Why We Need To Restore Tax Fairness to Restore School Funding

Recently, both the House and Senate have proposed “band-aid” budgets that ignore a direct order from the Washington Supreme Court to fully fund public schools. Both budgets also ignore the will of the voters to lower class sizes. Both budgets continue to give away billions in tax breaks to billionaires while depriving our state’s one million school children of their constitutionally guaranteed right to an adequate education. Washington state used to be 11^th in the nation in school funding. Today, Washington is $4,000 per child or $4 billion per year BELOW the national average in school funding. As a consequence, our children are forced to endure some of the lowest funded and most over-crowded schools in the nation.

There is another option. Senate Bill 6093, the School Funding Through Tax Fairness Act, sponsored by Senators Chase and McAuliffe, would provide an additional $4 billion per year to restore school funding and lower class sizes in our state to the national average by repealing a single 1997 tax exemption used by the wealthy to avoid paying their fair share of state taxes.

Comparing Senate Bill 6093 to the House and Senate Band-aid Budgets
Here is a table comparing Senate Bill 6093 to the House and Senate Band-aid Budgets.

Senate Bill 6093, the School Funding Through Tax Fairness Act is a simple solution to the school funding crisis in Washington state which raises billions in state revenue without raising the tax burden on working class families. This report will show that the underlying cause of our state’s school funding crisis is the lack of fairness in our state tax structure. In fact, the reason our state has among the lowest school funding in the nation is that Washington also has the most unfair tax structure in the nation. While the poor and middle class pay much more than the national average in state taxes, our wealthy pay far less than the national average. The only way to have adequate school funding is to insist on having a fairer tax structure by requiring the wealthy to pay their fair share of state taxes.

In September 2014, Supreme Court Justice Charles Johnson proposed that the Washington Supreme Court declare all 650 tax exemptions worth more than $30 billion annually as illegal because they make it impossible for the state legislature to comply with its constitutional duty to fully fund public schools. Justice Johnson proposed nullifying all $30 billion in tax breaks to provide the additional $4 billion needed to fully fund schools – and then only after public schools are fully funded, allowing law makers to restore whatever tax breaks they wants with the remaining $26 billion.

Thomas Ahearne, attorney for the McCleary lawsuit, agreed with this solution. Ahearne said “It is unconstitutional to give away money in the form of a tax exemption in place of amply funding schools.”

But the truth is that there is no need to repeal all 650 tax breaks. Repealing just one of the tax breaks, the largest of the bunch, called the 1997 Intangible Tax Exemption, would provide all of the needed funding and also restore a fairer tax structure at the same time!

What is Intangible Property?
Tangible property is property you can touch –such as homes and commercial buildings. Intangible property includes all other forms of wealth – such as stocks, bonds and computer programs. With the concentration of wealth in the hands of the very rich, the value of intangible property is now much greater than the value of tangible property.

How much does the intangible property tax exemption cost our State?
In 1997, a change in our tax structure made intangible property exempt from our State’s 1% Property tax. According to the Washington State 2008 Tax Exemption Report, this intangible property tax exemption is the single largest tax exemption. In 2008, it was valued at nearly $4 billion annually. Currently, it is as much as $8 billion annually. By comparison, funding for our public schools for one million school children is also $8 billion annually. So we spend as much on this single tax break for the rich as we do on educating our state’s one million school children.

The failure of our current state legislature to adequately invest in our public schools is not only contrary to our state constitution, it is harmful to our democracy, to our economy and to the future of our children. Washington state used to be 11^th in the nation in school funding. However, in 1997, the state legislature passed senate bill 5286 exempting all intangible property from our state property tax. This massive tax loop hole has given billions of dollars in tax breaks to our richest citizens every year during the past 18 years by exempting over one trillion dollars of “intangible property” from our State property tax.

Since 1997, this tax break has been used to funnel billions of dollars per year away from our public schools and into the pockets of our State’s wealthiest citizens. As a consequence, Washington State school funding has plunged from 11^thin the nation to 45^th in the nation. The plunge in school funding since 1997 closely parallels a related plunge in State revenue. Washington State Revenue as a Percent of Income has declined dramatically during the past 20 years:

In 1996, Washington State was 12^th in the nation in State income and in State taxes as a percent of income. However, by 2005, our State tax rate as a percent of income fell to 37^th in the nation. Currently, the national average for state and local taxes is 10% of income while state and local taxes in Washington state is only 9% of income. This does not sound like much of a difference – but it comes to $3 billion in revenue less per year! Source: Washington State Department of Revenue http://dor.wa.gov/docs/reports/2008/Compare06/Table3.pdf

We would need to collect an additional four billion dollars per year in revenue just to return to the national average in State taxes. This tax exemption for the wealthy is the primary reason that school funding in our state is $4 billion per year below the national average and getting worse every year.

Senate Bill 6093 would repeal this huge tax break for the wealthy and invest $4 billion per year in public schools to restore school funding in our state and lower class sizes in our state back down to at least the national average. In this report, we will explain the many benefits of Senate Bill 6093, the School Funding Through Tax Fairness Act.

Two Decades of Tax Breaks for the Rich have caused Two Decades of Decline in Public School Funding
During the past two decades, since the intangible property tax exemption in 1997, our children have been forced to endure some of the lowest funded, most over-crowded schools in America. Washington is 45^th in Per Pupil funding adjusted for the cost of living. Washington is 46^th in education spending per thousand dollars of income.
US Census Bureau, Public Education Finances, 2012, published May 2014. Washington spends about $40 per $1,000 or 4% of income. The national. average is about $50 per thousand or 5% of income. http://www2.census.gov/govs/school/06f33pub.pdf. See Table 12, page 12. As a result, Washington is also 46^th in the nation in average class size according to the National Center for Education Statistics (NCES).

Washington School Funding as % of National Average
For the past 18 years, our State has fallen far below the national average in school funding. We are now about $4,000 per pupil below the national average. $4,000 per pupil equals $4 billion per year just to restore school funding in our state to the national average. (US Census Bureau, Public Education Finances 2012).

School Funding increased in the rest of the nation, but plunged here in Washington State during the past 20 years
While other States have recognized the need toinvest more in their publicschools, our State hasreduced spending on public schools. Since we have about one million students in our State, it will take $4 billion dollars per year to restore school funding in our State to the national average. This would permit Washington State to hire 40,000 more teachers to restore national average class sizes.

As other states invest more in there schools every year, the gap between our state and national average school funding has grown worse every year.

Decades of Decline in School Construction Funding… School Construction and Repair Funding has also plunge by BILLIONS of dollars
Hiring tens of thousands of additional teachers will also require building tens of thousands of additional classrooms. Sadly, not only has our legislature failed to provide adequate funds for operating schools, but they have also failed to supply funds for the repair and building of schools. In particular, our Legislature has failed to help growing communities build urgently needed schools. While the legislature claims to “match” up to 50% of school construction costs, the Legislature’s distorted school construction “formulas” result in a “match” of as little as 3% of actual school construction costs. As a consequence, over half of school construction bonds have gone down to defeat in the past 14 years and 10% of our one million children now forced to spend their school days in unhealthy portable boxes. (Washington State 2007 School Construction Task Force).

The history of school construction and repair funding in Washington State during the past 20 years mirrors the history of school operation funding in that there has been a steady decline in State funding for school construction. Whereas our State legislature historically provided more than 66% of the actual construction costs of public schools in the 1980’s, State funding has fallen to below 10% of actual costs during the past 14 years. Compared to a national average spending on school construction and repair of $1,000 per pupil per year, our state legislature now allots less than $300 per year per pupil for school construction and repair- with local homeowners forced to pick up the difference!

State % Match of Actual School Construction Costs 1986 to 2014
Source: 2008 OSPI School Construction Transparency Study

The national average per pupil cost for school construction and repair is about $1,000 per pupil per year. The Superintendent of Public Instruction requested $1.6 billion per year ($1,600 per pupil per year) to build thousands of classrooms needed to support smaller class sizes. Yet the 2015 Senate proposal only included $120 per pupil – shifting over 90% of the cost of building and repairing schools onto the backs of local homeowners – who have already seen their property taxes DOUBLE since 1996 due to the failure of the state legislature to pay for school construction!

Due to the lack of state school construction funding, since 1996, more than $20 billion in school bonds have gone down to defeat.

More than $12 billion in school bonds have been passed – costing local homeowners more than $10 billion in additional property taxes. Most of this has been spent on temporary emergency classrooms forcing students to spend their school days in unhealthy portable classrooms.

Fewer permanent classrooms were built in 2005 to 2014 than at any point in the past 30 years. Due to the $20 billion school construction backlog, in 2015, OSPI requested $1.6 billion in build urgently needed permanent classrooms. Sadly, the Governor’s proposal was only $300 million and the Senate proposal was only $120 million.

This decline in State Matching funds has resulted in a transfer of this funding burden from the State to local home owners via an increasing dependence on local school construction bonds. Like with operating costs, the State’s failure to help fund school construction has led to a dramatic increase in local school bond and levy costs which in turn have led to a rapid rise in local property taxes. This unfair tax burden increase on middle class homeowners is as high as $2,000 additional dollars per year on the average home in King County. For example, in 2014, residents in King County pay on average $4,507 annually in property tax. This is more than twice what we paid in property taxes in 1996. This dramatic rise in property taxes can best be seen in the chart of total King County Taxes since 1996. The total property tax collected has more than tripled even as funding for schools and other services have been slashed:

Source: 2015-2016 King County Issue Paper General Fund Financial Situation
http://kingcounty.gov/exec/PSB/Budget/2015-2016.aspx/2015-16Issue_Paper-GenFundSit.pdf

Years of Broken Promises Led to 2014 Contempt of Court Ruling
In 2009, our state legislature passed the “Education Reform Act” promising to restore school funding to the national average by 2018. However, they failed to provide any funding to actually keep this promise. Instead, our schools have continued to fall further and further behind the national average. As a consequences of these years of broken promises, in 2014, the Washington Supreme Court, for the first time in the history of our state, held the Legislature in Contempt of Court for violating our State Constitution and failing to make “steady progress” towards restoring school funding. Also in 2014, the voters approved Initiative 1351 which requires steady progress to reducing class sizes in our state down to the national average. Steady progress would require more than $2 billion per year in additional school funding:

It would take nearly $4 billion per year in additional funding annually just to restore school funding in our state to the national average – with another $1 to $2 billion annually to restore school repair and construction funding to the national average.

Where will this $5 to $6 billion in additional state revenue for school funding come from? The legislature has struggled to find a way to solve this problem. Thus far, only minor “band aid” solutions have been proposed. Yet the future of one million children depends on our finding a way to solve this problem to fully fund our public schools. On March 27, 2015, the Washington State House proposed a “Band Aid” budget that providesless than$700 million per year in additional school funding. This is less than $700 per pupil per year. (See page 25, House Summary). On March 31, the State Senate proposed a “Band Aid” budget that also provides less than $700 million per yer in additional school funding. Either proposal only brings per pupil annual funding to about $8,300 – $3,400 per pupil per year below the 2014 national average of $11,700.

The House & Senate Band Aid Proposals do not comply with the 2014 State Supreme Court “Steady Progress” Order or with Initiative 1351 Steady Progress Requirement.

It would take $5,000 per pupil per year (or $5 billion in additional state funding per year) to bring school funding in Washington to $12,700 per pupil as required by the Washington Supreme Court, the Education Reform Act and Initiative 1351.

The difference between current school funding levels in Washington state and the national average is even greater when you add the fact that Washington state only pays $200 per student for school construction and repair while the national average is $1,000 per pupil. This raises the 2015 National Average total school funding to $13,000 per pupil while the 2015 Washington State House and Senate are only proposing to spend $8,500 per pupil. It would take $4,500 per pupil ($4.5 billion per year) in additional state funding to meet the 2015 total national average spent per pupil on school funding.

The Underlying Cause of our School Funding Crisis… A Massive 1997 Tax Break for the Super Rich!
We have not always had the lowest school funding in the nation. In 1997, Washington was near the national average in school funding. Something happened in 1997 to cause a huge plunge in state revenue and school funding. Where did all of the money go? For the answer, see the 2008 Washington State DOR Tax Exemption Report, Summary List.
http://dor.wa.gov/docs/reports/2008/Tax_Exemptions_2008/Tax_exemptions_2008.pdf

The largest tax exemption is the “Intangible Property Tax Exemption.”This single exemption was responsible for $7 billion in state tax breaks per biennium or $3.5 billion in state tax breaks per year in 2008. This makes this single tax break much larger than any other tax break. The law allowing for this tax break is RCW 84.36.070. http://apps.leg.wa.gov/rcw/default.aspx?cite=84.36.070

Due to a rapid rise in the concentration of wealth in the hands of the richest one percent, and with nearly all of this wealth being in the form of intangible property, the amount of lost revenue due to this tax exemption has skyrocketed since 1997 to the point where it is now causing a loss of state funding of more than $4 billion per year.

Currently, our state taxes tangible property, such as houses, at a rate of one percent a year. By contrast, intangible property, such as stocks and bonds, are not taxed at all. The School Funding Through Tax Fairness Act is a fair and simple solution to the school funding crisis. It provides more than fourbillion dollars per year in additional funding for our public schools, without raising taxes on our middle class, by repealing the 1997 tax loop hole on intangible property, such as stocks and bonds, from our State property tax (see 1997 ESSB 5286). This tax loophole gave billions of dollars in tax breaks to our richest citizens every year during the past 18 years. Historically, intangible property accounted for a very small percent of all property. However, with the concentration of wealth in the hands of the richest one percent, intangible property now account for over 70% of all property. Over 90% of intangible wealth is owned by the top one percent of our richest citizens. It is time for a fairer property tax structure.

It is no mere coincidence that our State has been short changing our public schools by billions of dollars a year ever since. As a direct result of this massive and unwise State tax give away, as well as the federal tax cuts since then, the wealth of the richest one percent of our population has DOUBLED in the past 20 years from 20% of our total wealth to 40% of our total wealth.

In the face of the current school funding crisis, we can no longer afford this tax give away for the super rich while our school children get the shaft. The School Funding Through Tax Fairness Act would exempt all retirement accounts and all personal intangible property up to $200,000. It thus only applies to the richest 1% of our citizens. It would not even harm millionaires as they could deduct their state taxes from their federal taxes. So this bill is really a transfer of four billion dollars from the federal tax rolls to the state tax rolls.

The School Funding Through Tax Fairness Act would also create over 80,000 new jobs in our State, bring school funding back up to the national average and restore a fairer and more stable tax structure.

School Funding Through Tax Fairness Act Promotes Home Ownership
The School Funding Through Tax Fairness Act would also reward middle class home ownership with tax breaks for middle class homeowners instead of promoting stock market speculation with tax breaks for the intangible property of billionaires. Let’s compare the current tangible property tax of a typical King County homeowner to the world’s richest billionaire who also lives in King County. A typical family in King County owns a $300,000 home on which they owe $200,000 and pay $4,000 in property taxes. Their combined income before taxes is about $50,000 and their combined net worth is $200,00 – $100,000 in retirement savings and $100,000 in home equity. They not only pay property tax on their $100,000 equity in their home – they pay property tax on the $200,000 in home value owned by the bank! Their property tax bill is currently 8% of their total combined income. Under the School Funding Through Tax Fairness Act, each parent would receive a property tax exemption for $200,000 – lowering their property tax bill to ZERO and saving the family $4,000 per year and lowering the percent of their income they pay in property taxes to 0% of income.

By contrast, Bill Gates has an income of over $10 billion per year and a total net worth of over $100 billion – nearly all of which is in the form of intangible property such as stocks and bonds. Therefore Bill Gates pays less than one percent of his income in property taxes. Under the School Funding Through Tax Fairness Act, Bill Gates would pay a property tax of about one billion dollars per year – or 10% of his annual income – but he could also deduct the entire one billion dollars from his federal taxes – so he is still really paying almost nothing!

Since our State revenue is billions of dollars lower than the national average, our problem is not out of control State spending, but out of control State tax breaks for millionaires.

In shifting the tax burden to our middle class homeowners, and causing the firing of thousands of public servants, these massive tax exemptions for the rich do not create jobs. Instead, they cost jobs. We do not have an “out of control” State spending problem… We have an “out of control” tax breaks for millionaires problem. Meanwhile because of tax breaks for the rich, our teachers are paid LESS in real dollars today than they were 20 years ago!

These ever-increasing “tax shifts” of the tax burden away from millionaires and onto our middle class homeowners have led to increases in middle class taxes. In particular, the property tax burden on our middle class has skyrocketed in the past 14 years as the ratio of commercial to residential tangible property has shifted from about 50-50 in 1997 to 66% residential to 33% commercial by 2006.

Source: Washington State Department of Revenue http://dor.wa.gov/docs/reports/wa_tax_system_11_17_2004.pdf

When $100 billion dollars of commercial property is exempted from property taxes, residential property taxes must go up even if State and local spending remains the same.
As a consequence of these tax break for millionaires, and tax shifts to our middle class, our middle class now pay much more than the national average in State taxes while millionaires in our State pay much less than the national average. Working families see their tax bills go through the roof and they naturally assume that State spending is “Out of control.” But what is really out of control is tax breaks for millionaires. Because of all the tax breaks they get, millionaires now pay less than 3% of their income in State taxes. Meanwhile, our poor and middle class pay State taxes at a rate of 12% or more. We have allowed our State to become a tax haven for millionaires. Those who can afford to pay the most are paying the least. Meanwhile, those who can afford to pay the least pay the most. As a consequence of these tax breaks for millionaires, in just the past 10 years, the richest one percent have gone from owning 20% of our nation’s wealth to owning 40% of our wealth.

This Act would place a referendum before the voters asking to repeal the current exemption on intangible property from the State property tax and tax intangible property at the same one percent rate as tangible property. Retirement accounts and personal intangible property up to $200,000 not in retirement accounts would be exempt. So closing this tax loop hole would only increase taxes for 5% of our citizens. The other 95% would see a reduction in their State taxes. Now is the time to begin a public discussion over the best way to balance the State budget while still protecting the future of our children and our communities. Funding our public schools should be more important than protecting tax breaks for millionaires. We hope the public and the press will give this Bill a fair hearing. With the serious nature of our current school funding crisis, it is time to put all options on the table and begin a public discussion over the future of our schools and our State. 

Originally published at Washington Tax Fairness Coalition