Information Deficits and Texas Public School Finance

University of Michigan economist Joel Slemrod and Princeton University political scientist Larry Bartels say that Americans just don’t get tax policy:

…despite their philosophical support of a progressive tax system and their awareness that inequality has increased over the last several decades, voters support tax policies that would perpetuate a more regressive tax system that includes tax cuts for the wealthy, the repeal of the estate tax, a flat tax, and a retail sales tax.

The data (from a National Public Radio/Kaiser/KSG Survey done in February/March 2003) apparently showed that over 60 percent of Americans don’t know what “progressive” means in the context of tax policy. This, plus some other results, led the panelists discussing the study to think that perhaps the completely unsurprising ignorance of the populace might have something to do with this bizarre political behavior.

I sure hope so. In Texas, we are currently facing a decision that could completely destroy poor kids’ chance of getting a decent public education and hamstring our state’s ability to provide health care and human services for our population for the next 10 to 15 years…or, in a best case scenario, move Texas up from having the 5th most regressive state tax system, equitably fund public education, and solve longstanding structural problems in our state’s revenue-generating mechanisms.

It’s the decision about how to change the Texas public school finance system, which everybody hates.

But Princess, you may be asking, I understand how public school finance could change the financing of public schools, but what are you babbling about with regard to health and human services and structural problems in the state’s something-or-other?

Here it is, and don’t blame me for figuring this out – blame the folks at ProTex and the Center for Public Policy Priorities.

The current public school finance system in Texas was put together by the courts after we got sued for letting kids in San Antonio go to school in raw sewage with no books while kids in wealthy suburbs of Dallas had private instruction in Latin and ballroom dance. Yes, that’s hyperbole, but not by much.

For the purposes of explanation let’s say public schools are paid for by taxing cows, and San Antonio has four cows while Dallas has 20,000 cows. No matter how high you make the cow tax in San Antonio, they won’t be able to raise enough money to educate their kids. In Dallas, the tax could be 1 cent per cow and they’re rolling in after-school programs. This was judged constitutional by the U.S. Supreme Court because (in their eyes) education is not a right, but then it was ruled unconstitutional by the Texas Supreme Court because our Constitution says the public education system has to be run efficiently and the massive imbalance in resources was just not efficient.

The current system is called Robin Hood, and it limits rich school districts’ ability to hike their property tax rates and also makes them hand over some of their money to less fortunate districts. I won’t bother you with the mechanics, ’cause they’re a pain in the neck even if you use the cows as an example. You can read the Legislative Budget Board’s explanation if you want to. Robin Hood is wildly unpopular, and discontent has reached such a critical mass that the Legislature and the Governor have to do something about it.

They could punk out and do something stupid like, say, define a certain sum of money as “adequate” for providing a public education, make sure the poor schools have that, and free the rich districts from any obligation to give anything to anyone. Then that “adequate” number will never change, and the poor schools will get more and more behind, and we’ll have to get sued again to straighten it out.

They could do something silly and cosmetic like cut property taxes but raise a bunch of fees to make it up, or increase sin taxes, or increase the sales tax, or expand the franchise tax, or a combination of a few of these. As you might expect, none of this would do a damn thing to keep us from coming up with another big deficit in the next few Legislative sessions if the Texas economy doesn’t wake up.

Or (here’s the interesting part) they could decrease property taxes, increase state funding for schools, stabilize the state’s revenue streams, make the state’s tax system more progressive, protect the public from Legislative screwing around with a major piece of the tax system, and likely increase the attractiveness of Texas as a place to do business all at the same time.

Did you see this coming? They could propose a personal income tax.

An income tax based on the one in Kansas, which is fairly non-aggressive, projects for Texas that everyone but the two highest income quintiles would end up paying less in total taxes. Because the Texas Constitution requires 2/3 of the income tax to reduce property taxes, property taxes for both residences and businesses would drop by 90%. State income tax is deductible on federal tax returns, so the federal government would pick up about 10% of the cost of the income tax.

The end result under this model would be $5.8 billion in additional funding for schools, at a cost to taxpayers of only $4.0 billion. Last and best, the Texas Constitution requires voter approval for a change in the income tax rate once it’s voted in, so the Legislature can’t just hike it later on a whim.

This is where the idea of doing minor property tax relief or releasing rich districts from an obligation to share the wealth gets scary. Robin Hood isn’t working for anyone right now – poor schools still don’t have enough money, and rich districts are cutting programs because they’re maxed out on what they can raise but their populations are growing.

So rich districts are mad not just because they’re giving away funds, but because they can’t do right by their kids. Right now they could conceivably be bargained into accepting an income tax in return for property tax relief and the ability to actually fund their schools. However, if they get permission to raise unlimited funds (by hiking the cow tax a little and keeping it all) or the Leg cuts property taxes and makes up the difference with another revenue stream, they’ll be happy and completely unmotivated.

That’s a problem for people like Protex and CPPP (and me) because Texas has problems with its revenue-raising strategy in general. Our tax revenue as a percentage of personal income has dropped from about 9.3% in 1994 to about 8.6% in 2003 – and strangely enough, if we were still at 9.3% we would have had no budget deficit in the last legislative session.

Taxable sales have declined as a percentage of total sales in the state, from about 25% in 1992 to about 22.5% in 2002, because the economy has shifted away from retail to services. We don’t tax services even though we rely on sales tax revenue for about 25% of the state’s revenue. We don’t tax personal income, and we increasingly rely on property taxes to fund a larger percentage of the pubic school budget, even though it has grown much faster than property values since 1990.

It’s a big mess, and we end up running out of money and cutting health care and everything else for poor kids (though not the Cow Genome Project) and no one is happy with their schools. One good solution is to do an income tax, but to get that through the door we need some pretty amazing leverage on the people in rich districts who have a lot of influence in the Legislature – i.e. property tax reduction and more money for their schools.

How does all this connect to our friends Joel and Larry way back at the beginning of this post, and why did I say I hoped they were right about information being a key?

It is simply this: Texans have no idea what the hell is going on with public school financing as it stands. The majority of Texans believe that their school district is giving away money, but 88% of students live in districts that are receiving money – including 1.4 million white children, lest the media confuse you into thinking otherwise. All the gnashing of teeth and rending of garments is over poor Grandma not being able to pay her property taxes, but the majority of property tax is paid by businesses – 57% in property-poor districts and 62% in property-rich districts.

If an information deficit is what’s leading people to scream “Tear Down Robin Hood!” at their Legislators, then maybe the lefty coalition that’s currently forming to promote a better solution has a chance to be heard. The Texas School Finance Project website doesn’t seem too committed to broadcasting any of this – I don’t immediately see a section entitled “Common Misconceptions,” though I suppose someone could go through all the handouts from various presentations and eventually find the presentation from CPPP.

But theoretically, if enough people figured out that the majority of folks are benefiting for the current system, the message to the people who have to get re-elected might change for the better. The people sending that message might even vote for an income tax, which would rank as a miracle.

In the fever dream where Texas politics could produce a positive solution, we could smooth out or even increase funding for health and human services by straightening out our revenue plan, using public school finance as the presenting problem. In the nightmare where I’ve been paying attention to how people usually act, we could make a dramatic but useless set of changes to the system that uses up any desire on the part of the rish or the general electorate to demand change, and it will be another 15 years before we get another chance.

Here’s hoping. I don’t know if I can maintain my boundless optimism if we have another few sessions where the choice is to either cut a lot of kids out of programs or to cut the benefit package but leave more kids in the programs. It’s too depressing.