For further information about Michigan's school finance reform programs, the reader may contact Joe Carrasco, Jr. at the Senate Fiscal Agency (517) 373-2768, or Dr. Hank Prince at the House Fiscal Agency (517) 373-8080.
The 1994-95 fiscal year witnesses a dramatic change in the way that Michigan's public elementary and secondary schools are funded.
In July 1993, the Legislature eliminated local school property taxes, reducing by nearly $7 billion the annual funding for Michigan's public schools beginning in the 1994-95 school year. The result of this change opened the door to an exchange of ideas. The national spotlight was on Michigan for the remainder of 1993 as it wrestled with the issue of replacement revenues. On December 24, 1993, the Legislature passed legislation to establish a new method for distributing State school aid through a foundation grant system, and produced two solutions to school finance reform. The Legislature opted to let the people of Michigan decide between two revenue proposals for the funding of public schools.
Voters were presented with Proposal A, a
constitutional amendment on school finance, in a March 1994 special election.
The ballot proposal, if approved, would amend the Constitution to increase
the sales tax, limit future assessment increases, and allow different classes
of property to be taxed at different rates for school operating purposes.
Approval of the amendment also would trigger a package of related tax changes
including a six-mill State education property tax for school operations and
an income tax rate decrease from 4.6% to 4.4%. Rejection of the ballot proposal
automatically would make effective the alternative plan referred to as the
Statutory Plan. Among the tax changes in the Statutory Plan were an increase
in the income tax from 4.6% to 6.0%, an increase in the personal exemption,
a State education property tax of 12 mills on nonhomestead property, and
an increase in the single business tax rate from 2.35% to 2.75%. The tax
changes in each plan are summarized in Table 1. The new school aid
system for distributing State payments to school districts through a per-pupil
foundation allowance would be the same under either plan.
TAX REFORM COMPONENTS
SCHOOL FINANCE REFORM PACKAGE
|Tax Change||Ballot Plan||Statutory Plan|
|Sales Tax Rate||From 4.0% to 6.0%||No change|
|Use Tax Rate||From 4.0% to 6.0%||No change|
|Sales & Use Tax Base Adjustments||Exempt Residential Utilities from two-cent increase||Tax Interstate Phone Calls|
|Tax Interstate Phone Calls (Exclude 800 Service)|
|Income Tax Rate||From 4.6% to 4.4%||From 4.6% to 6.0%|
|Income Tax Personal Exemption||No change||From $2,100 to $3,000 per dependent|
|Income Tax Credit Adjustments||Increase Renter's Credit||Increase Renter's Credit|
|Single Business Tax Rate*||No change||From 2.35% to 2.75%|
|Real Estate Transfer Tax**||Impose at 0.75%||Impose at 0.75%|
|State Education Property Tax
Homestead and Qualified Ag. Property
Levy 6 mills
|Local Homestead Property Tax||None||Levy 12 mills|
|Local Nonhomestead Property Tax||Levy 18 mills||Levy 12 mills|
|Cigarette Tax Rate Increase||Increase from 25 cents to 75 cents per pack||Increase from 25 cents to 40 cents per pack|
|Tax on Other Tobacco Products||Tax at 16.0% of Wholesale Price||Tax at 16.0% of Wholesale Price|
|* After the approval of Proposal A, Public Act 247 of 1994 reduced the Single Business Tax rate from 2.35% to 2.3%, effective October 1, 1994.|
|** As passed in December, the Real Estate Transfer Tax would have been 2% under the Ballot Plan and 1% under the Statutory Plan. The rates were reduced to 0.75% by Public Act 3 of 1994 prior to the election.|
Local School Operating Taxes
Public Act 336 of 1993 and amendments passed in June 1994 (Public Act 283 of 1994) comprise the School Aid Act for the 1994-95 school year. This Act and related School Code legislation marked the beginning of the foundation grant approach to State school aid payments. This was a departure from the district power equalizing approach that had been in effect for almost twenty years. The school finance reform plan also diminished the State's reliance on local school operating property taxes as a source of funding for K-12 public schools. Although some local school operating property taxes were reinstated, they were significantly reduced for most homeowners and businesses in the 558 school districts in Michigan.
In 1993-94, the statewide average millage rate for local school operating purposes was just under 34 mills on all property. In 1994-95, for most districts, the local school operating millage rate will be 18 mills on nonhomestead property only. The 18-mill tax on nonhomestead property will provide local school operating revenue and will remain within the school district to serve as a component of the district's foundation allowance. Owners of homestead and qualified agricultural property will pay no local school operating taxes in most areas (except in districts with "hold harmless" or enhancement millage, which is discussed further below).
State Revenues for Education
State revenues for education will change considerably as a result of the adoption of Proposal A. The tax sources going to the School Aid Fund (SAF) will be expanded to include the revenue from the sales and use tax increases, the cigarette tax increase, the new state real estate transfer tax, the tax on tobacco products, and proceeds from the new State education property tax of six mills on all property. From the income tax, 14.4% of gross collections before refunds is now earmarked to the SAF.
The revenues earmarked to the SAF before and after the adoption of Proposal A are compared in Table 2. The new revenue from the sales tax increase is dedicated to the SAF by the constitutional amendment. The other sources are earmarked by State law.
REVENUE SOURCES EARMARKED TO THE SCHOOL AID FUND
|Revenue Source||Before Proposal A||After Proposal A*|
|Sales Tax**||60% of proceeds at a 4% rate||60% of proceeds at a 4% rate and 100% of revenue from the 2% increase|
|Use Tax||All revenue from the 2% increase|
|State Education Property Tax||All revenue from statewide 6-mill property tax|
|Real Estate Transfer Tax||All revenue from 0.75% tax|
|Income Tax||14.4% of gross collections after refunds at a tax rate of 4.4%|
|Cigarette Tax||Two cents of the 25 cents per pack tax||63.4% of proceeds from the 75 cents per pack tax|
|Other Tobacco Products||All proceeds of the tax (16% of the wholesale price) on cigars, noncigarette smoking tobacco, and smokeless tobacco|
|Lottery||Net Revenue||Net Revenue|
|Industrial and Commercial Facilities Tax||Paid to the SAF for properties in school districts receiving State equalization aid (in-formula districts)||The school district share goes to the SAF except for the amount (if any) attributable to "hold harmless" millage levied by the school district.|
|Commercial Forest||Paid to the SAF for properties in school districts receiving State equalization aid (in-formula districts)||The school district share goes to the SAF except for the amount (if any) attributable to "hold harmless" millage levied by the school district.|
|Liquor Excise Tax||Revenue from 4% excise tax||Revenue from 4% excise tax|
|* The effective
date of the earmarking changes varies by tax. For new taxes such as the State
education tax and the real estate transfer tax, the earmarking begins on
the effective date of the tax. The income tax earmarking begins October 1,
1994. The sales, use, cigarette, and other tobacco products tax rates and
earmarking changes were effective May 1, 1994.
** Constitutionally dedicated to the School Aid Fund.
District Power Equalizing and State
In recent years, Michigan public schools have been financed through a combination of State aid payments and locally raised revenues. Generally, State aid was provided in two forms: general purpose aid and categorical aid. Most general purpose aid was provided through an equalization formula while special programs and services such as special education, vocational education, bilingual education, and transportation (to name a few) were funded through categorical aid.
Beginning in 1973, the Gilbert E. Bursley School District Equalization Act created a funding equalization formula known as District Power Equalizing. This method was used through the end of the 1993-94 school year. District Power Equalizing guaranteed each district a minimum return per pupil for each mill of property tax levied. Districts were allowed to tax themselves at whatever rate the voters approved, within the 50-mill limit of Article IX, Section 3 of the Michigan Constitution. If a district's revenue from the levied tax rate was less than the State guaranteed revenue from that tax rate, the State paid each district the difference in the form of State formula aid payments.
If a district's local revenue per pupil per mill exceeded the State's guaranteed revenue under the District Power Equalization Formula, the district was "out-of-formula" and thus received no State formula aid. In the 1993-94 school year, 177 of Michigan's 558 school districts were out-of-formula. The remaining 381 school districts received State aid according to the State Membership Aid Formula. In the 1993-94 school year, the guaranteed amount per mill or the equalization payment was $102.50. In addition, the formula included fixed-dollar payments per pupil that could total $400 (assuming that a district met all requirements for receiving certain incentive payments). The total formula aid included the equalization payments, a flat grant of $326 per pupil, and incentive payments of up to $74 per pupil.
The boxes in Figure 3 show the relationships that determined formula aid payments to a school district. First, a district's guaranteed millage revenue was calculated as the product of the local mill rate (in decimal terms) and the State guaranteed amount per pupil per mill. The sum of the guaranteed millage revenue and the flat grant (including incentive payments) was termed the gross allowance per pupil. The guaranteed millage revenue and the gross allowance varied between districts based on the school operating millage rate levied.
A district's State formula aid payment per pupil was computed by taking the difference between the gross allowance per pupil and the local operating revenue per pupil for the district. The local operating revenue was the local school operating millage rate times the State equalized valuation (SEV) per pupil. SEV is equal to 50% of the property's true cash value. If a district's local revenue on its school operating mills was greater than the gross allowance, then the district was out-of-formula and received no State formula aid. Otherwise, the State membership aid per pupil was the difference between the gross allowance for the district and the local operating revenue.
Amount Per Mill
|Gross Allowance Per Pupil||=||Guaranteed
EXAMPLES OF THE TOTAL REVENUE PER PUPIL RECEIVED BY DIFFERENT SCHOOL DISTRICTS WITH VARYING SEVs AND MILLAGE RATES
|District||District Tax Rate (Mills)||Guaranteed Millage Revenue
|Gross Allowance Per Pupil1 [(c)+$400]||Local SEV Per Pupil||Local Revenue Per Pupil [.001 x(b)x(e)]||State
Formula Aid Per Pupil
[(d) - (f)]
|Total Revenue Per Pupil [The larger of (d) or (f)]|
|1) Assumes districts qualify for all incentive payments.|
The foundation allowance is a per-pupil revenue
amount that a district may receive. It is calculated for each district based
on a formula in the School Aid Act. In general, the starting point is the
amount of eligible base revenue that a district received per pupil in the
1993-94 school year. This base amount is then increased as permitted by law
to determine the foundation allowance for FY 1994-95. The increase varies
from $250 per pupil for the lower revenue districts to $160 per pupil for
the districts with base revenues of $6,500 or more; however, each district
will have a foundation allowance of at least $4,200 in FY 1994-95. The FY
1994-95 foundation allowance per pupil for districts with base revenue above
$4,200 and less than $6,500 is determined by the following formula:
Revenue Per Pupil
|+||$250||-||($90 x (Base
Revenue Per Pupil - $4,200) )
THE STATE AND LOCAL SHARE OF THE FOUNDATION ALLOWANCE
FOR SAMPLE SCHOOL DISTRICTS
(amounts per pupil)
|District||1993-94 Blended Base Revenue||1994-95 Foundation Allowance||Nonhomestead SEV Per Pupil||Local Revenue on 18 Mills .018x(c)||State Share of Foundation Allowance1||Local Hold Harmless Revenue Needed2||Total Local Revenue Needed (d)+(f)|
|W||$ 3,850||$ 4,200||$ 25,000||$ 450||$ 3,750||$ 0||$ 450|
|1) The foundation
allowance or $6,500 whichever is less, minus the local revenue on 18 mills.
2) For districts with a foundation allowance above $6,500, the foundation allowance less $6,500.
LOCAL SCHOOL OPERATING MILLAGE RATES FOR SAMPLE SCHOOL DISTRICTS
|District||1994-95 Foundation Allowance Per Pupil||Nonhomestead SEV Per Pupil||Homestead SEV Per Pupil||Local Hold Harmless Revenue Needed Per Pupil||Hold Harmless Millage||Total Local Millage|
|Homestead Property||Nonhomestead Property||Homestead Property||Nonhomestead Property|
|W||$ 4,200||$ 25,000||$ 50,000||$ 0||0.00||0.00||0.00||18.00|
|Note: The State 6.0 mill education property tax will be paid on all taxable property in addition to the local millage rate shown in the table.|