K-12 finance, tax reforms worth considering
In my last column, I outlined a simple, politically pragmatic construct to restore K-12 education funding to prerecession levels.
To reprise, raise the state sales tax 1 percentage point. Increase the base level, the starting point for calculating state aid to both district and charter schools, by a commensurate amount, and index the higher level for inflation. Leave it up to the schools to decide how best to spend the money.
There are, however, fundamental reforms to education finance and taxation that would be better for students and the economy, which could be implemented in conjunction with raising the additional revenue necessary to restore K-12 funding to pre-recession levels.
Politically, at present, these are pie in the sky. And if they were to gain any traction, they would face strong political resistance.
Still, they are worth thinking about. So, here are the two reform constructs.
The first would be true backpack funding.
The school-choice model calls for there to be a set amount of money that goes to whatever school the student attends. In Arizona, a lot of the tax money available for education does follow the student. But enough of it does not to create inefficiencies in the schoolchoice model and inequities between schools not caused by the enrollment decisions of students and parents.
For district schools, Arizona has a bifurcated funding system. Some money comes from the state; some is raised locally. And some sources of funding can be used just for capital projects, some can be used just for operations, and some can be used for both.
With true backpack funding, all money would come from the state. There would not be separate funding streams for operations and capital. They would be combined into a single grant. And the only way for a district or a charter system to get more money would be to attract more students.
Arizona currently spends roughly $8,500 per student from state and local sources. That would need to be increased by approximately $900 to restore overall funding to pre-recession levels.
In this construct, the burden of raising the additional dough wouldn’t necessarily have to fall entirely on the state sales tax. Local property taxes already contribute more than $4 billion to the overall kitty. Some of that would have to remain at the district level for a time to service outstanding bonds. But in making the transition from a local to a state property tax for education, some additional revenue could be raised.
Relieving the burden on the existing sales tax would be, other things being equal, a good idea. Which is why the second reform construct involves taxation.
Our current sales tax is designed to fall on the final sale of a retail good. Due to increases at the state and local levels, it is now quite high. The combined rate exceeds 9 percent in many Valley cities. If the state rate is increased 1 percentage point to restore K-12 funding to pre-recession amounts, it would exceed 10 percent in some places.
That’s still the easiest political sell and would attract the least opposition. But Arizona does need to start talking about broadening its consumption tax base.
The broadest possible base would be a business gross receipts tax. Total up sales in Arizona. Send a percentage of that to the state.
Tremendous amounts of money could be raised with very low rates. These are back-of-the-envelope calculations by a journalist, extrapolating from the tax expenditure report by the Arizona Department of Revenue. But I think they are in the ballpark.
A gross receipts tax of just 1.7 percent could replace what the state currently receives from the sales tax and the corporate income tax. The additional $1 billion to restore K-12 funding to pre-recession levels could be produced with a rate of around 2 percent. All that could be done and the individual income tax abolished with a rate of a little over 3 percent.
Fundamental reform usually has to be driven by the executive. Gov. Doug Ducey has expressed support for the school-choice model and the idea of backpack funding. And he famously vowed to get income taxes as close to zero as possible, although he has not, to my knowledge, ever indicated an interest in the business gross receipts tax alternative.
Ducey might have a chance to expand the discussion to include fundamental education finance and tax reform. But only if he agrees that the end result would be $1 billion in additional revenue to restore K-12 funding to pre-recession levels.
And so far, that’s a line Ducey has been unwilling to cross.