Tuesday, July 22, 2008

The Disappearing Personal Property Tax

As much as I harp on the fact that the expense side of our school operations is dominated by compensation and benefits, there is a dynamic on the revenue side which I've not addressed: the phase-out of the Ohio Tangible Personal Property Tax.

This is a tax levied on the value of manufacturing equipment and inventory owned by businesses. The Taft Administration decided to restructure the business tax rules in Ohio, and the most significant of those changes was to phase out the Tangible Personal Property Tax and the Corporate Franchise Tax and replace them with a single Commercial Activity Tax.

The trouble is, some or all of the Tangible Personal Property Tax was channeled directly to local school districts, while there is no such provision in the Commercial Activity Tax system. In other words, the State of Ohio is taking money away from us – permanently.

This is different from the state funding component which is variously called "State Aid" or "State Grants-in-Aid." Our school leaders have been saying for quite a while that this component has remained virtually unchanged while our enrollment has continued to grow. In 2005, this revenue source amounted to $37.6 million, and dropped slightly to $37.4 million in 2008. In 2012, State Aid is projected to be $43.7 million.

How significant is the revenue from the Tangible Personal Property Tax? According to our Treasurer's revised Five Year Forecast, it was $16.6 million in 2005. For the year ending June 30, 2008, we received $9.3 million. By 2012, it will have dropped to $2.9 million, and then will disappear altogether.

Not all districts are affected the same way by this change. For example, rural districts with little industry will see almost no impact. The big urban districts have sufficient political power that we can feel assured that their State Aid will be adjusted to offset the loss of the Tangible Personal Property Tax income. As always when it comes to school funding, the suburban districts get the brunt of it. That means we'll need to replace this revenue with money from our own pockets.

So let's do some math: if a 9.5 mill levy would generate $21.9 million/yr in revenue (per the March campaign brochure), that means 1 mill raises $2.3 million/yr. So:

Just replacing the $16.6 million/yr in Tangible Personal Property Tax revenue requires 7.2 mills – forever.

One could argue that it would make sense to put a 7.2 mill levy on the ballot and call it the "Bob Taft Sends His Love" levy – just to make the point that the levy was not due to increases in compensation and benefits.

The Treasurer's Forecast takes the phase-out of the Tangible Personal Property Tax into account when he states the magnitude of the cutbacks necessary should we not get a levy passed in time for the 2009-2010 budget approval. As a reminder, those numbers are $18 million in 2009-2010 and $8 million more the following year.

So when the Board meets to decide on the size of the next levy, they have to figure out how much money to ask for to cover both the increase in personnel costs and the phase-out of the Tangible Personal Property Tax.This isn't quite correct, please read through the attached comments for additional information -- pl

This is just one more moving part in the school's economic engine that the public doesn't understand. It should have been part of the comprehensive community education program I've been advocating for years. This would have been a good thing for the ACT Committee to talk about.

Now the whole information/education burden is likely going to get dumped on the campaign committee, and they haven't even been told by the Board what the levy amount will be yet.

It is now 70 days until Early/Absentee voting begins.


  1. Paul,

    Your board is not telling the full story. All districts are being reimbursed -- held harmless -- for lost TPP by the state, based on their 2005 TPP reciepts -- with a whole lot of qualifying language of course.

    Read appendix B from this doc from Taxation. Also, search ODE for your reimbursement schedule.

    As with everything else in school funding law, when you go out past this biennial state budget, you cannot be certain that anything you read will hold. That said, Hilliard is currently being held harmless.

    Bet your treasurer failed to mention that.

  2. Maybe Bob Taft has actually done us a favor - the more the homeowners/tax payers are squeezed for increasing expenditures and decreasing funding, the more attention they will pay to the business of running a school. Perhaps more educated voters will vote to change the school board in favor of a more fiscally responsible leadership. And perhaps the voters will demand changes in school funding from their state representatives. It's a shame that there will be children whose educatio will perhaps suffer through these lean times, but the net result may end up being positive in the next 5-10 years.

  3. Based on this post and Jim Fedako's correction to it, the school funding issue is beginning to seem like federal income taxes - that is, mostly incomprehensible.

    (Money magazine had ten professional tax preparers do one person's income tax and I believe they came up with ten different answers. Pretty soon not only will the citizenry not understand school financing, but neither will the BOE.)

  4. The following is copied verbatim from the Treasurer's most recent Five Year Forecast:

    Property Tax Allocation

    Tangible Personal Property Tax Replacement Revenues – The district is required to classify this new revenue source in this category. It is important to remember these revenues are replacing local tax revenues eliminated by H.B. 66. The following represents this revenue source by fiscal year:

    FY08 - $6.7 million
    FY09 - $9.4 million
    FY10 - $10.9 million
    FY11 - $8.1 million
    FY12 - $6.3 million

    These replacement revenues make the district whole until FY11 and then will be phased out annually until completely eliminated after 2018.

    So, can't blame this communications error on the Board or the Treasurer - it was my mistake in overstating the near-term effect of this. It will most definitely be a concern in the next levy cycle - unless a new school funding paradigm is developed. Sorry folks.

    Thanks for the correction, Jim.


  5. Paul,

    Keep in mind that reduced TPP valuation also plays out on the basic aid side.

    Since the TPP assessment percentage is decreasing (phasing out), your district is also losing valuation on its basic aid calculation (SF3).

    Reducing valuation on the SF3 can cause basic aid to increase by 23 mills times the lost valuation (this is not true if Hilliard is on the guarantee). Plus, you would also get additional revenue under categorical aid.

    So, assuming no guarantee, Hilliard loses its voted operating millage (not effective mills) times lost TPP valuation, less ([23 mills * lost TPP valuation] + additional categorical aid + the reimbursement that's in effect).

    Does your treasurer note additional basic aid due to the phase-out of TPP -- in the out years?