School reform and tax reform: a successful marriage?

• Author: Ballew, Paul D.
• Position: Point

Over the past year, the state of Michigan has profoundly changed the way in which the state's elementary and secondary schools are funded and, at the same time, fundamentally reformed the state's revenue system. With the passage of Senate Bill 1 during the summer of 1993, the Michigan legislature effectively abolished the use of local property taxes as a primary funding mechanism for elementary and secondary education. In doing so, the state eliminated more than $6 billion in locally imposed property taxes that would have provided more than 60 percent of the cost of the state's public elementary and secondary education. In its place, Michigan recently put together a blend of other tax sources, including a statewide property tax and an increase in the sales tax. This new state tax structure is intended to enhance the state's competitiveness and environment for growth and investment. At the same time, the state has established an entirely new system for distributing revenues for education that will reduce disparities between communities in per pupil spending.

Michigan's new tax plan has been more dramatic than most, but it reflects a combination of forces that has put both education and tax reform near the top of many states' agendas since the 1980s. For this reason, other states are examining the Michigan reform package as one way of achieving both school reform and tax reform. This article looks at the Michigan education finance reform plan and the ways in which it changes the state's tax structure while attempting to improve the delivery of educational services.

Michigan's New Plan

A ballot measure passed by Michigan voters on March 15 makes wholesale changes to the state's tax structure in order to replace property tax revenues for education and boost overall spending on education. The measure raises the state sales tax from 4 percent to 6 percent effective May 1, 1994, increases the tax on cigarettes from $.25 to $.75, and levies a new real estate transfer tax and a new 6 percent tax on out-of-state phone calls. The proposal also trims the state's personal income tax rate from 4.6 percent to 4.4 percent.

Michigan's new plan does not eliminate property taxes to fund education. In place of a locally determined common rate on all types of property, however, the state now has statewide tax rates for different classes of property. The plan significantly reduces the school operating property tax rate for homeowners and makes modest average reductions for business property. The new state property tax rates will be 6 mills on primary homes (an 82 percent reduction from the previous statewide average property tax rate for homeowners) and 24 mills on secondary homes and businesses (a 30 percent reduction).

Rather than being dedicated to local school operation, tax revenues raised from local real property will now be pooled and distributed to local school districts through the state's school aid allocation program. In the process, some of the traditional disparity in per pupil expenditure across districts will be eliminated. Minimum per pupil expenditures will be raised from the current $3,000 to $4,200 in the first year. Districts that have been spending less than $4,200 per pupil--primarily rural and some urban...