Monday, March 19, 2018
Those who pushed the new federal tax law never stopped to seriously consider how it might affect key services at the state and local level. The cap on deductions for state and local taxes was about far more than whether the deduction favors rich or poor states. The intent of the cap may have been to fairly rebalance the interests of these states, but tax policy is never so simple. A cap on state and local tax deductions may have unintended consequences across the nation. One of the most significant loosers will be public education.
The largest chunk of state and local taxes go to support public schools. That money matters. Reviewing decades of data, a 2014 study found that a 20 percent increase in school funding, when maintained, results in low- income students completing nearly a year of additional education, wiping out roughly half of the graduation gap between low- and middle-income students. As to student achievement, a Kansas study conclusively showed that “a 1 percent increase in student performance was associated with a .83 percent increase in spending.” The debate over school funding is not whether money matters, but how to spend it on things that matter the most.
When federal law caps the deduction for state and local taxes, what it is really doing is creating a disincentive to fully fund educational needs. New Jersey, for instance, does not collect high tax revenues just so that it can buy newer and fancier police cars. New Jersey collects more tax dollars because the cost of education is higher there than most anywhere else in the nation. When people in New Jersey lose their federal deduction for state and local taxes, it will, as a practical matter, cost them more to fund education next year than it did last year. It will cost more because they will pay federal taxes on their state taxes.
Average and poor states will similarly find it hard to meet the needs of their most disadvantaged students under the new tax bill. Most people in these states won’t notice the cap on state and local deductions. But an important chunk of people will and those people are crucial to those states’ ability to fairly fund education. Because the cap on state and local deductions is a flat cap of $10,000 per taxpayer, it can hit high earners and land owners in any state. And those are the exact people who make what we call progressive school funding possible.Progressive school funding involves state efforts to ensure that students with the highest needs get the resources they need to achieve at a reasonable level and graduate. More practically, this means that states should, on average, spend an extra 20 to 40 percent on students with disabilities, English language learners, and students from low-income families. This last group, in particular, is concentrated in particular school districts, and those districts local tax base tends to be insufficient to meet their students’ needs.
States that do the educationally sound thing substantially supplement school funding in these poor districts. States really only have one of two choices to meet this goal: capture a portion of the property taxes from wealthy districts and redirect them to poor districts or just fund education out of statewide income tax revenues. Either way, the state is primarily relying on its richest citizens to fairly fund education across the state. The more the state tries to meet the needs of its disadvantaged students the more it is going to ask of these richer citizens.
A new federal cap on state and local tax deductions will make it harder for states to ask this of its citizens. Regardless of which state they live in, these citizens, like those in New Jersey, will be paying taxes on their taxes.
Through this lens, the new federal tax bill is not just about pay checks. It is about funding what the Supreme Court in Brown v. Board of Education called “the most important function of state and local governments.” And it about ensuring, as one state supreme court emphasized, that poorer students get a chance “to pass or fail with at least the same amount of money as their competitors.”
The new federal tax law, pending school funding litigation, and necessary increases in local school funding have the potential to create a perfect storm in New York. New York lost a series of major school funding litigation cases about a decade ago. New York promised to improve its school funding, but then the Recession hit. They state never fully carried through on its promises, which generated a second round of litigation from some new plaintiffs. Securing a remedy in this new lawsuit could very well bump up against the disincentives of the new federal tax code.
At least one politician in New York seems well aware of the problem. John Brooks, who represents the 8th District in the New York State Senate, wrote this:
In many ways, the federal tax law invalidates the way New York funds government and education. The state funds education primarily through taxes on real property, which are paid solely by those who own principally land and buildings. The state has established programs to help economically challenged areas with greater state aid for education; as a result, local funding in areas like Long Island covers upward of 75 percent of the cost of education through property taxes. With the $10,000 cap on SALT [state and local tax] deductions, the federal government penalizes those districts that have provided the most funding for education. Some have argued about the use of property taxes and the fact that the value of a home doesn’t always reflect the financial ability of the homeowners. Seniors and others on fixed incomes or with significant medical costs struggle to pay property taxes. Long Island’s high property taxes make it difficult, if not impossible, for many to own a home.
New York is correct to challenge the new tax law, and the voters will be correct to seek changes in Congress to ensure the act is reformed, but we must also recognize that we are now at a crossroads in governmental and educational funding. The tax burden being placed on homeowners is excessive, and we can no longer consider real property taxes as a primary funding source. Taxes on more than 300,000 homes on Long Island exceed $10,000 each. To ensure the sustainability of the region, we must find ways to provide property tax relief for those districts with excessive residential tax obligations while preserving the quality of life and of education Long Islanders expect.
Now is the time to re-examine how we fund government. We have to be more efficient in the operation of government, and fund government and education with methods that are fair and reflective of the financial ability of the funding source. That includes funding education based on regional costs, and core educational costs that adjust based on regional factors. In the dark of night and at the close of a fiscal year, Congress enacted a federal tax law with little vetting, knowing its negative fiscal impact on many states, and knowing that the changes benefit corporate America more than Americans.
Thanks to this Republican-controlled Congress, we will now pay taxes on our taxes. That is the definition of double taxation.