Chapter 5 taxation issues

Education is a State Responsibility Requiring Public Funds TAXES• Taxes are a means to • Spread financial burden over as large a group as possible • Prevent poverty, ignorance,... Taxes

Chapter 5

Taxation Issues

Education is a State Responsibility Requiring Public Funds (TAXES)

• Taxes are a means to

• Spread financial burden over

as large a group as possible

• Prevent poverty, ignorance,

Taxes Share Financial Burden

of Supporting Education

Dispersing education’s tax burden over the

entire state allows smaller, remote, or economically

disadvantaged localities with little internal capacity

to pay for quality education to provide one

Taxes for Schools Benefit the Entire State

The entire state benefits economically from an educated population:

 Higher income tax revenues

 Higher discretionary spending

 Higher charitable contributions

 Lower public assistance costs

 Lower incarceration rates

Taxes Help Localities

If a local economic

downturn occurs, the

burden can be spread over

the entire state; not borne

only in a relatively small

area For example, if a

locality’s largest employer, a

textile plant, closes, local

children can still receive a

strong education

Taxes for Education

It seems logical, therefore, that all in the state contribute towards education, not just the people in a locality

Competition for Education Dollars

• Taxpayers want lower taxes

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

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

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

•Tax Categories –

–Stock of Wealth

–Flow of Production

•Capacity & Effort

•Equity v Equality

Understanding Tax Terms

That Underlie School Funding

Issues, cont

Stock of Wealth

Flow of Production

Understanding Tax Terms

That Underlie School Funding

Tax Equalization

 Tax equalization tends

to make the most

needed services more

Taxes Should be Spread Out

• A local service a city

or county park should

be distributed over the

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

Our country holds a

moral & legislative

imperative that wealth

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

or equalize funding –

to help less wealthy localities meet these educational

benchmarks

Brief History of Property

Taxes Funding Public Schools

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

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

Two Tax Categories

Taxes levied on the

 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

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

• 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

In Rem vs In Personam Taxes

• $100,000 income

• $100,000 net worth

• This is a better indicator of your wealth

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

requires the same

percentage from each

person’s income

 A sales tax is an example

 This tax affects the less

wealthy persons more heavily than it does the richer ones

 The amount taxed on any

item is the same dollar

amount for each, but it

represents a larger share

of the less well-off person’s financial resources

4.5%

Proportional Sales Taxes can

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

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

Regressive Taxes

 A regressive tax

requires those with

higher incomes pay

 FICA taxes are not collected after one’s income reaches $68,400

Regressive Taxes, cont.

 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

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

Individual Taxes Paid Taxes as a

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

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

$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

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

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,

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, 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”

 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

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

the core of school

funding violated the idea

of equity.

• 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

School System A

School System B

An Equity Scenario, cont.

School System B School System A

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

Income Taxes – 2nd Major Source of State Income

U.S Income Taxes –

U.S Income Taxes – Joint/Married Taxpayer

If Taxpayer Income is: Tax Rate is:Between But Not More Than

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

Lotteries & Legal Gambling

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, 2000State Gross Revenue $ Per Capita Rank

(in millions) Revenue

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

• Corporate income taxes once

generated approximately 1/4th of all

federal revenue Today, it accounts

Corporate Taxes, cont.

 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