Looking back at Michigan's school funding "reform"

There's been a lot of attention on what Michigan did with school funding back in the 1990s.
In summary, the state did away with property taxes paying for schools, banned local property tax increases and raised state taxes, making them the source of school funding.

This allowed Michigan to narrow the gap between the have and have-nots and become a role model for progressive education funding.

Then the economy tanked.

In 2005, as so-called "tax swap" plans swirled at the Illinois Capitol, I revisted the Michigan reform and wrote this story:

SPRINGFIELD -- Ten years after Michigan embarked on the nation's most dramatic education funding swap, its state budget is awash in red ink and, as a result, schools there have been forced to close buildings, end programs, and cut staff.
Michigan's experience is part omen, part case study for Illinois as proponents of a tax swap - albeit a milder one - push their case here.
"The problem with this method of funding is it's dependent on sales tax and sin taxes and income tax, all of which become very unstable when the economy is down and that's what's happened in Michigan," said Shirley Bryant, spokeswoman for Birmingham Public Schools, a suburban Detroit district annually ranked among the state's best. As state funds have come up short, the district closed buildings and is considering cutting the programs it offers students.
"All the districts in Michigan are drowning," Bryant said.
Still, political pressure mounts in Springfield to raise state taxes and use the money to replace local property taxes for funding schools, something suburban lawmakers blocked in 1997.
Proponents say Michigan's plan was flawed and they've learned from others' mistakes. The result is a version that they say makes school funding more equitable statewide while also fixing the state's "structural deficit" to ensure the funding can be sustained.
Ralph Martire, executive director of the Center for Tax and Budget Accountability, is the architect of the plan and has traveled the state preaching its benefits.
On the other side, critics contend it's a massive government tax hike poorly disguised as a school funding fix.
"Anytime someone talks about the 'structural deficit,' watch out. That's the code word for: 'We want to raise your taxes,'" warned state Sen. Peter Roskam, a Wheaton Republican. He's spending $40,000 on radio commercials rallying opposition.
A vote on tax swap proposals could occur in the coming weeks. Senate President Emil Jones Jr., an influential Chicago Democrat, personally supports the concept.
But huge political hurdles remain. Aside from Roskam's campaign, Gov. Rod Blagojevich was elected on a vow not to raise the state income or sales tax, both of which this plan requires.
"It doesn't have a chance at all," said former Gov. Jim Edgar, who pushed a failed tax swap in 1997. "Without the governor on board I think it's an extremely huge long shot, as much as I think it's needed."
Economic lessons
Politics aside, the economic lessons of the last decade have altered this debate.
When Michigan all but did away with property taxes to fund schools in 1994, it became a national example of school funding reform. A 50 percent sales tax hike and tripling of cigarette taxes, combined with high economic times, sent billions of new dollars into Michigan state coffers and on to schools even as local property tax bills were reduced by nearly 45 percent. Michigan officials were able to use the newfound money to narrow the gap between what districts in poor and affluent areas spend on students.
But by 2001 there were signs the economic tide was going out and then the economy all but collapsed following the September terrorist attacks. People lost jobs and stopped buying items. Income and sales tax revenue plummeted. Not just in Michigan, but across the country.
In Illinois, state education funding was cut, but local property taxes made up for it.
In Michigan, there were no local tax dollars to cover the gap. The funding swap law banned local property tax increases for school operations. So schools had to cut. Now education groups are calling for additional tax increases to restore school funding, including a statewide property tax.
"We're going to have to raise taxes," said David N. Plank, co-director of Michigan State University's Education Policy Center.
A similar situation likely could have occurred here had schools relied more on state taxes. As the economy dipped, so too would have their state funds, and Illinois schools would have had to make cuts or call for tax increases locally or statewide.
Granted, the proposals in Illinois are less extreme than Michigan's. But the underlying problem is the same: If schools rely more on state dollars, what do they do when those dollars dry up?
Suburban concerns
Martire believes his version is far more stable, largely because it keeps property taxes in the mix. But also because the state tax increases would be far broader.
To begin with, the state would pay 25 percent of the local property tax bill that goes to schools.
On the flip side, the state personal income tax would raise to 5 percent from 3 percent. That's a 67 percent increase. The corporate income tax goes up too. And you'd pay sales tax on car repairs and other services. For instance, now when someone gets a muffler fixed, they pay tax on the muffler, but not on the labor.
That last provision is key, said Martire. Because even in slow economic times people still get cars fixed and pay for other services. So the plan is far more sustainable, he argued. Just extending the sales tax to such services would bring in $1.5 billion a year.
In addition, the proposal asks lawmakers to grant education funding special protection in the budget, ensuring that dollars for schools are doled out no matter what. It would mean that in tough budget times schools automatically get their state dollars while cuts occur elsewhere or taxes increase.
But just as in 1997, suburban lawmakers see little reason to support this. There's little money for suburban schools because many don't qualify for the general state funding formula.
Critics, like Roskam, see nothing but tax increases for suburban residents in this trade. That's why the 1997 plan failed. Suburban lawmakers, led by then-Senate President James "Pate" Philip, a Wood Dale Republican, saw little benefit for their areas and it was voted down in a committee.
"If you look at it from a property taxpayer, the likelihood is your income tax and service tax are going to go up and your property tax is going to go up over time," said Roskam. "It doesn't prohibit a school from going out for a referendum. It doesn't prohibit other taxing bodies from raising rates. That's the deception."