Thursday, January 1, 2009



When Tony Bennett lobbies state legislators on behalf of Indiana public school students, it won’t be with hands outstretched. “I am not a person who thinks we need more money infused in the system,” said Bennett, who takes office Jan. 12 as Superintendent of Public Instruction.

Indiana invested $776 million extra in K-12 education over the past four years “with no appreciable change” in test scores, he noted. So a tight economy may be a blessing in disguise because it will force folks to be creative about getting dollars into the classroom.

At a time when many states have had to cut education budgets, Indiana certainly can’t be accused of inadequate funding. K-12 spending consumes 32 percent of the state budget — $8.6 billion in this biennium. That’s five percent more than the previous biennium and more per capita than the majority of states. In 2005-06, the latest year for which national statistics are available, Indiana ranked 18th in per-pupil spending at just over $11,000.

A more telling statistic is this: Indiana ranked 27th in the percentage of funding (60.1 percent) that goes into instruction instead of things like administration, support services and transportation. Twenty-six states spent more of their education dollars in the classroom.

“It comes down to how we spend the money,” Bennett said. And he has several ideas about how to drive more dollars into instruction. These include:

• Deregulation. Bennett would like to modify rules such as “seat time” for students or certification provisions for teachers that limit academic options or cost money. He cites the example of a school that recently lost vocational funds when it received a waiver so an English instructor could teach a vocational program.
• Streamline the Department of Education. “We intend to spend less money in Indianapolis if at all possible so we can send more to local school corporations to spend inside the classroom.”
• Find ways to “de-silo” spending. As it is now, operating budgets are kept separate from capital, technology, food services and transportation budgets. If a school system saves money in one area, it should be able to divert savings to the classroom. House Bill 1006, passed in 2006, took steps in this direction but has yet to achieve its potential.

Another strategy is school consolidation, although the extent to which it will shift money into instruction is disputed. The Indiana Commission on Local Government Reform recommended combining school districts with fewer than 2,000 students to achieve economies of scale. The governor is proposing that districts with enrollment under 1,000 merge central office operations with other districts.

The idea, Bennett says, is to streamline administration and pool purchasing power and not to close schools. In fact, the proposal would impose a five-year moratorium on high-school closings.

It’s not consolidation itself but the sharing of services that offers real savings. A study by Deloitte Research and the Reason Foundation concluded that school districts could save millions by sharing everything from buses to information technology to gymnasiums.

That same study, however, cited research by a management expert, Dr. William Ouchi, whose ideas have been applied to Indiana schools by the Indiana Policy Review Foundation, that indicates centralized budgeting is not a good idea. “Schools perform better on fiscal and academic outcomes when there is a) local control of school budgets by principals and b) open enrollment, which allows per pupil funding to follow the child," says Ouchi.

The latter idea, known as Weighted Student Funding, is being piloted around the country and gaining acceptance. In its purest form, students would get to choose any public school in their region and per pupil funding would go with them. The allotment would be higher for students with special needs (such as high poverty or English as a Second Language) and school buildings would have flexibility to spend as they deem fit. Because parents would get to choose their child’s school, a competitive environment would force principals to spend wisely, thus more money for instruction.

Bennett is philosophically behind the idea. “I do believe money should follow students.” He has yet to endorse anything specific.

What’s encouraging is that he understands the next wave of education reform: Spending more effectively. This means shifting dollars from overhead to instruction and giving consumers more purchasing power.

Andrea Neal is a teacher at St. Richard's School in Indianapolis and adjunct scholar with the Indiana Policy Review Foundation.

Blunt Proof of the Feasibility to Permanently Abolish Property Tax

Media Contacts:
Melyssa Donaghy 317-938-8913
Max Katz 765-409-6669

Hoosiers For Fair Taxation, Senator Delph, Representative Noe, Representative Elrod and many other legislators along with Stop Indiana, attorney John Price, Eric Miller's Advance America, and the Statewide Taxpayer Alliance know that property tax abolishment, without substantial increases in sales tax and income tax, is realistic and possible. The economist Dr. Bill Styring's 2/2/2 Plan demonstrates that the state of Indiana can completely replace property tax without changing the state's current spending habits.

Dr. Styring's plan does not account for positive changes in Indiana's economy that will undoubtedly follow the elimination of property tax such as heavy real estate investment and increased consumer spending due to increased statewide disposable income. The real estate investment in Indiana alone would cause such an economic boom that it could likely end our abandoned property and foreclosure crisis. Property tax elimination would also likely cause a surge in Indiana's population as more people locate to Indiana to take advantage of real estate purchase opportunities without the burden of property tax. With the population surge would come more sales and income taxes.

The General Assembly does not have to adopt a specific plan until the year 2011. In the meantime, we recommend that the General Assembly approves the 27steps outlined in the report prepared by the Sheperd Kernan commission. While the Governor's commission cannot forecast the savings to the state once the plan is implemented, there is no doubt that the savings would be substantial--perhaps equivalent to the the entire property tax burden currently placed on Indiana's homeowners because our legislators have not had the political will to liberate Indiana's governing structure and her taxpayers from the 19th century.

Our citizen networks will work to replace all legislators who do not support property tax repeal in the November 2008 election.

The 2/2/2 Plan, to replace property taxes in Indiana based upon the latest revenue forecast (07/08 fiscal, estimate):

1) Current IN sales tax (state level rate of 6%): $5.601 billion2% increase would yield an additional $1.867 billion

2) Current corporate profits tax: ~$2 billion

2% increase would yield an additional $.286 billion ($286M)

3) A 2% statewide average of the COIT would yield $2.705 billion to cover local civil units of gov.

By adding these three together ($1.867 billion + $.286 billion + $2.705 billion), a total of $4.858 billion is realized; enough revenue to replace property taxes.

Indiana has a 70-plus year history of attempts to lower property taxes by raising other, non-property taxes. In every case these have failed miserably. The new taxes, or higher rates on old taxes, remain in place. And, in short order, property taxes rise back to their old levels, poised to roar even higher.

--1933. General Assembly imposes two new taxes: an individual gross income tax and a corporate gross income tax. The morgue of the Indianapolis Star indicates that the political leadership at the time said this was for property tax relief (1933 was the pits of the Great Depression, and people were losing their homes. Home prices declined by over 40% in the 1929-1933 period). Property tax relief was nonexistent. The state used the money to bail out the state's own finances.

--1963. General Assembly imposes a new sales tax at a rate of 2% and changes the 1933 individual gross income tax (from 1933) to an adjusted gross income tax (the one we have now) at a rate of 2%. Again, the ostensible reason was for property tax relief and again little PTR was forthcoming.

--1967. Those 1963 tax changes were raising more money than projected. The GA decides to give back 8% of sales and income tax revenue to local government for property tax relief. Local units spent the money. No PTR.

--1973. Gov. Otis Bowen launches the most determined PTR offensive yet. The sales tax goes to 4% and a new corporate supplemental net income (profits) tax is imposed. Strict property tax levy controls are imposed. It works... for a time. By 1980, property taxes adjusted for inflation are some 30% lower than in 1973. When Bowen leaves office the levy controls are relaxed. By the end of the decade, property taxes (adjusted for inflation) are back to 1973 levels. The doubling of the sales tax rate from 2% to 4% remains in place, along with the new corporate SNIT.

--2002. More fiddling with the sales tax in the hope of property tax relief. The results of this are obvious, or we wouldn't be debating the current property tax mess. All of this suggests that unless the property tax is totally ripped up by constitutional amendment, the assessment and collection mechanism dismantled, it will grow back. The PTR-inspired hikes in other taxes remain. That is our history. It is a terrible deal for taxpayers.

2. A vote in the 2008 legislative session for a constitutional amendment to repeal property taxes does not amend the constitution. It merely starts the amendment process. Amendments must be passed by two consecutively elected General Assemblies, then submitted to a referendum. Thus any amendment passed by the '08 Assembly must be passed by either the 2009 or 2010 legislatures, then submitted to the voters at the 2010 general election. The General Assembly does not need to decide on a "replacement revenue" package until the 2011 session.

3. What might such a "replacement revenue" package look like? The particular answer will come from the 2011 General Assembly and cannot be determined now (if for no other reason than forecasting state level taxes and property taxes out that far would be a most unreliable exercise. No one need be locked into any particular plan just yet. However, as an illustration that a replacement plan is feasible and less scary than many fear (we don't need to be talking about a 12% or 13% sales tax ... in fact, we should not be), consider just this one possibility.

Local sales taxes are generally very bad policy, for a whole host of reasons too numerous to mention in this short sketch. Sales and corporate taxes are best levied at the state level. It happens that roughly a 2% increase in the sales tax and a 2% increase in the corporate profits tax roughly take care of school propertytaxes. The loss of local control by the state assuming school property taxes is minimal. About the onlylocal control left is on building projects.

For local civil units, a statewide average increase in the individual adjusted gross income tax of about 2% suffices to replace local civil government property taxes, higher than 2% in some units, less than 2% in others.

Thus, a "2-2-2" plan~2% sales and 2% corporate profits at the state level for schools and a 2% average on personal income taxes for civil units—is about what would be needed. This is merely a ballpark projection to 2011.

There may be better plans, it's really a policy question for the General Assembly: do you want to make the trade of something like this in exchange for no-property-taxes-forever-on-anything? Everyone understands "zero."

4. Are there "practical problems? Of course. The two identified are how to make the civil government transition from a property tax base to an income tax base, and how to handle debt backed by property taxes. Without elaborating, the former can be handled using locator software (Map quest-type programs). The debt problem might be handled by treating the current state paid PTRC's as in lieu of property taxes (which they are) and paying PT-backed debt service from each unit's own PTRC.

Conclusion: Total elimination of the property tax via constitutional amendment is the only way to give property tax relief that will stick. The other tax action necessary to achieve this goal—in 2011-are large but not so scary as "a 13% sales tax." They are feasible. The question is for the General Assembly. Are we going to once again go down that 70-odd year path of failed PTR policies or are we going to rip the property tax up by the roots?

Posted by Hoosiers For Fair Taxation on Friday, January 4, 2008.