California’s Solution for a Looming Covid-19 Budget Disaster

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(Bloomberg) -- With 45 million children in 43 states already enjoying an extended summer vacation, school boards and legislators are trying to determine how the coronavirus recession will affect K-12 funding for the next academic year and beyond.

Since U.S. lockdowns first began, governors in eight states signed bills to free up funding for disadvantaged students in poorly funded public schools, some where students often arrive hungry or have undiagnosed learning disabilities. Now, six states are considering November ballot measures to boost school funding or change financing mechanisms to help disadvantaged students.

These include Arizona, where taxes would be raised on incomes above $250,000 to boost teacher salaries; Colorado, which is targeting corporations for at least $151 million in taxes to fund out-of-school learning; and North Carolina, which would issue bonds worth $1.9 billion in part to pay for school capital improvements.

But it’s a ballot measure in California that may have the biggest effect, upending the business property tax structure to free up as much as $12.5 billion annually for public schools (K-12 education currently receives $97.2 billion from state, local and federal sources). The measure, if adopted, could set a new standard for how property taxes are used in other states. It would certainly help California deal with its projected $54 billion shortfall. 

California’s Solution for a Looming Covid-19 Budget Disaster

Property taxes are a key component of public school funding in America, a fact that has historically created high-performing schools in wealthy neighborhoods and poor-performing schools in poor neighborhoods. Economic stratification in America, often along racial lines, has long been attributed in part to this mechanism of school funding.

California’s ballot initiative wouldn’t change that system. Rather, its proponents say it would make it more fair. Under the state’s heretofore untouchable Proposition 13, which took effect in 1978, property is re-assessed only when it changes hands or is redeveloped, a boon to longtime landowners. The California Schools and Local Communities Funding Act of 2020, however, would assess the market value of some business properties every three years. Given high property values in some parts of the state, this “split-roll” measure could mean big money for public schools.

“We’re ensuring that if you started a business yesterday and the person next to you started theirs 40 years ago, that they don’t pay the same taxes they did 40 years ago,” said Alex Stack, communications director for Schools & Communities First, an organization of school district officials and labor groups behind the initiative. Stack points to a study from the University of Southern California showing that 78% of the revenue generated would come from just 6% of the property owners.

The ballot measure would affect any parcel owned by an entity whose total commercial or industrial land holdings exceed $3 million. The proposal seeks to protect small business owners, while big companies that own a large number of small properties (like a restaurant chain) must pay up. The new law would hold the maximum tax rate to 1% while offering some exemptions.

Proposition 13 has long been defended as a lifeline to senior citizens in California who, without it, might have trouble paying property tax bills. But its most powerful defenders have been corporations and other owners of high-value commercial and industrial properties that have saved billions of dollars over the years.

“We have the highest marginal income tax rate in America, the highest sales tax rate in America, the highest gas tax in America, and the highest corporate tax west of the Mississippi,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, a lobbyist group which actively opposes the ballot measure. “The costs of businesses are invariably passed along to consumers, and a $12 billion tax increase will simply exacerbate the cost of living situation in California.” 

With the recession likely to slash states’ revenue for years to come, schools are going to need help from somewhere. Many are still recovering from the last economic downturn. By 2017, the last year for which complete data was available, spending on elementary and secondary education in 22 states had yet to recover to levels prior to the Great Recession, according to an April report from the Albert Shanker Institute, a Washington-based nonprofit.

As state coffers empty to fight Covid-19, many school districts “will be facing a possibly unprecedented funding crisis while they are still digging out from the last one,” wrote senior research fellow Matthew DiCarlo and Bruce Baker of the Rutgers University Graduate School of Education.

The effects of the 2008 financial crisis were most severe in districts that could least afford the cutbacks, and occurred amid 25-year declines in both state revenue and state spending on education as a share of personal income. This time may be worse.

“What’s happening now will have a much more significant impact than the Great Recession,” said Phil Vaccaro of the consulting firm EY-Parthenon, partly because of the social-emotional and academic setbacks resulting from a truncated school year, as well as trauma felt by families of the 111,000 Americans killed in the pandemic, the most of any nation by far. “It will be felt disproportionately by students from low-income families, with special education needs, and in earlier grades,” he said.

California’s Solution for a Looming Covid-19 Budget Disaster

The $13 billion in aid to K-12 schools nationwide in the federal Covid-19 bailout was about one-quarter of what Washington provided in 2009, while the Center on Budget and Policy Priorities, a left-leaning research institute in Washington, calculates state budget shortfalls for fiscal 2021 alone will amount to $290 billion.

California’s schools rank in the middle of states by per-student spending. Before 1978, California was near the top. But in the years after Proposition 13, it fell toward toward the bottom. The recent climb back up is largely a function of other states’ declines.

When it comes to education funding and outcomes, size does matter, Baker said. “Significant additional investments in schooling have led to better outcomes, and recessionary cuts have led to flattening and declining outcomes,” he said.

That’s largely because education is labor-intensive: The biggest line item in school budgets is staff—around 70%, according to Vaccaro—though the average starting salary in the U.S. is below $40,000. Baker predicted that the California initiative “could serve as a timely counterbalance” to looming revenue falloffs.

California’s Solution for a Looming Covid-19 Budget Disaster

Coupal, the business lobbyist, contends California schools are already getting what they need. Rex Hime, president of the California Business Properties Association, added that under the new tax regime, “there’s going to be a significant upheaval among the smaller owners.”

“Some folks had their property tax in place for 20 years,” Hime said. “Suddenly they’re going to get a tax bill reflecting a 2020 value rather than a 2000 value, and they’re going to be very hard-pressed to make those payments.”

Willie Brown, the former San Francisco mayor and speaker of the State Assembly, agreed. The Democrat wrote in Cal Matters, a news site on state policy, that a significant percentage of California businesses are minority owned, and many rent from entities that will be forced to pay more. (Because of Covid-19 shutdowns, there has already been a 41% decline in black-owned businesses.)

“African American-owned small businesses are nearly twice as likely to fail because they have insufficient cash flow or sales to cover their costs than U.S. businesses as a whole,” Brown wrote. If their landlord qualifies for re-assessment, he warned, they will pay the price next time their lease is up.

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