Sunday, June 23, 2013

Three Card Monte Taxation Plan

When I was in my young twenties, I was thrilled to be assigned to attend a big trade show in New York City. It was my first trip there, so I took the opportunity one afternoon to just wander around midtown Manhattan and take in the sights, sounds and (ugh) smells.

It wasn't too long until I came upon a set of three or four people gathered around a guy who was playing with three cards on a little table. He was running a Three Card Monte game, and I had never seen anything like it. After watching for a while, I thought I had the game figured out, and felt "hey, maybe I could win a few bucks!" Fortunately, someone else was sucked in before me, and I watched him lose probably $100 before walking away. When I told the story to my savvy New York colleagues, they had a good chuckle at my expense, and I learned an important lesson.

We're being similarly played by our lawmakers down in the Statehouse. Their game is "Hide the Taxes," and they're hoping they can "con" us into being the rubes.

The Biennial Budget Bill they're working on right now contains a cut in personal income tax rates. If the proposed language makes it into law, there will an immediate change in the State Income Tax withholding tables used by employers, and everyone's take-home pay will increase a little.

Voters usually like that sort of thing. But it doesn't mean our tax burden will go down. It's a little game of "hide the taxes."

Many years ago, another set of lawmakers decided that they wanted to cut property taxes across the State. But since property taxes are the primary revenue source for local governments, like townships and school districts, the political powers of the day forced them to simultaneously implement a mechanism to keep the local governments whole. It works this way:

Find a recent property tax bill, and look at the green box in the lower right hand corner (this information can also be found on the website of the Franklin County Auditor). You'll see two lines, one labeled "10% Rollback" and one labeled "2 1/2% Rollback."  These rollbacks - shown as negative numbers - are how the lawmakers decided to portray the property tax cuts for Ohio landowners.

To keep the local governments whole, the lawmakers added an amount equal to the property tax cut to the funding each local government receives from the State. This is recorded in our Five Year Forecast as part of the amount in Line 1.050 "Property Tax Allocation."

Line 1.050 is used to report money we receive from the State to replace revenue taken away by changes they make to property taxes. It includes not only the replacement for these two real estate property tax rollbacks, but also the cuts made during the Taft Administration to Tangible Personal Property Tax rates. For the fiscal year ending June 30, 2013, the total of these two categories of reimbursements is $17.4 million, of which $11.4 is for the real estate tax rollbacks, representing 7% of our total revenue.

Here's the game: To offset the revenue reduction the State will see with a State Income Tax cut, our lawmakers plan to eliminate the 12.5% rollback on future property tax levies (ie no change will be made to the rollback/reimbursement for levies now in force).

This change, like most changes to the tax code, creates winners and losers. When the Tangible Personal Property Tax on businesses was eliminated, the winners were the big manufacturers who have enormously expensive equipment and inventories. To offset that, the corporate income tax structure was changed. The net impact was to shift a great deal of the corporate tax burden from manufacturers to every other kind of business operating in the State.

Under current law, if we pass a new school property tax levy that adds, for example, $100 per year to your property taxes, the 12.5% rollback would reduce that by $12.50 per year, and the school district would be reimbursed the $12.50 from the State. The State gets the money for that reimbursement from many sources, the primary one being personal income taxes. In other words, when this property tax rollback was implemented, it was funded largely with income taxes.

Let's put aside for the moment any debate about whether our school district should be spending more money or less, and just envision that there might be a point in time in the future when the majority of us agree that more revenue is needed to operate our schools.

If the determination is that $1 million/yr more is needed, then under current law, we could pass a levy that would generate $1 million/yr more, with $875,000 collected via our local property taxes, and $125,000 contributed by the State.

With the proposed law eliminating the rollbacks, the whole $1 million/yr would have to be collected in local property taxes.

So would you be a winner or a loser?

The winners would be folks who have higher incomes and proportionately lower property values. Their income tax liability would drop more than the extra 12.5% property tax on new levies. Think of a middle-aged family still in their starter house even though their family income has gone up substantially in the years since they purchased their home.

Folks who have high incomes and high property values, or low incomes and low property values probably come out even, with their income taxes going down about as much as the lost property tax rollbacks.

Many of the losers will be retired folks, who bought and paid for nice homes during their working years, but now have much smaller incomes - a class which includes my wife and me. We would get little benefit from reductions in income tax rates, but would bear the full brunt of property tax increases.

Little mystery as to why many of my friends who, upon retiring bailed out of Ohio and took up residence in states where there are much lower property and income taxes. The Carolinas and Florida seem to be popular destinations.

To be continued...

[more on this topic from The Columbus Dispatch]


  1. Paul, I know there's more to come, but perhaps if we actually paid the full levy amount instead of having the State pay 12.5% of it, more people might decide that reigning in spending is a better solution?

    1. With the rollbacks, the voters would hear something like "this 5.9 mill levy will add $516.25 per $100,000 of value to your property taxes."

      Not seeing any obvious connection between the numbers 5.9, 516.25 and 100,000, I think most voters just chalk it up to tax voodoo, and vote on emotion.

      You're suggesting that changing that sentence to "this 5.9 mill levy will add $590.00 per $100,000 of value to your property taxes" might sway their decision.

      If the voters would change their decision based on this nuance, then that will say we've been successful teaching them more about public school economics than has ever been generally known before.

      That would be a victory.

    2. Paul, you're correct that any vote on emotion (both ways).

      But many vote on economics. Once the price tag hits that particular voter's "breaking point", their "yes" vote becomes a "no" vote. If they are being asked to pay the full amount, that "breaking point" arrives sooner...

    3. You are raising the question of "elasticity," which is how sensitive buyers are to a change in price. In the case of the last levy election, it took a change of 14.5% - from 6.9 mills to 5.9 mills - to move from failure to passage.

      But note that the price of a levy is always expressed in mills. So will the voters notice that a 5.9 mill levy in passed in 2014 would them cost 12.5% more than a 5.9 mill levy passed in 2012?

      Again, I hope the answer is yes, because it will mean they understand things better.

    4. Actually, it took a 14.5% change in millage (but not dollar amount) and a big chunk of misinformation from the school district to move it from failure to passage.

      That wont happen again.

      But yes, thanks to your efforts and others, the voters are beginning to realize the true cost here. But then the sheer number of levies needed guaranteed that was only a matter of time.

  2. With three card monte you can exit the game when you have had enough. Unlike the HCSD you must pay and pay and pay. In any tax system there is always a winner and loser. Any taxpayer in the district is a loser.

    Our leadership team has done nothing with local or state govt. When you look at how much we send the state via income tax and sales tax in relationship to what we get in the way of school funding. The process is neither effective or efficient.

    We would be much better off keeping the money and funding the schools 100% within the district. This would start the process of looking what total costs are. Looking at total costs would help wake up some voters.

    For the most part parents are willing to pay but want someone else pay the bulk. Sports costs is one area that this opinion shows its ugly head. The tax payers of Hilliard do not know what total costs amount on a per taxpayer basis.

    I feel if we paid 100% direct in school taxes things would be very different.

    We would look at sports and class offerings and say, is that really needed. I have tired of the process of hearing we are only keeping what we have only to find out later we have expanded offerings. It is not that we would not approve new classes, but the bold face lie that is told to pass a levy!!!

    I will ask again what did the new learning center cost? And what was not done to shift money to do this. We hale 2020 as Dales great plan, but was a cost ever provided, when did we vote for this plan and the cost.

    Dale has had no respect for the tax payer and I for one have little if any respect for his boss, the board.

    My concern is that the board lacks leadership skills needed. Look, listen and hold them accountable for how they spend your money.


    PS I know many must also be tired of my comments about Dale. However he is the one who brought us accountability. On 8/1/13 we will start to learn what effect his 14 year term has had on our district and the future effects.

    1. Dave:

      Your comment "Any taxpayer in the district is a loser" seems to ignore the fact that all school tax levies are voted on by the people of the district, and a new tax is imposed if and only if the majority of the voters agree to it. Again, it's the way democracy works.

      I share many of your concerns, as I'm sure do others in the community. But there are other equally valid perspectives and opinions, including those who think we should spend more and offer more.

      Such diversity must be resolved in respectful, empathetic dialog - not in attack mode.

  3. Paul, I might be preaching to the choir here but there's a pretty sharp political book out by Kevin Williamson called "The End is Near". If you'll forgive the length of this comment, here's an excerpt you and your readers might find interesting:

    In the American context, there probably is no better example of the contrast between the world of the iPhone (the world that works) and the world of politics (the world that doesn’t work) than the public school system. Consider the cell phone in your pocket, which gets better and cheaper every year, and the public school down the street, which gets more expensive and less functional every year. The contrast is striking. There is a temptation to think of the difference as being merely technological: We are used to rapid improvements in the quality and affordability of gadgets and gear. But measured against practically any other product of the private economy—from bread and butter to banking services and airline travel—the contrast is substantially the same: lower prices and higher quality in the private economy, the opposite in the schools.

    [Schools] have mistaken its customers for its product...A functional, market-based education system would properly recognize that its customers are students and that its products are various kinds of education, ranging from classical liberal arts studies to forms of specific occupational training...Being political institutions, the schools operate under the theory that their customer is the State—or “society” at large—and that their product is a national workforce, tailored to meet national needs—which is to say, political needs.
    All serious education reform programs must put private citizens—students and their families—in charge of appropriating education funds, rather than political bodies. The Obama administration tellingly describes its guiding educational principles in terms that cast students as national resources to be deployed serving the interests of the State: “Providing a high-quality education for all children is critical to America’s economic future. Our nation’s economic competitiveness and the path to the American Dream depend on providing every child with an education that will enable them to succeed in a global economy that is predicated on knowledge and innovation. President Obama is committed to providing every child access to a complete and competitive education, from cradle through career. President Obama will reform America’s public schools to deliver a twenty-first-century education that will prepare all children for success in the new global workplace.” Even in this embarrassing specimen of political boilerplate, we can discover the underlying ideology. The main thing to notice is that the national interest (“America’s economic future,” “our nation’s economic competitiveness”) comes first, while the individual’s interest (“the path to the American Dream”) is tacked on as an afterthought.

    So, at first it was God who needed an educated citizenry, then God’s deputy, the king, ruling by divine right, then the more quotidian secular-nationalist autocrat, and today those meaningless aggregates “our nation” and “the economy,” all of which in political reality amount to the same thing...It is therefore easy to answer the question, “Why does the education system not do a better job of serving our students’ interests?” The answer: Because it is not designed to. It is designed to serve the interests of the State. (CONTINUED)

  4. ....The political function of private schools is to give the wealthy and the politically powerful ready alternatives to the dysfunctional monopoly of school systems, ensuring that the very parties who are best positioned to achieve meaningful reform of the government schools are those who have the least incentive to do so, and that those who suffer the worst of the public schools’ dysfunction are those who have the least economic or political ability to do anything about it. There is a kind of genius at work in that: Practically no one objects to the fact that the wealthy and the politically powerful exempt themselves and their children from the public school monopoly.

    Given our maxim—Reality Is Not Optional—and our promise that we will understand political organizations by analyzing what they do rather than what they say they intend to do, the public schools are best characterized as a wealth-transfer program in which resources are taken from renters (ranging from very poor Section 8 apartment dwellers to wealthy commercial enterprises), landlords, and homeowners, with the poor paying a disproportionately high rate (because they tend to rent rather than to own homes, meaning that they are paying their landlords’ taxes at the commercial-property rate without the benefits and tax deductions enjoyed by homeowners). This money is then given to a group of largely female and white, upper-middle-class college graduates with professional credentials.

    This is a remarkably sophisticated con, and it is especially impressive considering the relatively low intellectual caliber of the people in charge of the public school system. Decades’ worth of research has shown that education majors have the lowest scores on the SAT and other standardized tests of any group of college graduates—yet students taking education classes receive, strangely enough, the highest college grades, which would seem to be evidence of massive grade inflation. That grade inflation continues throughout the public schools themselves, in which teachers receive “overwhelmingly positive evaluations,” according to a report from the New Teacher Project. As Cory Koedel of the University of Missouri puts it: “Grades . . . play an important filtering role in most academic departments, deterring students with limited skills or with skills poorly matched to the discipline. Grades do not appear to play such a role in education departments.”...The United States currently spends about 145 percent of the average among countries in the Organisation for Economic Co-operation and Development, of which it is a member, on education, but its results are toward the back of the OECD pack. According to Agence France-Presse, “The three-yearly OECD Programme for International Student Assessment (PISA) report, which compares the knowledge and skills of 15-year-olds in 70 countries around the world, ranked the United States 14th out of 34 OECD countries for reading skills, 17th for science, and a below-average 25th for mathematics.” Total federal, state, and local spending on education in inflation-adjusted dollars per pupil is today about twice what it was in 1985, and yet results have been stagnant or worse.

    1. Jerry:

      Some of this I agree with, but I find this...

      This is a remarkably sophisticated con, and it is especially impressive considering the relatively low intellectual caliber of the people in charge of the public school system.

      ... more than a little offensive. While I may not always agree with the political bent of the folks engaged in our public education system, I certainly wouldn't call anyone I've engaged with to be of "low intellectual caliber."

      Nor do I understand why so many who have otherwise reasonable points feel compelled to resort to insulting language. Do they really think that will lead to any kind of resolution of differences?

    2. Paul, you forgot the second part:

      "Decades’ worth of research has shown that education majors have the lowest scores on the SAT and other standardized tests of any group of college graduates"

      If the second part is indeed true, the first part is definitely acceptable.

      And, even more so, if the second part is indeed true, then failing to acknowledge the first part means the root of the problem can never be addressed.

      The first step for rehab for an alcoholic is for them to recognize that they are an alcoholic. If our teachers are, in fact, intellectually less superior than the majority, we must acknowledge that.

      Lastly, but must importantly for those with steam flooding our of their ears right now... neither of the two parts says the are ineffective teachers. It simply implies that the system was not designed by teachers, but by others.

      And I for one question the motives of the people that design such a system that claims to be in the interest of the children (the customers) but is in fact in the interests of someone else entirely...

    3. I have to mea-culpa a little here as re-reading the quote it refers to the people "in charge" of the public school system, which is generally not the teachers themselves, although many of course are former teachers.

      The overall point is still valid though.

  5. Being retired with only Social Security, I've already reached my breaking poing with property taxes in Hilliard. With the improved market, my house is now up for sale ... Tennessee, here I come!

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  7. Every time I get depressed by the hard right anti-school lobby in my area, I check out your blog and am relieved to see that there are people out there who I may disagree with on some (or even many) fundamentals of schools, but at least I find are intelligently looking at the picture.

    I'm glad to see that you realize the shell game being played here....

    And to further your points, we should all remember that as property tax levies in Ohio do not adjust for inflation (and many expire), keeping real (ie inflation-adjusted) spending *FLAT* means that the property tax roll backs will eventually go away. If you're taxed at an effective 55 mils today, inflation will gradually reduce that millage. Even simple fluctuation in values can do this (ORC allows adjusted millage to drop but not increase).

    So if we just want FLAT school spending, we all eventually end up paying this higher tax rate. This hits lower income to middle class homeowners and the retired the most. While I'm not in favor of much special treatment for any group of citizens, we should recognize that senior citizens can be wonderful to have in your district - they provide funds without increasing the demand for services, allowing a lower tax rate for everyone.

    1. Thanks for your comment. My objective is to explore several perspectives as to how we should make education available in our country. Democracy isn't always fair. It's not meant to be fair. It mostly the majority view, with the minority protected by courts interpreting the limits and rights of the Constitution. But wise leaders know that oscillating from one extreme to another isn't healthy for a democratic government at any level.

      I would argue that home values and inflation are not the same thing. Inflation is a monetary event that is national in scope, while changes in home values are often local in nature - sometimes varying wildly from neighborhood to neighborhood.

      And it's not uncommon for home values to rise while incomes remain constant. That's what instigated HB920 in the first place - low income folks in a run down neighborhood who were being taxed out of the homes when the neighborhood started to regentrify.

      I'm not sure that's right about the effective millage not going up. The ORC language is tough to digest, but I recall the County Auditor making the point during the housing crisis that falling home values would not equate to lower property taxes - that the HB920 mechanism works in both directions, keeping the dollars collected by a levy on a parcel the same regardless of whether values went up or down.

      Remember that senior citizens have a weapon of their own - the earned income tax levy. Because seniors usually turn out in greater percentages than younger voters, they might be able to push through an earned income only income tax levy, if the school board decides to put one on the ballot. It's not too hard to get people for vote for a tax they don't have to pay.

    2. Agreed that home values and inflation aren't exactly the same thing, but they generally do correlate. Even if they don't move perfectly in unison, I think my statement still holds true. If, for sake of example, inflation is at 3%. Say the district collects $1 million in revenue, and for simplicity's sake it all comes from property taxes). After five years, the purchasing power of that revenue has been reduced to $863k in today's dollars. Just to keep inflation-adjusted spending flat, taxes would have to increase by 15.9%, but HB920 doesn't allow for this without new levies. Those new levies will be passed without the rollbacks. Eventually the old levies with the rollbacks will either become a negligible percentage of the total tax, and/or housing inflation will drive down the applied millage.. and we all asymptotically approach the point where there is no rollback at all. It won't be overnight, but it will happen (unless they ever fix the funding constitutionality problem).

      As for the change in millage with property value declines, I think I have it generally right, but there are exceptions:

      1) Emergency school levies are clearly exempted
      2) Bond levies are clearly exempted
      3) The 10 mil "floor" is exempted

      (All per ORC 5703-25-45(B)(2))

      The change of effective millage is in ORC 319.301(D), unless I'm mistaken and it is discussed elsewhere. In that section they state that the auditor should calculate the reduction factor needed to collect the same $ collected as in the previous year. It doesn't directly mention increasing the rate from one year to the next, so I guess the question is whether changes are cumulative - ie, the reduction factor is applied to a net reduction factor from the year before, and that has to be less than 1, or if the "reduction factor" doesn't mean "reduction" but rather "adjustment" (and there I'm not sure if the millage can ever go above the approved millage if values drop enough to necessitate it).

      I'm guessing (again I could be wrong) my interpretation has some truth to it based off of my taxes - our area lost some value - not much, but some.. my home lost significantly less than average, but my taxes dropped by an amount just less than the drop in value - ie, my home lost ~10% on its appraised value, the district as a whole dropped about ~15%, and my taxes dropped ~8%. Since no levies expired or were greatly reduced, I would think that there's a limit to their ability to increase applied millage.

      But I could be wrong. :)