Local
School Districts by the Phase-Out of Reimbursement for the
Eliminated Tangible Personal Property Tax in Ohio
Situation Analysis: In school districts scattered throughout Ohio, a
financial crisis looms. These pending financial emergencies are not the
result of over-spending or poor fiscal management. They are the
unintended consequences of tax policy reform enacted in 2005 through
HB 66 calling for tangible personal property tax in Ohio to be phased
out over the next three years. In 2008, the majority of general business
taxpayers paid their final TPP tax bills. This action reduced the tax
burden on business taxpayers without providing a replacement
mechanism for school districts to recoup these critical local funds.
Instead, when the law was crafted, legislators included a provision
requiring the state to make hold harmless reimbursement payments to
affected school districts limited to the amount the districts were
collecting from these local taxes in 2004. Now, despite several years of
awareness building, negotiating, lobbying and citizen contact with
legislators and the governor, this group of adversely affected school
districts stand at the precipice of financial crisis. An accelerated phaseout of these TPP reimbursements is set to begin in July 2011. The
economic impact of lost TPP reimbursements will account for more
than 10% of some districts’ budgets to as high as 18% or 21% in other
districts. Revenue losses of this magnitude will be impossible to recoup
through additional operating levies in these districts. Many of these
affected districts are Ohio’s highest-performing districts, strictly
meeting the state’s standards for educational and fiscal accountability.
History:
The TPP, or tangible personal property tax, had its roots in Ohio dating back to 1846, when the
General Assembly enacted legislation requiring that “all property, whether real or personal…
unless exempted, shall be subject to taxation.” Until that time, the Ohio legislature had
exempted most personal property, such as tools and machinery, from taxation. In 1851, the
newly ratified state constitution included provisions requiring that real and personal property
be taxed. Subsequently, in 1931, a constitutional amendment went into effect that limited the
principle of taxation by uniform rule to real property rather than all property. The affect of this
amendment was that the tax on tangible personal property was limited to personal property
used in business. The tax base for tangible personal property used by Ohio businesses included
machinery, equipment and inventories.
Throughout the 1970s and 1980s, the Ohio General Assembly enacted several changes to the
TPP tax laws adjusting the taxable value amounts and exempting the first $10,000 of taxable
value from taxation. In 2005, the General Assembly enacted House Bill 66, which included a
provision phasing out the TPP tax by 2008. For nearly all Ohio businesses, this meant the tax
ended completely in September 2008. Some utilities continued paying the tax through 2010.
The tax:
The TPP tax revenue generated in the local communities stayed in the local communities. The
tax revenue was distributed to the counties, municipalities, townships and school districts
based on the taxable values and total millage levied in each community. Statewide, school
districts received about 70 percent of the total personal property tax revenue.
The genesis of the state TPP reimbursements:
Six years ago when the proposal to eliminate the tax on tangible personal property was
introduced, even the most adversely affected school districts reluctantly agreed that Ohio’s
taxation of TPP was harmful to the overall state economy and was a serious competitive barrier
to attracting new businesses to Ohio. School district representatives worked in good faith with
legislators to change that tax policy with the understanding that schools would not bear the
brunt of this meaningful tax relief for the business community.
To stave off the harsh economic effects of losing those local revenues for school districts, the
legislature created the hold harmless clause, directing state funds to school districts to make up
for the business tax breaks. However, those amounts were based on the projected revenues
from the initial year of the hold harmless plan and frozen at that amount, not allowing for any
revenue growth in subsequent years.
As good partners with the business community, school districts supported the positive changes
in the taxing structure to help businesses, but the agreement on eliminating the tangible
personal property taxes never included the intention for the entire responsibility of making up
that lost revenue to rest solely with the schools and local taxpayers.
The Commercial Activities Tax and education:
When the Commercial Activities Tax was enacted to broaden the state’s tax base, the TPP hold
harmless reimbursement payments were – and still are – made using these tax revenues. It is
important to note, however, that the CAT revenues are funneled directly into the state’s
General Revenue Fund. The eliminated TPP revenues were directed to the local communities in
which they were generated.
Due to a variety of factors, including the state’s poor economic condition, the CAT is underperforming and revenues are well below projections.
Phasing out the TPP reimbursements:
With the TPP reimbursements set to begin phasing out in 2009, school districts worked
steadfastly with members of the General Assembly to make the reimbursements permanent.
Their efforts seemingly paid off when the House-Senate Conference Committee reconciling the
budget measures included a permanent solution in the FY 2009 biennial budget bill. Lawmakers
in the House and Senate passed the bill just days later.
In signing the budget bill, Gov. Ted Strickland line-item vetoed the bi-partisan budget provision
extending indefinitely the present-level hold harmless payments to school districts to replace
eliminated tangible personal property taxes. The conference committee understood the critical
need to act and continue the hold harmless payments permanently, but the governor would
not commit to the permanent solution. Instead, he postponed the start of the reimbursement
phase-out until FY 2013. Although the affected districts would have two more years until the
phase-out begins, the phase-out commencing at that time would be at Year Three
implementation levels, meaning the real dollar impact for districts in year one of the phase-out
implementation would be tripled.
Now the situation has changed yet again, and that two-year reprieve has disappeared thanks to
the administration’s budget proposal for FY 2012 and FY 2013. School districts begin losing their
reimbursements in July 2011 as Governor Kasich and his budget and tax team are proposing to
snatch the low-hanging fruit of the CAT revenues away from local communities
disproportionately affected by TPP loss and siphon it to other communities.
Severe economic impact:
The phase-out of the TPP hold harmless reimbursement will increase reliance on residential and
business property taxes in the affected school districts. In several of these communities, the
combined loss of business tax revenue and ending of the hold harmless payments beginning in
2011 amounts to more than a million dollars lost in the first year and projected annual revenue
decreases as high as $1.2 million and higher each year thereafter. Losses of this magnitude are
catastrophic for school districts. The multi-million dollar revenue loss some districts would
experience in the first year of the phase-out alone is the equivalent of losing more than 40
teachers and dramatically increasing class sizes. Every year of the phase-out, this loss is
compounded, meaning additional positions would need to be cut just to keep up with the lost
revenues.
These communities have done their part to support their schools financially by passing school
operations and facilities levies as needed. The districts have implemented serious expense
reductions to increase efficiency. The budget gaps created by the impending end of the hold
harmless payments would be unsustainable for these communities.
Citizens and school representatives in these communities understand the severe constraints
legislators face in crafting a workable budget compromise. But the impending budget process
must include a commitment not to deal school districts a crippling financial blow.
This is not a case of Business vs. Schools:
Although this situation seemingly pits school districts against businesses, this generality does
not accurately portray reality. Throughout the state, the most affected communities, in
addition to recognizing the need for elimination of the TPP tax, have supported additional tax
relief for businesses in their communities through tax abatement packages. The districts have
supported the abatement grants given by cities – despite the lost revenue to the school districts
– because they are keenly aware that a business friendly climate is vital to the overall strength
of the community.
Today, the businesses in the most affected communities that had eagerly awaited the benefits
of the eliminated TPP will face a new financial challenge if the TPP reimbursement phase-out
proceeds as scheduled. As the full impact associated with a phase-out of the hold harmless
payments comes into focus, those anticipated financial benefits stand to lose much of their
luster. If the TPP reimbursement continues as scheduled, school districts will have no choice but
to turn to the ballot to recoup – at least in part – this lost revenue. In addition to the residential
property owners who will have to shoulder an increased tax burden, local businesses in those
communities will also face steep increases in their property tax bills, nullifying the benefit of the
TPP elimination in some cases and greatly increasing the tax exposure for other smaller
businesses that are paying the CAT and didn’t reap much of a financial gain from the TPP tax
elimination in the first place.
Citizen engagement and avoiding the crisis:
Many of the most onerously affected school districts have the highest student achievement
results in the state and are not rewarded for that success. In fact, just the opposite is true. Due
to the positive reputation of these districts, many families look to relocate to those
communities. Unlike businesses that receive financial gains for results at the top of their
industry, high achievement results in education yield nothing in increased revenue.
These communities were purposely developed with significant industrial zones to balance their
tax bases. The elimination of the TPP guts that balance and the budget gaps created by the
impending end of the hold harmless payments would be unsustainable.
Citizens in the districts most adversely affected by the elimination of TPP reimbursement are
astute and hold the school boards and administrators accountable for results academically and
financially. Citizens and school representatives in these communities understand the severe
constraints legislators face in crafting a workable budget compromise. But the impending
budget process must include a commitment not to deal school districts a crippling financial
blow.
There are no easy answers. At the same time, it is critical to remember that no one is
suggesting that the TPP return, only that a fair and rational solution be crafted to make the TPP
reimbursement permanent.