Wednesday, March 19, 2008

You Think We've Got Problems...

While the leaders and citizens of our community struggle with a 9.5 mill permanent operating levy, imagine being in the position of New Albany-Plain Local Schools right now.

Half of their operating funds are generated by a single 20.7 mill emergency levy that expires in December 2009. And because they must deal with the same constantly-increasing personnel costs we do - and every other district does, they think they might have to put a 27 mill levy on the ballot just to keep up.

Can you imagine trying to get a 27 mill levy passed?

Without doubt, their leaders will make the point that this isn't all new taxes - that 21 mills of it is to replace the expiring levy, and only 6 mills of tax increase. But if New Albany is like many communities, many folks won't understand all the vocabulary of levies, and will just hear the 27 mills and reject it out of hand.

They have a real poker game on their hands.

One approach might be to break this levy up into pieces: 21 mills for the replacement and 6 mills for the increase. Then the voters could feel like they have a little more control. But the risk is that the people might vote down the 21 mills and pass the 6 mills - which is perhaps the worst outcome. A little more money does no good, yet voters will feel they're "done their part."

What about three 10 mill levies? Might be the same problem, but my guess is that they could get two of three passed. Twenty mills is better than nothing. I'd make them permanent levies this time.

They're also considering an income tax. New Albany is a pretty affluent community, so a small income tax could still generate a lot of money. An income tax also has the feature that it automatically increases with income, which can be pretty handy in times of inflation.

Ohio Law allows for two kinds of school income taxes. One is based on the full Adjusted Gross Income (the bottom line on the front page of your 1040). The other is an Earned Income Only tax, which excludes interest, dividends, pension income, Social Security and the like, and is targeted to protect senior citizens on fixed incomes. And because senior citizens are the voter group most likely to turn out, giving them an option to swap property taxes for essentially no taxes is a winning proposition.

Note that excluding interest and dividends not only benefits senior citizens, it also helps wealthy individuals who receive a lot of their income from investments. This is an extreme case, but take Les Wexner for example: Mr. Wexner and his wife currently pay $740,000 per year in school taxes for their estate (the total property tax bill is over $1 million/yr). About half of that - $370,000/yr - goes to New Albany's permanent 20 mill levy, and half to the levy that is about to expire.

Les Wexner is, of course, founder and CEO of Limited Brands. According to Forbes, Mr. Wexner is paid about $5 million/yr, so a typical 1% school income tax would generate $50,000/yr. To generate the same $370,000 that the expiring levy generates, the earned income tax rate would need to be 7.4%. Slim chance of that passing.

Mr. Wexner also owns about 8.6 million shares of Limited Brands stock, which currently pays 60cents/share in annual dividends. That's another cool $5 million/yr. But with an earned-income tax, his dividend income would be shielded from taxation. Bottom line is that substituting a 1% earned-income tax for the expiring levy would save Mr. Wexner about $320,000 per year.

Again, this is an extreme example, but the big numbers help make the point: an earned-income tax levy may be easier (not easy) to get passed, but it might not generate the outcome one expects. It will protect seniors with low incomes from pensions and retirement plans, and relieve them from the crushing effect of ever-increasing property taxes. Most people would support that.

But in the same breath, it will benefit the most wealthy individuals in the district, who tend to have very expensive homes (the Wexner estate is appraised at $47 million) and and substantial portion of their income from investments.

Where does the burden go?

The same place as always: The middle-class, two-income family who has mortgaged themselves to hilt to buy a nice house in a nice community in a good school district. The high home value means high property taxes. Shifting to a earned-income property tax doesn't change things much because most middle-class folks don't have much investment income outside their already tax-sheltered IRAs and 401(k)s. Except that the taxes formerly paid by the senior citizens and the most wealthy now have to be paid by the middle class folks as well.

By the way, I recommend listening to this interview with Elizabeth Warren. As a Harvard Law professor, she started a research project trying to find out if all the folks filing for bankruptcy were just taking advantage of the system (her belief at the time). What she found was that the backbone of America - the hardworking middle class - is in real trouble. Her punch line? That because of the way schools are funded (via property taxes) Americans have to mortgage themselves to the limit be able to afford a house in a good school system for their kids.

The only folks winning in this game are the land developers and the homebuilders. I for one am not sorry to see them suffering hard times right now, especially given the role some played in the sub-prime mortgage debacle. But I also recognize that the homebuilding industry propped up lots of other sectors and provided lots of jobs (and drew lots of immigrants to central Ohio).

I don't know of any districts which have actually exchanged a property tax revenue stream for one based on income taxes. The more common configuration is a mixture of the two. There are already three Franklin County districts who do this: Bexley (0.75%), Canal Winchester (0.75%), and Reynoldsburg (0.50%).

New Albany is in a jam. Do they go 'all in' and try to get one big 27 mill levy passed? Is it time to bring an income tax into the mix? How much of each?

We may face a choice like this in our future. It's not going to be any easier.


  1. I don't know of any districts which actually exchange a property tax revenue stream for one based on income taxes. The more common configuration is a mixture of the two.

    A mix seems to be the wave of the future - people don't seem to notice high taxes as much if it comes out of many different streams: federal, state, gas, sales, property...even auto registration. The latest idea is to charge for services heretofore covered.

    We're like the frog in the boiling pot. As long as the increase in taxes is slow and steady and we don't experience too big an increase in any one source (i.e. like prop tax), we'll probably look the other way.

  2. You ask "Where does the burden go?" when you should be asking "Where does the benefit go?"

    The current system benefits the staff as they continually receive salary and benefits increases twice that received by those in the private sector.

    Sure, you can hide the costs via a number of different tax options, but the end is the same: Public schools continue to increase costs at an unsustainable rate.

    And, it's not for the kids.

  3. Here is a great link regarding school income tax.

  4. Thanks... this is actually the same link embedded in my original post.


  5. For those wondering where the opposition to the Reynoldsburg tax levy (issue 80) is, check out this web site which demands accountability:

  6. That link doesn't work. Here's one to the Dispatch summary.