The truth about school funding and sales taxes

It’s budget season again and inevitably we have claims about sales tax and school funding being tied to each other. If that sounds familiar it should, the same claims were made last year.

Everyone who purchases goods in the City of Germantown pays a 9.75% sales tax on those goods. That tax rate is made up of 7% for the State of Tennessee, 2.25% for Shelby County and 0.5% for the City of Germantown. In 2012, we voted to establish our own school district but to do so required that the city contribute funding equal to $0.15 of the property tax rate. This is only the City’s portion of funding. School funding is a mix of Municipal, County, State and Federal funds. To meet this obligation we voted to raise the City’s portion of the sales tax rate from 0.25% to 0.5%. The referendum was worded so that the funds would not to be tied to the schools but would easily meet the requirements for generating the funds the City would be obligated to contribute to GMSD. 

In other places, especially those with small independent school districts, public education is funded by a school tax. While school tax laws vary, typically, the taxing authority lies with the school board that determines the tax rate. Along with that power to levy taxes, the school board bears the responsibility of providing for the needs of the district with school tax revenue. This means the school board must balance their budget based on the revenue they generate from the school tax they levied on taxpayers. And ultimately, the Board of Education must answer to the public politically for the imposed tax rate and stewardship over revenues.

We don’t work that way here. Our school boards do not have the authority to levy a tax. Instead, our public schools are mostly funded by revenue generated primarily from state sales tax and county property tax. Each county in Tennessee is required to operate and contribute funding for a public system of education. In order for a municipality to operate its own separate and independent district, the municipality must provide SUPPLEMENTAL funding. It is up to the municipal governing body to determine the amount and source of supplemental funding within the parameters of state law. So, what are those parameters?

At this point lets stop for a moment to discuss maintenance of effort or MOE.

The term “Maintenance of Effort” (“MOE”) generally refers to a requirement placed upon many federally funded grant programs that the State Education Agency (SEA) and Local Education Agencies (LEAs) or school districts, demonstrate that the level of State and local funding remains constant from year to year.(1)

Ask the City of Memphis about this. They famously tried to cut funding from Memphis City Schools and ran into issues with MOE. So what does MOE have to do with the sales tax? Great question! Sales taxes are elastic, meaning that they fluctuate based on economic conditions. More simply, it fluctuates based on how much you and I shop in Germantown. Had we tied the sales tax to the schools, MOE would require that every time we break a record in sales tax collections, we would then have to meet that funding level going forward (even if we hit a recession and collet fewer taxes). You can always go up but never down, it is a one way street with MOE.

The administrators who crafted the wording of the resolution understood this and thus worded the referendum accordingly. It allowed the new sales tax rate to fund our obligations without escalating due to economic ups and downs. This is fiscally smart because when sales tax revenues drop the only other source to pay that obligation is your property taxes. In a recession not only would you have the negative impact of a down economy, the city would be in a position to be forced to raise your property taxes to meet the MOE requirements.

This is why the fiscal policy of tying school funding to a variable revenue source is dangerous. That policy reduces the predictability of property tax rates for people on fixed incomes. One year you are fine and the next we have a tax hike to offset sales tax shortages. 

See the CA article below to read how Aldermen Barzizza and Massey raised the same issues last year…

Despite public view, sales tax hike was never intended solely for suburban school systems

Bonus – Why Sales Tax vs. Property?

Sales tax is a burden shared by everyone purchasing goods in Germantown. It allowed the City to meet the revenue generation needs with out over burdening home owners. It spread that revenue generation across the broader community. You come from out of town and spend money in Germantown? You help fund our schools. And we thank you!

Reference

(1)   Maintenance of Effort: The Basics