Unintended Consequences: The Serious Budget Gaps Created ...



Continuing the Fight to Reverse or Slow the Phase Out of TPP Funding Reimbursement -19812021717000Situation AnalysisCurrent law eliminates Tangible Personal Property tax reimbursement to local schools through a rapid phase out over the next few years. With no action this budget session, Solon’s $8.3 million in annual TPP funding would be eliminated by 2024.Ohio last collected local TPP taxes in 2008, with a commitment to replace lost revenues.Throughout Ohio, school districts face a serious financial threat without a change in current state law to reverse or slow the phase out of Tangible Personal Property tax reimbursement funding. In 2008, the majority of general business taxpayers in Ohio paid their final TPP tax bills, reducing the tax obligation on businesses without providing a replacement mechanism for school districts that had collected those critical local tax dollars. Instead, legislators included a provision requiring the state to make hold harmless reimbursement payments to affected school districts in the amount the districts were collecting from those local taxes in 2004. Now, despite several years of awareness building, negotiating, lobbying and citizen contact with legislators and the governor, this group of significantly impacted school districts are again poised on the edge of a financial crisis over which they have no control.The two-year biennial budget passed and signed into law in summer 2011 resulted in all Ohio school districts absorbing a 2 percent TPP reimbursement loss in fiscal 2012 from their operating revenue and an additional 2 percent in fiscal 2013. This shared sacrifice by Ohio school districts helped close the state’s budget hole at the time. Subsequently, the FY ’16-’17 state budget enacted in summer 2015 reinstituted a rapid phase out of state TPP reimbursement funding to schools. A total elimination of the reimbursement through a rapid phase out would be devastating and jeopardize the long-term solvency of these districts. The economic impact of lost TPP reimbursements would equal more than 10 percent of some districts’ operating budgets and as much as 18 to 21 percent in other districts. Revenue losses of that magnitude would be impossible to recoup by shifting the tax burden through additional operating levies. Many of the affected districts are Ohio’s highest-performing districts, strictly meeting the state’s standards for educational and fiscal accountability. HistoryTPP tax in Ohio began in 1846 and evolved to cover business inventory, equipment and machinery.The TPP, or tangible personal property tax, originated in 1846, when the Ohio General Assembly passed legislation requiring that “all property, whether real or personal… unless exempted, shall be subject to taxation.” Until that time, Ohio had not taxed most personal property, such as tools and machinery. In 1851, the newly ratified state constitution required the taxing of all real and personal property. Eighty years later, a constitutional amendment limited the principle of taxation by uniform rule to real property rather than all property, narrowing the tax on tangible personal property to personal property used in business. The tax base for tangible personal property used by Ohio businesses included machinery, equipment and inventories.During the 1970s and 1980s, the Ohio General Assembly enacted additional TPP tax changes, adjusting taxable value amounts and exempting the first $10,000 of taxable value from taxation. Finally, in 2005, the General Assembly enacted House Bill 66, phasing out the TPP tax by 2008. For nearly all Ohio businesses, this meant the tax ended completely in September 2008. Some utilities continued paying the tax through 2010.The taxTPP tax revenues were collected locally until 2008 and went directly to schools.TPP taxes were levied locally and the revenues generated stayed in those communities. The tax revenue was distributed to the counties, municipalities, townships and school districts based on the taxable values and total millage levied in each community. Statewide, school districts received about 70 percent of the total TPP tax revenue. The start of state TPP reimbursementsTPP tax was eliminated as a relief to businesses and replaced by the broader-based Commercial Activities Tax.Schools supported the TPP elimination only with the understanding that a solution would be developed to replace the lost local TPP revenues. When the proposal to eliminate the TPP tax was introduced more than 10 years ago, school districts agreed that Ohio’s TPP tax was harmful to the overall state economy and posed a competitive barrier to attracting new businesses to Ohio. School district representatives worked in good faith with legislators to change that tax policy with the understanding that schools would not bear the brunt of this meaningful tax relief for the business community. To stave off the serious economic impact to school districts losing that local tax revenue, the legislature created the hold harmless clause, directing state funds to school districts to make up for the business tax relief. The reimbursement was based on projected revenues from the initial year of the hold harmless plan and frozen at that amount, not allowing for any revenue growth in subsequent years. As good community partners with Ohio businesses, school districts supported the positive changes in the taxing structure, with the understanding that the entire responsibility of making up lost revenue from eliminated TPP taxes would not rest solely with school districts and local taxpayers. The Commercial Activities Tax and educationState commitment to use CAT revenues to reimburse local schools for lost TPP revenues.CAT revenues go to state general revenue fund, not local communities.CAT generates more than twice the amount needed to continue TPP reimbursements to schools.When the Commercial Activities Tax was enacted to broaden the state’s tax base, the TPP hold harmless reimbursement payments were – and still are – made using these tax revenues. Unlike the former TPP tax, however, CAT revenues go directly to the state’s General Revenue Fund. The eliminated TPP revenues stayed in the local communities in which they were generated. Due to a variety of factors, including the state’s economic condition, the CAT began its existence under-performing and revenues were below projections. But today, the CAT is performing well, collecting more than $1.6 billion for the state’s General Revenue Fund, which is more than double what is needed to continue the TPP reimbursements to highly impacted districts.Severe economic impact in local communitiesEliminating TPP reimbursements in the districts that still receive them would be devastating.Districts would be forced to make severe program cuts or go back to the ballot with large operating levies just to keep pace.Further elimination of TPP reimbursement funding through a rapid phase out will increase reliance on residential and business property taxes in the affected school districts. In many of these communities, the combined loss of business tax revenue and reduced TPP funding already amount to annual revenue decreases as high as $1.2 million each year. Losses of this magnitude have been significant for school districts. Every year, the loss is compounded, meaning additional school district cuts, including staff position reductions, need to be made just to keep pace with the lost revenues.These communities have done their part to support their schools financially by passing school operations and facilities levies as needed. The districts have implemented serious expense reductions to increase efficiency. They did their part in helping right the state’s economy by absorbing the reimbursement cuts in earlier state budgets. But further school district budget gaps created by additional rapid reductions to TPP funding would be unsustainable for these communities. Citizens and school representatives in these communities understand the severe constraints legislators face in crafting a workable and balanced budget compromise every two years. But the impending budget process must include a commitment not to deal school districts a crippling financial blow.Not a Business vs. Schools ScenarioThese communities have already experienced significant shifts in their property tax burden. The same businesses that TPP elimination was meant to help would face increased property tax obligations. Businesses that didn’t receive TPP relief now pay the CAT and would face those same increased property tax obligations,Although this situation would seem to pit school districts against businesses, that is not the reality. In the most affected communities throughout Ohio, school districts have both recognized the need to eliminate the TPP tax and supported additional tax relief for businesses through tax abatement and other incentive packages. In fact, despite the lost revenue to schools, districts have supported abatement and incentive grants given by cities because they are keenly aware that a business friendly climate is vital to the overall strength of their community. Today, businesses that had eagerly awaited the benefits of the eliminated TPP in the most affected communities will face a new financial challenge if a change to the TPP reimbursement funding phase out is not enacted in law. School districts would have no choice but to go on the ballot to recoup – at least in part – that lost revenue. In addition to residential property owners having to shoulder an increased tax burden, local businesses in those communities would also face steep increases in their property tax exposure. This would nullify the benefit of the TPP elimination in some cases and greatly increase the tax exposure for other smaller businesses that are now paying the CAT and didn’t reap much of a financial gain from the TPP tax elimination in the first place. TPP Reimbursement Is Not a “Rich District” IssueThe TPP reimbursement issue impacts districts of all types.These communities continue to support the infrastructure of these business centers. The idea that TPP reimbursement is a “rich district” issue could not be further from the truth. Ohio school districts most heavily reliant on TPP reimbursement are vastly different. Some are small, others are large. Many are urban, while others are suburban. What ties them together is the fact that the reimbursement for lost local TPP tax revenues comprises a significant percentage of their bottom line. Without the continued TPP reimbursements or a slower phase out, these varied districts all around Ohio would be forced to slash educational programming or pass on tax increases through operating levies to their local taxpayers to balance their budgets. These communities continue to support the infrastructure of the businesses that previously paid TPP taxes. Citizen Engagement and Avoiding Financial CrisisStudents and educational programming should not be hurt due to tax reform and business tax relief.Change in current law is needed to reverse or slow the TPP funding phase out.Many of the most onerously affected school districts have the highest student achievement results in the state and are not rewarded for that success. In fact, the opposite is true. Due to the positive reputation of these districts, many businesses and families look to relocate to those communities. Unlike businesses that receive financial gains for results at the top of their industry, high achievement results in education yield no in increased revenue.These communities were purposefully developed with significant industrial zones to balance their tax bases. The elimination of the TPP gutted that balance and the budget gaps created by the rapid phase out of TPP reimbursement funding would be unsustainable. Citizens in the districts most adversely affected by the elimination of TPP reimbursement are astute and hold their school boards and administrators accountable for results academically and financially. Citizens and school representatives in these communities understand the severe constraints legislators face in crafting a workable budget compromise. But at the same time, this year’s budget process must include a commitment to avoid creating gaping holes in these district budgets.There are no easy answers. Yet it is critical to craft a fair and rational solution to reverse or slow the phase out of the remaining the TPP reimbursement funding. ................
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