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 “forprofit” company
designed to
generate dividends
& increase stock
prices for
shareholders, such
as IBM
• They are not a
professional
“fee for
service”
organization
like a dentist’s
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.
TAXES ON:
Stock of
Wealth
In Rem
Flow of
Production
In Personam
Ad Valorum
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 education’s 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 Don’t 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 community’s
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
one’s income.
Today’s 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 individual’s
or company’s 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 people’s 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 
This tax affects the less
wealthy persons more
requires the same
heavily than it does the
richer ones
percentage from each
 The amount taxed on any
person’s income
item is the same dollar
 A sales tax is an example amount for each, but it
represents a larger share
of the less well-off
person’s financial
4.5%
resources
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 one’s 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
Joint Return
$0–$12,000
Single Taxpayer
Rate
$0–$6,000 10.0%
12,000–46,700
6,000–27,950 15.0
46,700–112,850
27,950–67,700 27.0
112,850–171,950
67,700–141,250 30.0
171,950–307,050
141,250–307,050 35.0
307,050 and up
307,050 and up 38.6
Examples of the 3 Tax Classifications
Individual
Income
Taxes Paid
Taxes as a
% of Income
Proportional Taxes
1
2
3
$10,000
$50,000
$100,000
$1,000
$5,000
$10,000
10%
10%
10%
Regressive Taxes
1
2
3
$10,000
$50,000
$100,000
$500
$2,000
$3,000
5%
4%
3%
Progressive Taxes
1
2
3
$10,000
$50,000
$100,000
$300
$2,000
$5,000
3%
4%
5%
Illustration: Proportional, Regressive, & Progressive Taxes
“Good” taxes
are generally considered to be
progressive
while
“Bad” 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 property’s 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 Home’s Value
 Most frequently, the tax rate
is expressed as a dollar
figure based on 100% of the
assessed home’s value
 For example, the tax rate may
be $1.50 per each $100 of
home’s 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 home’s 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
1st, locality needs a system to
inventory all the locality’s property
•
2nd, personnel must make periodic
physical assessments of the property
•
3rd, locality needs a system of
appeals for contesting valuation
•
4th, tax bills must be sent out &
collected
•
5th, locality needs a system to collect
delinquent taxes
Fair Market Value is
Difficult to Calculate
•
•
•
Realtors use a comprehensive market
analysis to determine a home’s 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
Alabama
California
Virginia
Illinois
New York
New Jersey
Property Tax
Per Capita
$ 273
$ 767
$ 838
$1,163
$1,361
$1,761
Rank
50
31
24
10
4
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
community’s 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 Area’s Wealth




Personal income
Real estate taxes
Sales taxes
Corporate income
taxes
 Lotteries & other
gambling
 Other revenues
“Capacity”: Contributors to
an Area’s 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 • Basically, the court found
that while California’s system
the core of school
for financing education did
finance reform
tend to equalize funding
efforts & court
among the school districts,
the system also generated
decisions since
revenue proportional to the
1976’s Serrano v.
wealth of the school and the
Priest decision
school district. Such
funding violated the idea
from the California
of equity.
Supreme Court
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 A
School System B
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 B’s students’ needs are
greater than School System A’s. School System B must spend more
funds to meet the identified special education population’s needs
than does School System A.
Income Taxes – 2nd Major
Source of State Income
State
Mississippi
S.Carolina
Vermont
Illinois
California
New York
Connecticut
Per Capita
Personal Income, 2000
$ 20,856
$ 23,952
$ 26,904
$ 31,842
$ 32,225
$ 34,502
$ 40,870
Rank
50
40
30
10
8
4
1
U.S. Income Taxes –
Single Taxpayer
If Taxpayer Income is:
Between But Not More Than
$
0.
$6000.
$ 6000.
$26,250.
$ 26,250.
$63,550.
$ 63,550.
$132,600.
$132,600.
$288,350.
$288,350.
------
Tax Rate is:
10%
15%
27%
30%
35%
38.6%
U.S. Income Taxes –
Joint/Married Taxpayer
If Taxpayer Income is:
Between But Not More Than
$
0.
$12,000.
$ 12,000.
$43,850.
$ 43,850.
$105,950.
$105,950.
$161,450.
$161,450.
$288,350.
$288,350.
------
Tax Rate is:
10%
15%
27%
30%
35%
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 $
(in millions)
Oklahoma
$
62
Rhode Island $ 298
California
$ 2,629
Illinois
$ 2,680
New York
$ 2,739
New Jersey $ 5,451
Nevada
$ 9,632
Per Capita
Revenue
$ 18
$ 285
$ 78
$ 216
$ 144
$ 648
$ 4820
Rank
40
30
6
5
3
2
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
Alaska
$ 856.33
Wyoming
$ 604.76
New Mexico
$ 244.71
Rank
1
2
3
Indiana
Illinois
Missouri
48
49
50
$
$
$
.09
.02
.01
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 1/4th 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
 Making AYP for all
 The No Child Left
Behind (NCLB)
legislation with
required Adequate
Yearly Progress
(AYP) goes into full
effect in 2014
students will require
additional funding for
professional
development,
supplies, remediation
for students –
especially in poor
urban schools
Securing More Taxes to
Support Public Schools
Results include:
• Higher student
their extra tax dollars’
achievement levels
impact with positive
• Increased public
results in the schools
satisfaction with their
• Educators must & will
school system
be held accountable for
• Customer friendly
results
schools for students &
the community
• Taxpayers must see
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.
U5
U4
U3
U2
U1
1
2
3
4
Quantity
5
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
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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
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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
• Everyone’s 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