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The High Cost of Educational “Adequacy” The group that mounted a successful court challenge to New York State’s public school financing system claims the state will need to boost spending by about $9.6 billion a year to meet the constitutional mandate of a “sound, basic education” for all students. There’s an Alice-in-Wonderland quality to the estimate by the Campaign for Fiscal Equity (CFE)[1], given the continuing fiscal stresses faced by every level of government in New York State. But the CFE has one edge on other insistent claimants to the treasury: it is backed, at least in principle, by a decision of the state’s Court of Appeals.[2] In a February 2004 report, CFE initially estimated that school districts in New York would need to spend an additional $7 billion, in 2004-05 fiscal terms, to ensure an adequate education for all pupils.[3] But the group subsequently issued a more detailed proposal for a total school spending increase of $9.56 billion, to be phased in over the next four years in equal installments of about $2.4 billion a year. The state should be responsible for financing “more than 90 percent” of the increase, the report said.[4] This would equate to at least $8.6 billion. Putting aside the dubious, money-solves-everything theory behind the lawsuit, this memo attempts to put the CFE’s spending target into financial perspective. For example, as shown in the chart below, generating $8.6 billion more solely through an across-the-board increase in the state personal income tax would require a top rate of 10.2 percent, New York’s highest in more than 20 years.
From bad to worse Assume, for illustrative purposes, that CFE can persuade state courts to agree with their funding target. In that case, here are some more specific examples of how the resulting spending increase might affect the state’s current financial structure: Personal Income Taxes—There are any number of ways the Legislature might attempt to raise $8.6 billion solely through an increase in the personal income tax. The alternatives would include:
In any case, a state personal income tax increase in the $8.6 billion range would also result in the loss of tens of thousands of jobs, based on previous research into the relationship between income tax rates and economic growth.[6] Sales and Use Taxes—New York’s sales and use tax rate, which is now 4.25 percent, would have to be increased to nearly 7.8 percent in order to raise another $8.6 billion. Since counties and cities in the state also impose sales taxes ranging from 3 percent to 4.25 percent, this would leave New York with a statewide rate of nearly 11 percent—the highest in the country. New York already imposes the heaviest sales tax in the northeast.[7] Business Taxes—Existing rates for the corporate franchise tax, bank tax, insurance tax, and the state corporation and utilities taxes would have to be raised by 233 percent across the board in order to raise $8.6 billion solely within this category. Thus, for example, the state’s top tax rate on corporate net income would have to zoom from 7.5 percent to nearly 25 percent—two to three times the rate in most other states. All Taxes—If $8.6 billion in new spending requirements was spread across the state’s entire general fund tax base, rates would have to be raised by an average of nearly 20 percent across the board.[8] The alternative to raising taxes to finance higher K-12 school aid would be to divert the money from elsewhere in the state funds budget, with no change in tax rates. Raising $8.6 billion in this manner would require immediate cuts of at least 19 percent in all other government programs, excluding only School Tax Reduction (STAR) subsidies and existing school aid. Dividing the cost The Legislature is likely to insist that any additional school spending mandated by the CFE case must be shared by both state and local taxpayers. At the same time, members of both the Senate and Assembly have also made it clear they do not favor the redistribution of school aid from wealthy to poor school districts. CFE, as noted, has proposed that local taxpayers shoulder only 10 percent of the added burden. But assuming the Legislature chose to evenly divide the increase between state and local taxpayers, it would require an increase of nearly 10 percent in all state tax rates, plus the following:
Alternatively, the Legislature might choose to raise and spend the additional $8.6 billion totally at the state level, but could offset a portion of the cost to itself by eliminating the popular STAR program, which will cost $3 billion in 2004-05. This would boost school property taxes an average of nearly $700 for homeowners outside New York City, and by twice as much for senior citizens. In the city, STAR’s elimination would result in smaller property tax hikes combined with a 5 percent across-the-board increase in city income tax bills.[9] A new record New York’s per-pupil school spending as of 2002-03 was first in the nation-47 percent above the national average.[10] The CFE and its supporters routinely ignore the question of how to pay for even higher school budgets. The only statewide official to even attempt an answer has been Governor Pataki, who has proposed a vast expansion of state-run video lottery terminals (VLTs) to ultimately raise another $2 billion a year. But the VLT plan faces a number of substantial political and legal hurdles. To summarize, raising $8.6 billion in new revenues would require the largest tax increase ever enacted by New York State—the largest, in fact, ever enacted by any state. There’s no reason to believe schools would actually improve as a result of the added spending, but there’s plenty of reason to believe New York’s already heavily taxed economy would be weakened in the process.
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