Michigan’s lawmakers need to meet their legal obligation to pass a state budget by July 1 – when school districts’ new budget year begins – so schools across the state can plan staffing and programming for fall classes.
With available state revenues, we can accommodate an inflation adjustment in the per-pupil foundation allowance that the state allocates to each district, along with increased funding to serve high-cost, increased funding to serve high-cost, special-need students.
Both are crucial for schools coping with substantial recent and pending cuts in federal revenues.
Progress on the budget, however, has been impeded by the recent passage in the Michigan House of House Bill 5873, which would repeal the State Education Tax, which levies 6 mills on nearly all property and deposits the revenue in the state School Aid Fund. This year, the education tax raised over $3 billion for distribution to all public schools statewide.
That’s a huge budgetary hole to fill.
The House bill states the intention “to annually appropriate sufficient funds” to compensate the School Aid Fund for revenue lost from the repeal of the education tax. It is tie-barred to House Bill 5880, which would newly extend Michigan’s 6% sales tax to as-yet unspecified services.
Perhaps this proposal merely represents the House majority’s election-year negotiating position in the current budget deliberations.
But it’s bad policy. It would put the future of Michigan’s K-12 public schools in great jeopardy. And, importantly, if property tax relief is the goal, there are far superior ways to provide it.
2 big problems
The proposed shift from property to sales taxation would create two problems.
First, it would make education funding more volatile, since sales tax revenues are sensitive to economic cycles. In a recession, sales tax revenues fall because people spend less. Property taxes by comparison remain stable.
Second, it would disproportionately benefit wealthy homeowners, but hurt low- and moderate-income taxpayers and renters.
Until the House specifies which services will be subject to the sales tax, this is not a serious proposal. While H.B. 5873 states an intention to backfill revenue lost with repeal of the education tax, these are empty words. They have no impact whatsoever on appropriations by future legislatures.
Final passage of these bills could risk a return to the disastrous cuts in real school revenue that Michigan suffered from 2002 to 2018, a decline of 23.5%, from which our schools have not recovered.
A tax swap that puts schools at risk
Michigan already relies heavily on the sales tax to fund our public schools. It is the School Aid Fund’s single largest revenue source, comprising fully 42% of revenue this year. Any increase in that share would make our school funding even more vulnerable to economic fluctuations.
Property taxes, by comparison are a stable source of revenue. One indication of this stability is that statewide inflation-adjusted property tax collections today are about the same as two decades ago. This is because the 1978 Headlee Amendment and Proposal A of 1994 limit the growth of property taxes to the rate of inflation. These guardrails make the property tax a predictable revenue source for schools and local governments.
Of greater concern in this era of sharply increased income inequality, the House bills deliver the largest tax cuts to the wealthiest taxpayers. This is because higher-income households own more valuable properties.
The state must pass its education budget soon. Work on credible property tax reform will take longer, but a superior path forward is clear. It would target tax relief for those who need it most, while avoiding harmful revenue loss to our schools and local governments.
There’s a smarter way to cut property taxes
An alternative set of tie-barred House bills, not yet passed, show one possible way. The Homestead Property Tax Credit is the primary policy tool to focus property tax relief on working and middle-income households. This law, passed in 1967, limits property taxes to taxpayers’ ability to pay when filing their state income tax return. H.B. 5997 would substantially expand eligibility for this credit to include households earning upwards of $100,000. Renters would benefit too, since under current law, 23 percent of rental payments are treated as property tax in calculating the homestead tax credit.
In a similar spirit, H.B. 5999 would exempt from property taxes individuals on disability, or those with retirement or social security income less than $2,200 per month (indexed to inflation). H.B. 5996 would moderate the “pop-up” in taxable values when properties are sold, and H.B. 5998 would eliminate a disincentive to home remodeling by preventing the first $100,000 of these expenditures from triggering assessment increases.
The combined revenue lost under these carefully crafted bills is a small fraction of the $3 billion foregone with the SET’s elimination. That foregone revenue could be offset entirely, thereby holding schools and local governments harmless, with an excise property tax on very high-valued vacation homes, H.B. 6003.
We can target property tax relief for financially strapped households, while protecting our public schools. This policymaking operation calls for a scalpel, not a chainsaw.
David Arsen is a professor emeritus in the College of Education at Michigan State University. Mike Addonizio is a professor emeritus in the College of Education at Wayne State University.
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This article originally appeared on Detroit Free Press: Michigan can cut property taxes without gutting schools | Opinion
Reporting by David Arsen and Michael Addonizio, Detroit Free Press / Detroit Free Press
USA TODAY Network via Reuters Connect
By David Arsen and Michael Addonizio, Detroit Free Press | USA TODAY Network
