Tax and Expenditure Limits (TEL)
The major question confronting New Jersey’s educational system is most likely whether the state should implement a 2.5% cap on local public school districts’ annual operating budgets which is otherwise known as a tax and expenditure limit (TEL.) This question seems to arise from the most compelling issue facing public office holders, legislators, and policy makers as well as taxpayers statewide which is how to limit the amount and growth rate of New Jersey’s taxes especially its property taxes. Governor Christie’s answer is to implement a 2.5% TEL on local property taxes and expenditures similar to Massachusetts’ Proposition 2.5 or California’s Proposition 13.
Why should taxpayers allow the passage of legislation that would enable the state of New Jersey to limit a local school district’s ability to determine the amount of property taxes it levies as well as its level of expenditures? Voters currently have more control over their local school district’s property taxes than they have over any other form of taxation whether the tax is levied by their municipal, county, state or federal government. Why then should the state be able to set an arbitrary one-size-fits-all limit on the amount of property taxes local school districts can levy when property taxes are set according to local needs and priorities? Such a one-size-fits-all cap will fit no district because districts are unique.
Taxpayers can vote on their local school district budgets in all but a handful of towns but no taxpayer is able to vote on the budget of his/her municipal or county government despite the fact that these two levels of government are funded almost entirely by local property taxes. Because taxpayers can vote on school budgets, they can hold their school systems accountable but without a corresponding vote on municipal and particularly county government budgets taxpayers can not hold these levels of government accountable. This is one of the chief reasons why county government costs New Jersey’s taxpayers more than $6.1 billion annually!
All Local School District Property Taxes are Invested in the Host Municipality
All of a local school district’s property taxes remain and are invested in the schools of the host municipality so that the taxpayers benefit fully from the property taxes levied. County property taxes differ sharply from those levied to fund our public schools because they are redistributed to support an unaccountable, wasteful, and duplicative layer of government. This leads many researchers, most notably O’Sullivan, Sexton, and Sheffrin (2007,) to conclude that “local governments” and public school districts “must have access to a revenue source that they can adjust to meet varying demands.”
Funding our public schools through local property taxes is essential because county government siphons away crucial local property taxes and state governmental financial aid is unreliable. O’Sullivan, Sexton, and Sheffrin (2007) demonstrate that “the property tax can be administered by local government” and public school districts “with relatively little fear of its tax base migrating to other jurisdictions, thus providing local governments with the needed fiscal autonomy. The property tax has been the source of economic independence of local units of government” and local public school districts for generations.
Unfunded State and Federal Mandates Cause TELs to Cut Regular Education
There are only two kinds of programs and services offered by our public schools: those that are mandate protected and those that are non-mandate protected. Because school districts are forced by the state and federal governments to fully fund the unfunded portion of their mandates, public school districts must choose between cutting non-mandate protected programs and services or raising property taxes. School districts have no control over many of their major cost drivers such as the costs resulting from increases in unfunded mandates, enrollment, utilities, transportation, health insurance, legal actions, and the number as well as the mix of special education students. When a school district that is limited by a 2.5% TEL experiences increases in these uncontrollable expenses, it must cut expenses in other areas to stay within the cap.
One major fallacy in the cap advocacy argument is that local school districts are required to fund the unfunded portion of all state and federal mandates over which local school districts have no control. State and federal mandates drive the overwhelming majority of local school district expenditures and, hence, property tax levies. Property taxes could be slashed nationwide especially those funding our public schools and there would be no need for TELs, if the state and federal governments would just fully fund all of their mandates!
A TEL may force a typical school district to increase class sizes so as to minimize its expenditures for teachers and aides. But this will lead to lower test scores and likely No Child Left Behind (NCLB) operational and financial penalties. A TEL, therefore, gives a school district only one course of action: hold property tax increases within the state imposed percentage point limit while simultaneously cutting non-mandate protected programs and services but fully funding the unfunded portion of all mandates. That is, cutting regular education.
There is No Such Thing as a Free Lunch
Governor Christie along with the proponents of TELs purport that school districts will be become more financially responsible because of the state imposed limit on their expenditures and tax levies. TEL proponents argue that if school districts are left to their own devices, they would continue to spend and tax at ever increasing rates while the TEL’s implementation will force school districts to hold down expenditures and property taxes. TEL proponents seem to expect units of local government and our public schools to provide the same level of public goods and services if not a higher quality of education but at a lower price.
TEL proponents and policy makers disaffected by the seemingly ever increasing size and cost of public education assert that the TEL will lower property taxes and, therefore, make the provision of public education more efficient rather than cutting essential educational programs and services. Although most people realize there is no such thing as a “free lunch,” TEL advocates claim that school systems could provide at least the same quantity of education without lowering the quality of education because the TEL would compel districts to eliminate waste. But no TEL can guarantee that any school district will not cut non-mandate protected programs and services or regular education before eliminating any waste or inefficiency.
The passage of the major TEL’s, Proposition 2.5 in 1980 in Massachusetts and Proposition 13 in 1978 in California, shows how voters frustrated with state governmental inefficiency, waste, and overspending resorted to a cap which they perceived as the only means available to remedy their situation. Voters in both states believed prior to the vote that the imposition of the TEL would substantially eliminate inefficiency, waste, and overspending but it would do so without lowering the quality or quantity of public goods and services such as education. But once the TELs were imposed in Massachusetts and California, however, taxpayers acted “consistent with the (O’Sullivan, 2001) regret theory of tax limits” or buyers’ remorse.
The history of TELs, budgetary caps or even the wage and price controls imposed under former President Nixon demonstrates that placing arbitrary limits on revenues and expenditures results in a corresponding reduction in the quantity and quality of the public programs and services such as education provided by the TEL affected entity. Indeed, Downes and Figlio (2008) describe the TEL proponents who assert that “constitutional constraints like Proposition 13 could reduce the size of local governments and, at the same time, have little or no effect on the quality of public services provided” as seeking a “free lunch.”
Apples versus Oranges: Massachusetts’ Proposition 2.5 versus Governor Christie’s 2.5% Cap
Contrary to Governor Christie’s 2.5% cap proposal, Massachusetts imposed its 2.5% TEL during an economic boom and provided significant amounts of incremental state aid to school districts to make up for the loss of local property tax revenue. But New Jersey is mired in a deep recession with seemingly ever increasing state budget deficits which have already resulted in severe cuts to state educational aid. Because state aid is declining and no additional state financial aid is forthcoming to offset lost property tax revenues, school districts would be forced to cut non-mandate protected educational programs and services much more deeply than was experienced in Massachusetts.
State aid is unreliable. Massachusetts educational aid fluctuates while California has not complied with Proposition 98’s constitutional guarantees to provide state aid to local school districts to make up for the property tax revenues lost under Proposition 13. As a result of Proposition 13, California’s per pupil spending fell precipitously to an average of approximately $7,500 per pupil as compared to an average of $47,000 per inmate at its state penal institutions while its average class sizes became the second highest in the nation. Also, Massachusetts imposed its 2.5% cap during a period of declining student enrollment while New Jersey’s enrollment levels continue to increase. Hence, Massachusetts’ lower school district expenditures were largely offset by a much lower level of student enrollment which helped to greatly minimize the cuts to educational programs and services which would not be the case in New Jersey.
Taxpayers’ Expectations for TELs
New Jersey taxpayers generally seem to believe that much greater accountability, efficiency, and transparency at all levels of government will lead to lower spending and, hence, lower taxes. But voters do not want fewer public goods and services; just a much lower price for the public goods and services that they enjoy today. Government at all levels tends to overtax, taxpayers contend, because governments waste financial resources and are inefficient. Governor Christie’s 2.5% TEL, therefore, seems to be a tempting way to accomplish these goals.
In addition, Governor Christie’s 2.5% TEL lacks the flexibility for state and local governments as well as our public schools to respond appropriately to unforeseen circumstances or a declining economy. For instance, public schools tend to experience an increase of students transferring from private schools when the economy declines and parents are more challenged to find ways to pay for tuition in addition to property taxes. Governor Christie’s 2.5% cap proposal, therefore, can not guarantee that any level of government will operate at peak efficiency before cutting the public goods and services including education that they provide.
Governor Christie’s 2.5% cap proposal would enable the state to determine the budgetary and property tax policies of local governments and school districts through its state imposed limitations. If enacted, the 2.5% cap would lead, therefore, to increased centralization of educational funding along with its concomitant increased control over local school districts’ operations. The 2.5% TEL would lead to limitations on local school district expenditures and property tax levies which in turn would lower the quality of public education.
TELs’ Impact on Education and Student Achievement
TELs not only limit the amount of property tax revenue available to school districts but also and more importantly adversely impact how a typical school district provides educational programs and services. Downes and Figlio’s (1999a) findings explain how “the imposition of tax and expenditure limits results in the long-run reductions in the performance of public school students.” Students attending schools in TEL affected districts (Figlio, 1997; Downes, Dye, & McGuire, 1998; Downes & Figlio, 1999b) not only experienced much larger class sizes but also scored significantly lower on mathematics, language arts, and social studies standardized tests. When it comes to education, therefore, TELs lead to a reduction in the quantity as well as the quality of education, an increase in class sizes, and a leveling down of student achievement.
TELs seem to adversely impact student achievement disproportionately to the amount of property tax revenues lost or expenditures cut. Downes and Figlio (2008) conclude that TELs “lead to reductions in student outcomes that are far larger than might be expected given the changes in spending.” Possible explanations for this result include disproportionate cuts in instructional rather than administrative expenditures, higher student-teacher ratios, and a shift especially of the more talented students to private K to 12 schools. Because teacher salaries and benefits generally account for more than approximately 70% of a typical school district’s budget, it stands to reason that these expenses would be cut more severely. Reductions of teachers under the constraints of a TEL often lead to larger class sizes which when combined with the loss of regular educational programs and services tends to result in the transfer of many students especially the more gifted ones to private schools (Downes & Figlio, 2008.)
While Governor Christie aims to limit local public school districts’ property tax revenues and expenditures to no more than a 2.5% annual increase, this cap will most likely lead to a leveling-down of the quality of public education. Indeed, our nation’s two major TELs, California’s Proposition 13 and particularly Massachusetts’ Proposition 2.5 on which Governor Christie’s proposal is modeled, demonstrate the downside of such caps. These TELs (Fishel, 2001) destroyed the connection among local control, property taxes, school district budgets, educational quality, and taxpayer support because taxpayers essentially lost their ability to hold local school districts accountable to their goal of maximizing their property values.
The fundamental problem with trying to hold all of New Jersey’s public school districts’ property tax revenues and expenditures to annual increases not exceeding 2.5% is that it leads to a one-size-fits-all approach for education but one that fits no district. Baker, Green and Richards (2008) explain, “The local property tax empowers local voters to express what they want for their local public schools.” But when the artificial budgetary constraints of a TEL are imposed by the state, as Baker, Green and Richards (2008) conclude, “the political advantages of empowering local citizens and promoting competition and sorting among jurisdictions is lost.” Thus, the TEL leads to school district budgets that are incongruous with the needs and priorities of local school districts.
Governor Christie’s proposed reduction in local school district control over the levying of property taxes and determining the operating budget decreases local school district accountability and adversely affects public school quality. Because reductions of property tax revenues through the 2.5% TEL will reduce the level of local investment in the school district; the stake held by local taxpayers is similarly reduced. Fischel (2001) explains this using the motives of taxpayers without children in the public schools, “At the local level, they are willing to support, or at least not oppose, high levels of spending because better schools add to the value of their homes.” Through the imposition of a TEL, “At the state level, voters without children do not perceive such an offsetting benefit to their taxes.” Having a lowered sense of ownership in their schools, taxpayers become more complacent without local control over their school district’s property taxes. This causes a corresponding reduction in the level of accountability required by the stakeholders and, therefore, the quality of their public schools’ education declines.
Taxpayers choose the local public school district that best meets their needs and one that will contribute to their property values by exercising true Tieboutian choice (Tiebout, 1956) and voting with their feet. But taxpayers vote not only with their feet but also on school district operating budgets, capital projects, and board of education members. Through the exercise of these votes, taxpayers control the quality of education provided by their local schools as well as the level of property taxes levied. Their collective decisions lead to a Pareto efficient allocation of local public education.
But a TEL, such as Governor Christie’s 2.5% cap proposal, would destroy the Tieboutian equilibrium (Tiebout, 1956) enjoyed by local public school districts. It would do so by artificially limiting budgets below the levels congruent with the needs and priorities of local school districts. Because the quality of a taxpayer’s local public schools as well as his/her property taxes are capitalized in the value of their home, the consequence of Governor Christie’s 2.5% TEL would be to lower educational quality and, therefore, property values.
Baker, B. D., Green, P., & Richards, C. E., (2008). Financing Education Systems, Upper Saddle River, New Jersey: Pearson Education, Inc.
Downes, T. A. & Figlio, D. N., (1999a). Do Tax and Expenditure Limits Provide a Free Lunch? Evidence on the Link Between Limits and Public Sector Service Quality. National Tax Journal, 52, 113-128.
Downes, T. A. & Figlio, D. N., (1999b). Economic Inequality and the Provision of Schooling, Federal Reserve Bank of New York, Economic Policy Review, 5, 99-110.
Downes, T. A. & Figlio, D. N., (2008). Tax and Expenditure Limits, School Finance and School Quality in The Handbook of Research in Education Finance and Policy, Ladd, H. F., & Fiske, E. B., (Editors) (373-388). New York, New York: Routledge Taylor & Francis Group.
Downes, T. A., Dye, R. F., & McGuire, T. J., (1998). Do Limits Matter? Evidence on the Effects of Tax Limitations on Student Performance, The Journal of Urban Economics, 43, 401-417.
Figlio, D. N., (1997). Did the “Tax Revolt” Reduce School Performance?, The Journal of Public Economics, 65, 245-269.
Fischel, W., (2001). The Homevoter Hypothesis: How Home Values Influence Local Government Taxation, School Finance, and Land-Use Policies, Cambridge, Massachusetts: Harvard University Press.
O’Sullivan, A., (2001). Limits on Local Property Taxation: The United States Experience in Property Taxation and Local Government Finance, Oates, W. E., (Editor) (177-200). Cambridge, Massachusetts: Lincoln Institute of Land Policy.
O’Sullivan, A., Sexton, T. A., & Sheffrin, S. M., (2007). Property Taxes and Tax Revolts: The Legacy of Proposition 13. Cambridge, Massachusetts: Cambridge University Press.
Tiebout, C. M., (1956). A Pure Theory of Local Expenditures, The Journal of Political Economy, 64, 416-424.