Public Testimony 2003

New York State Budget Hearing Testimony -- Taxes

Submitted by: Martine Guerrier, Albany Representative for the Educational Priorities Panel
February 2003, Albany, New York

From the perspective of the Educational Priorities Panel, the state's budget should not be balanced by lowering the quality of children's education through cuts to public schools of $1.244 billion, almost two-fifth of which are directed at the New York City Department of Education.

The Executive Budget proposal, as it stands, undercuts the spirit of the national movement to "Leave No Child Behind" (which in its current federal incarnation is one of the biggest unfunded mandates impacting education). In addition, the Governor's proposal ignores state-imposed, highly ambitious standards of achievement that are fully supported by the business community. While all school districts in the state are having difficulty in helping their students meet these rigorous testing standards, the challenges for districts serving high-need urban students are enormous. In other words, the Governor is proposing to leave lots of children behind.

In preparing this testimony, EPP had initially intended to outline some savings programs, largely in school bus transportation, that would have partially funded restorations to other parts of school aid. But whom are we kidding? A state budget gap of $9.5 billion cannot be closed through efficiencies in transportation. Some legislators have urged us to offer ideas for dedicated funding streams for education. EPP is reluctant to do so because we have seen how a major dedicated funding stream, state lottery funds, have merely supplanted general fund support for education.

Our local New York City economy is as lively as death eating a cracker. The big question is — will the downturn on Wall Street last only a few years or will it last longer? In the worst case scenario, we need to remember that after "the bubble burst" in 1929, the stock market did not regain its full value until 1954. In other words, if the financial engine of the state continues to lose steam, we may be facing more than a two-year problem. EPP's aim is not "a holding pattern." The key question is how New York State can move forward in helping all children meet high standards of learning even as Wall Street continues to struggle for many years to come. Keep the programs that work, but thoughtful restructuring is in order -- both in terms of educational expenditures and state revenues. Here are EPP's revenue recommendations:

Restructure New York State's tax policies so that they are more rational and effective:

· Analyze the extent to which high-income homeowners are benefiting from STAR when they file their federal income taxes;

· Recognize that high-income taxpayers are receiving such large federal tax reductions that a PIT surcharge or new tax bracket would have a negligible impact on this group of taxpayers;

· Have New York join California, Illinois, and 14 other states that use "combined reporting" to prevent profitable multi-state and multi-national corporations from avoiding state corporate incomes taxes through shifting income to out-of-state subsidiary corporations;

· Adopt a new state Corporate Alternative Minimum Tax similar to New Jersey's which applies only to businesses with gross profits of $1 million or more.
 

Restructure New York State's tax policies so that they are more rational and effective:

If New York is to move forward in closing the "achievement" and "school facilities" gaps, the state's "budget gap" must be closed. To do this, our state's taxation policies must be pragmatic, not ideological. EPP not only represents a wide range of advocates for better schools, we also represent a wide range of taxpayers, from moderate income to affluent. What matters to us is our total tax bill, after paying city, state, and federal taxes. We also want to be assured that all taxpayers, whether individuals or corporations, are paying their fair share of taxes. Most of the specific recommendations that follow come from the Fiscal Policy Institute. As a coalition, EPP supports them because they provide options for restructuring our state's revenue system in the context of federal policies and new practices adopted by other states to curb accounting abuses.

To be more specific, starting last year, affluent taxpayers have begun receiving large tax reductions from the federal government. A minimal increase in state tax rates for these filers will have a minimal impact on them at this time, because they will still be paying thousands less in personal income taxes to the federal government. But some other tax reductions are unfair. Many states are now closing loopholes to stop large corporations from using accounting tricks to evade paying taxes on sizeable revenue. New York State should adopt similar practices. We were particularly shocked, as taxpayers, to learn that Toys R Us shifts much of its profits from sales in New York State to payments of royalties to its own trademark, Geoffrey the Giraffe. This subsidiary of Toys R Us is located in a state that does not tax income from "intangibles" like trademarks. This is an accounting gimmick.

Here are our recommendations for increasing revenue:
Analyze the extent to which high-income homeowners are benefiting from STAR when they file their federal income taxes. EPP supports the Executive Budget proposal to cap the benefit of STAR for non-senior homeowners. In fact, we would go a step further. There is no income limit for the non-senior homeowners, so an unknown number of beneficiaries of STAR itemize their deductions when they file their income taxes with the IRS and include local property taxes among their deductions. If they receive a school property tax reduction because of STAR, they pay more in taxes to the federal government. When it comes to their total tax bill, how much of a real benefit is STAR to them? EPP recommends that the Division of the Budget or the Comptroller do a study to quantify the degree to which STAR property tax exemptions have merely increased federal tax revenues. If the benefits from STAR to taxpayers above a certain tax bracket are minimal, maybe it is time to consider an income limit for beneficiaries of STAR, just as in the senior portion of the program.

Recognize that high-income taxpayers are receiving such large federal tax reductions that a PIT surcharge or new tax bracket would have a negligible impact on this group of taxpayers. EPP was surprised to learn from a Fiscal Policy Institute analysis that federal tax liability for a hypothetical family of four with incomes ranging from $150,000 to $1,000,000 has decreased by $2,000 to $11,400 from the year 2000 to 2003. FPI analysis shows that three options for increasing state personal income taxes for these affluent families (two different types of temporary surcharges or an additional tax bracket) still leaves these taxpayers with total tax liability reductions ranging from $1,895 to $6,148. These options will increase annual state revenues by $1.4 billion to $3 billion.

Have New York join California, Illinois, and 14 other states that use "combined reporting" to prevent profitable multi-state and multi-national corporations from avoiding state corporate income taxes through shifting income to out-of-state subsidiary corporations; and adopt a new state Corporate Alternative Minimum Tax similar to New Jersey's which only applies to businesses with gross profits of $1 million or more. These new reporting procedures will not hurt small business and will curb accounting abuses. They will essentially close the Toys R Us accounting loophole. FPI estimates that "combined reporting" could raise between $340 and $392 million annually and a Corporate Alternative Minimum Tax could raise between $400 to $460 million annually.

Closing the budget gap through restructuring revenue streams must be accompanied by a thoughtful restructuring of educational expenditures. Given that Wall Street may remain underperforming for many years, EPP does not advocate for a "holding pattern" of merely restoring budget cuts. EPP recommends:

Move forward in closing the "achievement gap": Restore full funding for LADDER programs; Substitute rational formulas for the Governor's block grant.

Move forward in closing the "school facilities gap":
· Adopt a fair capacity formula for the calculation of Building Aid;

· Recognize that a choice of aid ratios in Building Aid is no longer necessary now that there is a regional cost index in Building Aid;

· Modify the Governor's proposal so that high-needs and low-wealth districts retain their entitlement to Building Aid while a fixed, prioritized Building Aid pool is created only for low-need, high-wealth districts;

· Augment $105 million in federal facilities funding with unused RESCUE funds and federal Qualified Public Education Facility bonds in order to end chronic school overcrowding which now affects over 450,000 elementary students;

· Restore the Minor Maintenance program (part of LADDER).

Move forward in closing the "achievement gap":

Restore full funding for LADDER programs. The Governor's proposals for education program reductions particularly target New York City children through the elimination of funds for class size reduction, pre-kindergarten programs, and minor maintenance. This funding comes to $375 million, almost 30% of the Governor's planned reductions in education. It undoes the 1997 state budget agreement to fund both the STAR and LADDER programs. This is the fifth year in a row that LADDER is treated as a sacrificial lamb, while STAR enjoys a kid-glove treatment. In 1997, there was a recognition that the needs of children in urban districts should be balanced with the needs of homeowners, the majority of whom are in the suburban and rural parts of the state. Why is there this continuing effort to undo this agreement? It seems only fair that, as long as the $2.7 billion STAR school property relief program remains funded at whatever level, parents in urban districts should at least continue to have the benefit of LADDER programs.

Even as an initial negotiating stance, EPP finds it objectionable that the Governor should want to eliminate programs that work so well and to create such havoc, once again, in planning for the next school year. Over 120,000 students from kindergarten to grade three are in small classes in New York City thanks to an annual appropriation of $88 million. If this funding disappears, there is no way the New York City will replace this funding. Instead, the bean-counters at the NYC Office of Management and Budget will be free to provide waivers for early-grade class size caps of 25 students, as they have in the past whenever there is a downturn in revenues. This is penny wise and pound foolish. Class size reduction studies across the country have proven the early childhood education model of education – one teacher, one classroom, fewer than 20 students-in-a room – to be the most successful means of giving students in grades K-3 the best start in language acquisition, reading, and engagement in learning. Class Size Reduction, as designed by New York State, is a highly functioning and successful program which should not be altered, trashed, or in any way underfunded. EPP seeks your commitment to protect Class Size Reduction as a funded categorical budget item, and to maintain the integrity of the program by rejecting any proposals for flexibility in defining Class Size Reduction or its target population.

Substitute rational formulas for the Governor's block grant. The proposal to block grant nine formulas (including funding for special education) into "Comprehensive Operating Aid" and then taking away $406 million from this block grant (32% of the Governor's planned education reductions) will have the effect of increasing, not closing, the learning gap between high-need students and their more affluent peers.

EPP used to complain about save-harmless and transition-cap policies because they tended to augment state aid for higher-wealth districts in the first instance and decrease aid to lower-wealth and high-need districts in the second instance. The cumulative effects of these inequitable policies have been frozen in place since 2001. New York State legislators need to recognize that Operating Aid for school districts is now completely off of any formula. Now it doesn't matter how many students a district educates or the property and income wealth of residents in the district — all that matters is the amount that the district got last year. Pupil counts are now four years old. Districts with a drop in students are benefiting while districts with more students are being hurt. This is no way to fund children's public education.

The battle to restore cuts to school aid is not enough if there is no effort to restore some element of logic in the allocation of funds to school districts. You may have been led to believe that school formulae are as complicated as rocket science. They are not. How many students are there? What are their needs? What proportion of education programs can be funded locally? What are the local labor costs so that talented individuals will not be penalized if they chose to be teachers? EPP recommends a simplified formula for Operating Aid based on pupil counts (registers blended with attendance) factored by A) a Combined Wealth Ratio, B) an enriched Extraordinary Needs Aid formula (including sparcity), and C) a Regional Cost factor (as proposed by the Regents). At this time, keep special education and categorical program funding separate.

When the Levittown lawsuit was wending its way through the courts, the New York State Legislature put in place temporary funding formulae to serve as a transition to a fairer system of funding school districts. These "temporary" formulae served as the school district funding system for a quarter of a century. The absence of any alternative to the Governor's proposal for a block grant, especially in light of the current Campaign for Fiscal Equity lawsuit, is surprising. We urge the New York State Legislature, this year, to at least develop a model of a simplified formula for Operating Aid so that school districts can transition to formula-based funding over the course of the next two to three years.

Move forward in closing the "school facilities gap":
There is one area where EPP agrees with the direction that the Governor has taken in restructuring education funding, though we do not necessarily endorse all of the Executive Budget's specific recommendations. Over the course of the last five years, it has been noted by several organizations that the growth of Building Aid has resulted in flat funding for Operating Aid. What used to be a $400 million annual allocation has now become a $1.2 billion allocation. Now that times are not so flush, Building Aid needs to be prioritized and very quickly. Should the Campaign for Fiscal Equity succeed at the Court of Appeals, as we expect it will, the most costly court-order remedy will be to close the "school facilities" gap so that children in New York City and other high-needs districts have adequate learning environments.

Unfortunately, Building Aid has been structured as a "spend-to-get" entitlement. The most affluent districts have been able to spend more, and, unfortunately, state taxpayers have heavily subsidized their projects because the wealth measurement in Building Aid has been singularly flexible. Worse, many high-needs districts have not had the local resources to access Building Aid. Much worse, the school district with the most student overcrowding received just about the lowest Building Aid reimbursement rate for new school construction in the state.

What happened over the last decade is that affluent school districts with more than adequate school facilities received more state resources in the form of Building Aid than they received from the state in Operating Aid. These districts were encouraged to build new schools and additions. New York City, on the other hand, with 267,406 elementary school students in overcrowded elementary school buildings (out of 514,887 elementary school students in 2001), received far less in state resources to help build new schools than they received for school repairs or for Operating Aid. School overcrowding in New York City has persisted over the decade because of low reimbursement rates of Building Aid for new school construction. The result of Building Aid calculations is that new schools have been constructed in affluent school districts with no student overcrowding problems while the school district with the largest enrollment growth has been unable to reduce its overcrowding problem without forfeiting state aid.

Adopt a fair capacity formula for the calculation of Building Aid. One of the findings in our 2002 report, Castles in the Sand, is that New York City has been shortchanged as much as 50% in state Building Aid reimbursement for new school construction, compared to reimbursement levels for school districts in the rest of the state. The source of the problem is not statutory or regulatory, but a matter of State Education Department procedure. Instead of applying a uniform student capacity formula to all districts, SED substituted a different measurement for New York City schools only. For this reason, EPP supports the Governor's proposal that the capacity formula in Building Aid be changed to provide a dollar amount reimbursement for students per square foot, adjusted for regional costs. Our one reservation is that this calculation might encourage New York City budget officials to cram more students into less space, but this could be corrected by setting a limit on the number of students per square foot. Another advantage of this capacity formula, beyond fairness, is that it would vastly simplify the processing of Building Aid claims. (For those of you who want to understand this problem in greater detail, I have attached a chart at the end of this testimony which compares the computation of the capacity formula in Building Aid for New York City with the computation used for other school districts in the state.)

Recognize that a choice of aid ratios in Building Aid is no longer necessary now that there is a regional cost index in Building Aid. During the last thirty years, property values in the downstate suburbs escalated dramatically. Originally, allowing school districts to select a more advantageous wealth measurement from the past for Building Aid was intended as a gimmick to help downstate suburban school districts cope. The inclusion of a Regional Cost Index in Building Aid has addressed the problem of high downstate costs. The Selected Aid ratio in Building Aid, in contrast, has worked poorly because it does not help suburban school districts whose wealth has declined.

EPP's Castles In the Sand shows that school districts outside New York City of vastly unequal wealth and levels of state support for their Operating Aid received very similar reimbursement rates for their new school construction. For example, EPP looked at how much Building Aid seven affluent school districts in Westchester (Bronxville, Mamaroneck, Dobbs Ferry, Hawthorne-Cedar Knolls, Croton Harmon, Briarcliff Manor, and Somers) received for building projects ranging from $16 million to $25 million initiated from 1998 to 2000. Unbelievably, the state's share of these costs averaged 53 percent, though these school districts' average Combined Wealth Ratio is 2.612, that is, they are two and a half times wealthier than the state average. Not all school districts in Westchester, however, had a beneficial Selected Aid Ratio. The state's share of a project in the slightly less wealthy While Plains school district (CWR of 2.047) came to only 14 percent. EPP supports the Governor's proposal to eliminate the Selected Aid Ratio in Building Aid. This reform is long overdue. (A chart giving details of Building Aid for these Westchester school districts is also attached.) I need to add how shocked our coalition members are that some districts of twice the wealth of New York City received a Building Aid reimbursement rate of over 50 cents on the dollar while New York City received, on average, 22 cents on the dollar for its new school construction projects (1996 to 2000).

Modify the Governor's proposal so that high-need and low-wealth districts retain their entitlement to Building Aid while a fixed, prioritized Building Aid pool is created only for low-need, high-wealth districts. EPP has taken another look at the Governor's proposal to eliminate Building Aid as an entitlement for all school districts. He would create a pool of $100 million for debt service. School districts with overcrowding and health and safety issues would be given priority for this funding. The problems with this proposal are that A) $100 million is too small an amount of funding for the entire state and B) urban, dependent school districts, which must issue general obligation debt bonds through their municipality on the basis of guaranteed payments of Building Aid to their bond underwriters and bond holders, may not get permission to initiate capital building and repair projects without a guarantee of Building Aid. EPP recommends that Building Aid remain an entitlement for all high-need school districts as well as all low-wealth school districts. Create a prioritized pool of $100 million for low-need, high-wealth districts so that only the most needed capital projects in these districts are subsidized by the state's taxpayers.

Augment $105 million in federal facilities funding with unused RESCUE funds and federal Qualified Public Education Facility bonds in order to end chronic school overcrowding in New York City which now affects over 250,000 elementary students. It is EPP's understanding that the last installment of federal funding for facilities, which has allocated $105 million to New York State under the School Renovation-IDEA program, will be targeted to high needs school districts. 75 percent of these funds are for capital projects and 25 percent are for technology and special education innovations. In light of the "facilities gap" (as well as a decade's worth of limited Building Aid for new school construction in New York City), EPP recommends that unused portions of RESCUE funds, which will no longer be available after June 2003, become available to the city and other high-needs school districts. In addition, we urge that the federal Qualified Public Education Facility program be directed primarily to New York City, where overcrowding still affects 250,000 elementary school students. It is very likely that only New York City will be able to navigate the intricacies of this program, which gives private developers access to tax-exempt bonds to build schools that will then be leased to the school district.

Restore the Minor Maintenance program (part of LADDER). Part of the "facilities gap" stems from inadequate funding for preventive maintenance in low-wealth, high-needs districts. As Healthy Schools Network has pointed out, poor maintenance of buildings is one of the chief causes of environmental health hazards affecting children in schools. Since New York City still uses schools that are over 100 years old, repairs are critical. In my introduction, I stated that good programs should be retained. Minor Maintenance is a successful program in New York City that actually saves the state money because more costly capital repairs are prevented. If this program is eliminated, the "facilities gap" will only grow larger.

In conclusion, EPP seeks your assistance on behalf of the children served by New York City public schools to insure the improvement of early childhood, elementary and secondary education even during these tough economic times, which may last a very long time. EPP believes that all children have a right to a sound, basic education which includes small class size, a quality teacher in every classroom, and a healthy learning environment.
 
 
 
 
 
 
 
 
Note: Two of our member organizations, the American Jewish Committee and the Junior League of Brooklyn, have abstained as coalition members from agreeing to EPP's revenue proposals. The Women's City Club of New York has not yet reviewed all the revenue proposals