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.

What Would It Take to Satisfy CFE? Three Options for Raising $8.6 Billion * Top Marginal Rate ** State Rate Only; counties and NYC add 3-4.5% *** Reflects 233% across-the-board hike in all business taxes

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:

• Raising tax rates for all income brackets, which would mean boosting the top marginal rate from the current (temporary) level of 7.7 percent all the way up to nearly 10.2 percent. The permanent top rate, now 6.85 percent, would rise to 9 percent. For a family of four with annual income of $65,000, that would translate into an additional $570 a year.
• Raising taxes only on high-income taxpayers—say, those earning $200,000 a year, who already shoulder fully half the state income tax burden. This soak-the-rich approach, which is popular among many supporters of dramatically higher school spending, would require boosting the top rate to about 12.7 percent, the highest income tax level in New York since 1977. Within New York City, such high income earners would be subject to a combined state-local flat rate tax of more than 16 percent—roughly two to three times the rate in most other states that have income taxes.[5]

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:

• A 13 percent increase in school property taxes outside New York City, and
• An 11 percent average increase in all current New York City tax rates (including the city’s property, sales, business and personal income taxes, as well as lesser taxes).

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 anystate. 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.

Originally Published: FISCALWATCH MEMO (Updated March 22, 2004)

Notes

1. For details on CFE’s funding claims, see the reports posted at http://www.cfequity.org.
2. A copy of the Court of Appeals decision in CFE vs. State can be downloaded at http://www.nycourts.gov/ctapps/decisions/74opn03.pdf.
3. See CFE’s “Preliminary Report of the New York Adequacy Study” at http://www.cfequity.org/Costingout/FINALVERSION-PRELIMINARYREPORT-2004-02-03.pdf.
4. See the CFE report, “An Adequate Foundation for All: A Preliminary Proposal for Reforming the State’s System for Providing Operating Aid to Local School Districts,” pp. 28-32, at http://www.cfequity.org/operatingaidproposal.pdf.
5. In nearby jurisdictions, the top income tax rate ranges from 3.05 percent in some Pennsylvania exurbs to 5 percent in Connecticut, 5.5 percent in Massachusetts, and 6.35 percent in New Jersey.
6. The State Tax Analysis Modeling Program, or STAMP, developed by the Beacon Hill Institute at Suffolk University in Boston, Massachusetts, was adapted several years ago to estimate the effects of changes in New York State’s personal income tax and state sales tax. The model has not been updated to reflect recent state tax code changes.
7. The maximum sales tax rate is just 5 percent in Massachusetts; 6 percent in Connecticut and New Jersey; and 7 percent in Pennsylvania.
8. This is based on the general fund tax total projected on page 217 of Appendix II of the 2004-05 Executive Budget.
9. Under STAR, the state subsidizes a partial school property tax exemption for all owner-occupied one-, two- and three-family homes. The benefits are far larger in school districts that rely primarily on property taxes. In New York City, which has relatively low property taxes on one-, two- and three-family residences, STAR subsidizes a combination of property tax exemptions and a 0.2 percentage point reduction in all city income tax rates.
10. See 2004-05 Executive Budget overview, p.31. Available at http://publications.budget.ny.gov/fy0405littlebook/lb0405.pdf. Moreover, state school aid has risen at twice the rate of inflation over the past decade, according to the 2004-05 Executive Budget. In other words, it’s not as if New Yorkers weren’t already digging deep for education.