Role of the Property Tax in Pre K - 12 Education Funding Tom Melcher Education Finance Working Group July 31, 2012

Trends in the Use of Property Taxes to Fund Pre K- 12 Education Impact on Equity for Students and Taxpayers Changes Proposed in 2011 Working Group Report Other Options for Reforming the Use of Property Taxes to Fund Pre K-12 Education Topics for Discussion education.state.mn.us 2

–Elimination of the uniform general education levy for taxes payable in 2002 (FY 2003) reduced school property tax levy by nearly 50%, reducing the property tax share of school funding from 25% to 12%. –Since 2002, school levies have more than doubled, and the property tax share of school funding has increased to 20%. –While the property tax share of school funding is still slightly lower than before the elimination of the general education levy in 2002, the new levies that have replaced it are largely unequalized, and are very uneven in their impact on students and taxpayers across the state. Trends in the Use of Property Taxes in Minnesota to Fund PreK-12 Education education.state.mn.us 3

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Adequacy and equity depend not only on the amount of state aid and property taxes in the system, but also on how the state aids and property tax levies are allocated among districts. Because school district tax base per student varies widely, levy equalization plays a major role in determining the adequacy and equity of the overall school finance system. In a fully equalized system, taxpayers in all school districts would make similar effort (bear similar burdens in relation to ability to pay) to raise similar amounts of revenue per student. This presentation uses property tax rates as a percent of taxable value to compare property tax effort among school districts. While not a perfect measure of tax effort, property tax rates do provide an indication of tax effort in relation to tax capacity. LEVY EQUALIZATION Impact on Adequacy and Equity education.state.mn.us 6

Two basic types of state aid formulas: –Flat Grants: State aid is allocated based on revenue need (e.g., student count or percent of expenditures), without regard to local tax base or tax effort –Equalization Aid: State aid varies inversely with local tax base per student so as to provide equal revenue per student for equal tax rates. Two basic types of property tax levy formulas: –Unequalized Levies: All local. No state aid is provided to mitigate disparities in local property tax base or tax effort. –Equalized levies: State equalization aid is provided to mitigate disparities in local property tax base or tax effort. STATE SCHOOL FINANCE SYSTEM DESIGN As Related to Property Taxation education.state.mn.us 7

Two basic types of equalization formulas: Fixed Revenue / Tax Rate Programs (e.g., old general ed levy, community education levy, ECFE levy) –Revenue = Fixed rate times need units (e.g., student count) –Levy = Fixed tax rate defined in statute x taxable value –Aid = Revenue - Levy Variable Revenue / Percentage Equalizing Programs (e.g., referendum, debt service, operating capital) –Revenue per student varies –Local share varies depending on local tax base per student in relation to an “equalizing factor” (guaranteed tax base/student) STATE SCHOOL FINANCE SYSTEM DESIGN As Related to Property Taxation education.state.mn.us 8

The effectiveness of levy equalization formulas depends on the extent to which the tax rates or equalizing factors are set at a level that minimizes wealth-related variations in tax effort needed to generate a certain level of revenue per student. If most districts are “on the formula” and receive equal revenue per student for equal tax effort, the formula is considered to be “fully equalized”. Districts are “off the formula” if the fixed tax rate raises more than the formula revenue, or if the district’s tax base per student exceeds the equalizing factor. In this situation, the district receives no state aid, and the tax rate is lowered to limit the revenue to the formula amount. If many districts are “off the formula”, the formula is considered to be “partly equalized”. Some partly equalized formulas come closer to full equalization than others. STATE SCHOOL FINANCE SYSTEM DESIGN As Related to Property Taxation education.state.mn.us 9

Over the past 10 years, state equalization formulas have not kept pace with inflation, and many districts have gone “off the formula”, creating disparities between property-rich and property-poor districts in the tax rates needed to raise the formula revenue. Today, most of Minnesota’s levy equalization formulas are partly equalized. While still providing assistance to districts with very low property value per student, these formulas allow wide variations to exist in tax rates needed to raise the same level of revenue per student. Some levies for Minnesota school districts are totally unequalized. These levies create greater disparities between property-rich and property-poor districts in tax rates needed to raise a certain level of revenue per student than equalized or partly equalized levies. Over the past 10 years, the portion of school revenues from unequalized levies has increased significantly. STATE SCHOOL FINANCE SYSTEM DESIGN As Related to Property Taxation education.state.mn.us 10

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Add slide showing trends in referendum aid and levy education.state.mn.us 14

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REFERENDUM LEVY BY WEALTH QUINTILE FY State Totals education.state.mn.us 17 Higher wealth districts have more revenue per ADM and higher tax rates; yield per unit of tax effort is similar across wealth quintiles.

REFERENDUM LEVY BY WEALTH QUINTILE FY State Totals education.state.mn.us 18 Higher wealth districts have more revenue per ADM; tax rates are similar across wealth quintiles; yield per unit of tax effort is higher in high wealth districts

REFERENDUM LEVY BY WEALTH QUINTILE FY County Metro education.state.mn.us 19 Higher wealth districts have more revenue per ADM and higher tax rates; yield per unit of tax effort is similar across wealth quintiles.

REFERENDUM LEVY BY WEALTH QUINTILE FY County Metro education.state.mn.us 20 Higher wealth districts have more revenue per ADM; tax rates are similar across wealth quintiles; yield per unit of tax effort is higher in high wealth districts

REFERENDUM LEVY BY WEALTH QUINTILE FY Non-Metro education.state.mn.us 21 Very low and very high wealth districts have more revenue per ADM and higher tax rates; yield per unit of tax effort is similar across wealth quintiles

REFERENDUM LEVY BY WEALTH QUINTILE FY Non-Metro education.state.mn.us 22 Very low wealth districts have more revenue per ADM than other groups; tax rates are lower in high wealth districts; yield per unit of tax effort is higher in high wealth districts

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Other school levies have more than tripled since 2002, from $223 million for taxes payable in 2002 to $707 million for taxes payable in Most of these levies are either unequalized or only minimally equalized. Some such as the OPEB debt levy and the alternative facilities levy are available only to a select group of districts. Other General Fund Levies Impact on Equity for Students and Taxpayers education.state.mn.us 26

MISC GENERAL FUND NTC LEVIES BY WEALTH QUINTILE FY STATE education.state.mn.us 27 Higher wealth districts have more revenue per ADM; average tax rates are lower for the highest quintile than for other quintiles; yield per unit of tax effort is significantly higher in high wealth districts

MISC GENERAL FUND NTC LEVIES BY WEALTH QUINTILE FY County Metro education.state.mn.us 28 Higher wealth districts have more revenue per ADM; average tax rates are similar across wealth quintiles; yield per unit of tax effort is significantly higher in high wealth districts

MISC GENERAL FUND NTC LEVIES BY WEALTH QUINTILE FY Non-Metro education.state.mn.us 29 Higher wealth districts have slightly more revenue per ADM; average tax rates are lower in the highest wealth quintile than other quintiles; yield per unit of tax effort is significantly higher in high wealth districts

Average homestead values, school taxes per homestead, and school taxes per $100,000 of market value are all higher in the metro area than non-metro, and are higher in large non-metro districts than in smaller non-metro districts. Market Values, Total School Taxes and School Tax per $100,000 of Value by Strata, Pay 2011 education.state.mn.us 30

Within metro and non-metro regions, average school taxes per $100,000 of market value are slightly higher in districts with low average home values than in districts with high average home values. Total School Taxes and Tax per $100,000 of Value by Region and Average Home Value Quintile, Pay 2011 education.state.mn.us 31

1.Roll $400 per pupil unit of referendum revenue into the basic general education formula. –Provide a more adequate, uniform and stable funding base for all districts and charter schools. –Lessen reliance on local referenda. 2.Establish a uniform general education levy by consolidating and replacing selected existing school levies. – No increase in total school levies. –Eliminate the portion of referendum levy rolled into the basic formula. –Eliminate operating capital, equity, transition, integration and safe schools levies. –A portion of the uniform levy would be spread on tax capacity and a portion would be spread on referendum market value so as to keep state total levy spread on each tax base unchanged. Property Tax Levy Changes Proposed in 2011 Working Group Report education.state.mn.us 32

3.Roll a portion of referendum revenue into a new location equity levy for the seven county metro area and for non- metro regional centers. –Location equity revenue would be funded through an equalized levy spread on referendum market value. –Amount rolled into location equity revenue limited to $400 per student for districts in 7 county metro area and $200 per student for non-metro regional center districts Property Tax Levy Changes Proposed in 2011 Working Group Report (Continued) education.state.mn.us 33

Proposed Changes by Levy Type 2011 Working Group Report ($ in Thousands) education.state.mn.us 34

Proposed Levy Changes by District Type 2011 Working Group Report: Year 1 of 4 Year Phase-In education.state.mn.us 35

Improve state levy equalization formulas: –Reduce tax rates for fixed-revenue programs and increase equalizing factors for variable–revenue programs so that most districts are “on the formula”. –Index equalizing factors to state average tax base per student to stabilize state share of funding over time. Convert selected levies to state aid, or roll additional levies into a higher general education formula, with old levy amount added to uniform general education levy. Equalize access to levies currently limited to selected districts or otherwise reduce revenue disparities caused by unequal access. Other Options Not Part of Charge to 2011 Work Group education.state.mn.us 36