CRC PUBLICATION RELEASE

For immediate release
September 7, 2010

• However, dividing the period from FY1997 to FY2008 into two time periods, FY1997 to FY2000, and FY2001 to FY2008 paints a very different picture. Michigan's strong economic performance during the FY1997 to FY2000 period resulted in tax growth that exceeded personal income growth and significantly exceeded inflation. Since FY2001, in the light of Michigan's poor economic performance and two national recessions, tax growth has failed to keep up with both inflation and personal income. Locally-raised property tax revenues performed strongly, but could not make up for the stagnation in incomes and consumption activity in the state.
  
  
• The Great Recession of 2008 and 2009 decimated school revenues. State taxes, adjusted for tax restructuring, fell 8.6 percent from FY2008 to FY2009 compared to an income drop of 3.0 percent and inflation of -0.3 percent.

"Much of the recent poor performance in state school aid growth reflects the poor performance of the state's economy more so than the structural problems with the system," says Craig Thiel, CRC's Director of State Affairs. Coming out of the recession, structural problems with the system will prolong the current fiscal difficulties facing schools. "We can identify a number of factors which will contribute to school revenues growing slower than the overall economy going forward," Thiel added.

• Michigan has very generous income tax exemptions for retirement income. Public pensions are fully exempt and the private pension exemption was $90,240 for a married couple in 2009. As the share of Michigan's population that is retired increases, an increasing share of state income will be exempt from the state's income tax.
  
  
• Most services are exempt from the state's sales tax. As the share of state spending on services increases and the share of spending on goods falls, the share of the economy covered by the state's sales tax will fall. In addition, many taxpayers fail to remit tax on purchases made over the Internet further weakening the performance of the sales tax.
  
  
• Property taxes held up relatively well over the past decade despite Michigan's poor economic performance. However, sharp declines in property values are now being reflected in property tax collections. Provisions in Michigan's Constitution that limit growth in the property tax base to the rate of inflation will keep the property tax from rebounding even if property values recover, placing greater pressure on the performance of state education taxes to provide revenue growth.

Repairing the weakened relationship between state education taxes and the economy would enhance the level of stability in the current system. Reconfiguring the state's sales tax to cover more services would help the tax grow more like the underlying economy. Changing to a more progressive rate structure or reducing retirement exemptions would help the income tax grow more like the underlying economy. Improving the performance of the property tax would require policymakers to confront a complex set of tax limitations, but if this is not done, the property tax will not keep up with property value growth for the foreseeable future.

"It is important to note that changes such as these do not necessitate tax increases," said Craig. "For example, if the base of the sales tax is broadened the rate can be reduced to keep the overall change revenue neutral. Regardless of the level of spending we choose, it is important that we support K-12 spending with stable revenues that will grow with the economy."

Finally, some critics of Michigan's school finance system contend that the primary failure is the "over-centralization" and lack of local options available to raise revenue. One option would be to allow individual districts to ask voters for additional millage subject to a statewide cap. However, this would represent a philosophical break from Proposal A, which dictated that nearly all spending decisions, via Proposal A's foundation program, would be made at the state level in order to improve overall equity in school spending.

This paper is the second in a series of papers that CRC is publishing on important education issues facing Michigan. The first paper, Public Education Governance in Michigan, was published in January. Other topic areas that will be covered by this series include school district service provision and reorganization, public school academies, early childhood education, and governance reforms. The goal of this comprehensive review of education provision is to provide the data and expertise necessary to inform the education debate in Lansing and around the state.

CRC's education project is funded in part by grants from the W.K. Kellogg Foundation, the Frey Foundation, the PNC Foundation, ArvinMeritor, the Richard C. and Barbara C. Van Dusen Family Fund, and a consortium of education groups including the Tri-County Alliance for Public Education, Michigan Association of School Boards, Metropolitan Detroit Bureau of School Studies, Inc., Michigan Association of School Administrators, Michigan School Business Officials, Middle Cities Education Association, Michigan Association of Intermediate School Administrators, Michigan PTSA, Michigan Association of Secondary School Principals, and the Michigan Elementary and Middle School Principals Association.

The Citizens Research Council of Michigan is a private, nonprofit public affairs research organization, founded in 1916 to analyze issues pertaining to state and local government organization and finance in Michigan.

CRC Examines State and Local Operating Support of Michigan Schools Join us for a Webinar on September 9 Space is limited. Reserve your Webinar seat now at: https://www1.gotomeeting.com/register/331654456 CRC's Director of State Affairs, Craig Thiel, will discuss the major findings of a new CRC paper "State and Local Revenues for Public Education in Michigan."  The paper explores the revenue sources for K-12 education funding, the causes of the revenue decline of FY2009-10, and the revenue implications of continuing current public policy. Title:   CRC Examines State and Local Operating Support of Michigan Schools Date: Thursday, September 9, 2010 Time: 2:00 PM - 3:30 PM EDT After registering you will receive a confirmation email containing information about joining the Webinar. System Requirements PC-based attendees Required: Windows® 7, Vista, XP or 2003 Server Macintosh®-based attendees Required: Mac OS® X 10.4.11 (Tiger®) or newer