Three Principles for Necessary for Successful Property-Tax/School-Funding Reform in Pennsylvania

Testimony of Matthew J. Brouillette, President, Commonwealth Foundation

Thank you members of the Committee for the invitation to testify this morning. My name is Matthew Brouillette and I am the president of The Commonwealth Foundation, a Harrisburg-based research and educational institute that focuses on Pennsylvania public policy issues.

In addition to the organization I represent, my testimony offers two additional perspectives. First, I am a former teacher who taught at the middle school, high school, and university levels for many years. Second, and most recently, I served as the Director of Education Policy at the Michigan-based Mackinac Center for Public Policy and am intimately familiar with Michigan’s property-tax/school-funding shift of 1994. In fact, in October 2001, I provided testimony to the Pennsylvania House of Representative’s Select Committee on Public Education Funding on Michigan’s experience. (I have provided my October 10, 2001 testimony for your interest.)

Now, I must say that I think you would be hard pressed to pair together two more contentious public policy issues than education and taxes. Of course, these issues are contentious only because education quality is too low and tax burdens are too high for most Pennsylvanians. But it is for these reasons that the General Assembly must not shy away from the politically difficult decisions that lay ahead in the process of reforming Pennsylvania’s property-tax and school-funding system.

I’m sorry to say this but the average Pennsylvanian does not believe you can do it. A recent poll out of Quinnipiac University found that only 3 percent of the people were “very confident” that you and your colleagues will develop a fair property tax reform plan; while 58 percent were “not too confident” or “not confident at all” in your ability to solve these public policy problems. I truly hope you will prove us all wrong.

To do that however, it will be important that you enact real reform, not just politically expedient solutions. You will fail the citizens of this Commonwealth if you merely put a Band-Aid over what is clearly a gaping wound.

So, you ask, what would a Band-Aid solution look like?

Well, actually it would look like most of the pending 66 bills sitting in the General Assembly today. The majority of these bills are designed to merely shift the tax revenue source. The generic formula employed in most of these proposals is to increase the state income or sales tax by a certain percent and reduce local school district property taxes by so many billions of dollars. Most shifts are revenue neutral, none call for reduced taxation levels on Pennsylvanians, but at least one proposal calls for a near $3 billion net tax increase.

Essentially, the discussion taking place in Harrisburg right now is simply deciding from which pocket the government will take taxpayers’ money—the front pocket of the property owner, the back pocket of working Pennsylvanians through an increased income tax, or everyone’s pocket through an increased sales tax. The problem is that this is not property-tax/school-funding reform. Simply choosing different taxpayers’ pockets from which to extract the same amount or more money is just tax shifting. But the citizens of Pennsylvania won’t accept this—they want reform.

In the same Quinnipiac University poll released last week, Pennsylvanians opposed raising the income or sales tax by 57 and 62 percent respectively. Less than a third of Pennsylvanians support a simple shift of taxes. What they are saying is this: “Don’t just address the revenue side of the equation, deal with the expenditure side too!” Pennsylvanians clearly don’t want the Band-Aid solutions offered in any of the 66 tax-shift bills currently pending in the General Assembly.

Pennsylvanians understand there is a significant difference between shifting and reforming: Shifting focuses only the revenue side of the equation and neglects or completely ignores the expenditure side. Reform, on the other hand, addresses both the revenue AND the expenditure side.

So if Pennsylvania policymakers are committed to property-tax/school-funding reform, and not just shifting pockets from which you take taxpayers’ money, what would this reform look like?

Many policymakers are pointing to the Michigan experience of 1994 as a blueprint for property tax reform. In fact, the Legislative Budget and Finance Committee just released a report—albeit flawed—which recommends tax shifts based on the Michigan model.

I would agree that the Michigan model can teach us many lessons about effective tax shifting, but it does not provide the kind of reform that Pennsylvanians are demanding. Yet Michigan’s limited success is attributable to two key provisions: (1) Michigan citizens constitutionally eliminated the power of school boards to increase property taxes for operating revenues; and (2) Michigan citizens placed public education funding under the state’s constitutional limits on the amount of personal income that the state can take from taxpayers. Without these provisions, Proposal A (as it is known throughout Michigan) would not have provided net tax relief to citizens and local school boards would have raised property taxes once again.

Proposal A, however, did very little to address the expenditure side of the equation. While it did incorporate a few incentives for school districts to become better managers of taxpayer money, the new school funding system did not include important accountability measures. For this reason, the Michigan model is incomplete and falls short of the reform that Pennsylvania taxpayers are demanding.

In order for real property-tax/school-funding reform to occur in Pennsylvania, legislators must construct policies that embody three key principles: (1) Taxpayer Protection through Tax Limitation; (2) Resource Management through the Competitive Delivery of Education; and (3) Continuous Quality Improvement through Accountability to Parents. These three principles deal with both the revenue and expenditure side of the equation; and I would argue that all three principles must be present for comprehensive reform to take place.

The first key principle—Taxpayer Protection through Tax Limitation—addresses the revenue side of the equation once a tax shift takes place. As previously noted, this component of Michigan’s property tax reduction of 1994 was the key to its success. Without the constitutional provisions included in Proposal A, it is likely that property-tax/school-funding reform would not have occurred in Michigan. Like Pennsylvania, the Great Lakes State had attempted to reduce property taxes many times prior to 1994 but proposal after proposal was defeated because there were no guarantees that after a tax shift occurred that property taxes would not rise again. Proposal A finally provided taxpayers with the appropriate protections by constitutionally prohibiting school districts from increasing property taxes for operating purposes.

In Pennsylvania, the source of our property tax crisis is the unilateral power of school boards to increase local property taxes. Since 1968, local school boards have increased taxes by between two and three times the concurrent rate of inflation. It is this dramatic rise in local property taxes that is specifically hurting families across the Commonwealth, particularly those with low- and fixed-incomes.

Therefore, simply reducing property taxes without eliminating or severely restricting the power of school boards to increase taxes once again policymakers will fail to solve Pennsylvania’s property tax problem. The willingness of school boards to “tax out” property owners and their unwillingness to restrain spending or say “no” to budget-busting union demands requires that policymakers include strong and permanent taxpayer protections. Anything less will provide citizens with only temporary tax relief.

The second key principle necessary for property-tax/school-funding reform is Resource Management through the Competitive Delivery of Education.

Today, Pennsylvania schools receive, on average, more than $10,400 per pupil. Is this adequate? Is it too much? Or it is just right? The problem is that we just don’t know. We don’t know because we lack the mechanism necessary to determine the cost of a quality education.

Let me provide you a few examples that demonstrate our current inability to identify how much is enough. Students in the Farrell School District in Mercer County have consistently scored below the state average on test scores—in the 7th percentile. Yet Farrell spent more than $13,300 per student in 2000. Some argue that this simply means that Farrell needs more money.

But contrast Farrell with the Solanco School District in Lancaster County that posted scores in the 75th percentile, yet was outspent by Farrell by 95 percent. It is true that these districts serve different student bodies, but it is hard to believe that $13,300 per child is not enough to adequately educate them—particularly when you look at the success in the private sector.

In the city of Pittsburgh, four Kindergarten through 8th-grade Catholic schools are educating approximately 850 predominantly African-American inner-city children—95 percent of whom are non-Catholic. Despite a student body where 63 percent of the children qualify for free or reduced-priced lunches and 60 percent come from single-parent homes, the schools boast a 96 percent high school graduation rate and send more than 88 percent of these students on to further learning.

So what is the average cost to educate each of these children? Well, put one way, the Farrell School District spent 280 percent more per student in 2000. The average cost to educate a child in one of these four Catholic schools is just $3,500. Families pay tuition of no more than $1,280 with the difference being made up through philanthropic means.

The conclusion we can draw from these examples is that $3,500 is adequate for some schools, while $13,300 can’t get the job done in others.

How then do we determine adequacy? The laws of economics tell us that competition between multiple providers is the mechanism by which we can accurately determine the price of any good or service. It is competition that establishes adequacy. This means that the only way Pennsylvanians will ever know how much money is necessary to provide children with a quality education is through the competitive delivery of education by multiple providers.

Today, we have no idea how much a quality education actually costs because there is an utter lack of competition among schools. When asked “How much would be enough?” the only answer coming from the school employee labor unions, school boards and other special interest groups is “More!” Some academics and dabblers have concocted complex formulas to try to identify how much is enough, but these approaches consistently fail when tested.

While it is true that there are myriad factors contributing to a child’s success or failure in school, study after study makes clear that more dollars will not produce more scholars. Yet that is precisely what those who benefit from the multi-billion system demand—more money; and that is exactly what the school boards and General Assembly provide year after year. But by almost any measure, Pennsylvanians can conclude that they are getting a poor return on its $17.4 billion annual investment in public education.

Nevertheless, some people refuse to accept the idea that competition among schools is beneficial for children. Competition, they say, would put school districts into financial trouble or even force them out of business. This is true, but it is precisely the reason why schools must compete.

In the private sector—where competition is the norm rather than the exception—businesses fail every day for a variety of reasons. Rarely, however, do they go out of business because they attract too many customers. Most will close because they do not provide a desired product or because other suppliers provide a superior service. Of course other factors may lead to the closure of a business, but the key is that competition forces businesses to identify and meet the needs of its customers or risk losing them to someone else who will. With such powerful incentives it is ultimately the consumer who benefits from competition.

In a competitive education marketplace, the behavior of consumers and suppliers will be the same as in other markets, with standards perhaps being even higher due to the singular importance most people place on education. Schools that provide high-quality education for children will attract and retain students, while schools that do not will likely lose students. In such an environment, it is reasonable to expect that schools that fail to provide an education that students and parents want or value will go out of business. Other schools may close because their service is inferior to that which is provided by other suppliers of education.

Obviously this hardly describes our current system where poor performance is usually rewarded with even larger sums of taxpayer money instead of less. The competitive incentives that force improved quality for lower prices are virtually non-existent in the current public education system where quality and costs can be ignored. They can be ignored because the consumers of education have few or no alternatives available to them. This relieves school officials from having to treat parents and children like customers to be served.

This brings us to the third and final principle. While Resource Management through the Competitive Delivery of Education focuses on the providers of education—the schools—the third principle, Continuous Quality Improvement through Accountability to Parents, focuses on the consumers of education—parents.

Without competition, the supplier—the local school district—is sovereign. But when schools begin to compete and parents are empowered to make choices in how and where their children are educated, the consumer becomes sovereign. This shift in sovereignty will completely change our education system—it will force schools to treat families like customers to be served rather than a captive audience. Making schools accountable to parents who can exercise school choice will finally fuel the engine that drives the continuous quality improvements that currently elude our public school system today.

In conclusion, the General Assembly has a great opportunity to relieve Pennsylvanians of burdensome taxes while dramatically improving the quality of education for all children. Simply shifting revenue sources without making significant changes in how education is delivered and how the effectiveness of that delivery is evaluated will fail the taxpayers and children of this state.

I believe the principles of taxpayer protection, competition among schools, and choice for parents are the foundation for the kind of property-tax/school-funding reform that Pennsylvanians are demanding.

One final comment, the same Quinnipiac poll cited earlier also found that 80 percent of Pennsylvanians consider your performance on this issue as “extremely” or “fairly” important in deciding how they will vote this fall. I’m sure I don’t need to remind you, but the people of Pennsylvania are watching—and it is clear that they want real reform, not just a tax burden shift.

Thank you and I am happy to answer any of your questions.

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Matthew J. Brouillette is president of the Commonwealth Foundation, a non-partisan, non-profit public policy research and educational institute based in Harrisburg, Pa.

The Policy Brief, Property Tax & School Funding Reform: The Michigan Experience and Principles for Pennsylvania, can be accessed here.