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Car Tax Cuts

How Should Localities be Reimbursed?


This Issue Paper is another in a series of thought provoking essays published by the Thomas Jefferson Institute for Public Policy and distributed to the Executive Branch, General Assembly, media and other leaders in Virginia.

These Issue Papers cover important topics of the day and focus attention on creative and workable alternatives to current public policy issues. The ideas presented in this on-going series are those of the authors and do not necessarily reflect the opinions of the Thomas Jefferson Institute for Public Policy or its Board of Directors.

This particular Issue Papers entitled, ” Car Tax Cuts – How Should Localities be Reimbursed? ” is the second of four education-oriented essays that will be published during the 1998 legislative session. The author, David Wheat, wrote the much-talked-about study for the Thomas Jefferson Institute, “Understanding Virginia \s Report Card-Why Standardized Test Scores Vary from One Community to Another

Other studies and Issue Papers published by the Thomas Jefferson Institute for Public Policy include:

A Tax Reform Agenda for Virginia

A Brief Review of the Fairfax County Budget for Fiscal Year ‘98 Public Education in Virginia: Challenges and Opportunities Vision 2001: Virginia’s Transportation System for the New Millennium Environmental Policy: Moving from “Needs” to “Wants”

Understanding Virginia’s Report Card

Downsizing State Government – Doing Better With Less

Compensation of Campus Faculty – How Virginia Compares Within the Region Paying for School Construction Is Not Difficult 2000 New Teachers — Where Are They Needed Most?

These studies can be ordered from the Thomas Jefferson Institute for Public Policy. Please call or write this foundation if you would like a copy.

Michael Thompson Chairman and President February 1998

This Issue Paper is published by the Thomas Jefferson Institute for Public Policy. The ideas presented are those of the author and do not necessarily reflect the views of this foundation or its Board of Directors. Nothing in this paper should be construed as an

attempt to hinder or aid legislation.

Car Tax Cuts: How Should Localities be Reimbursed?

An Issue Paper Prepared by

I. David Wheat, Jr.

for the

Thomas Jefferson Institute for Public Policy

Executive Summary

In January 1998, Virginia Governor Jim Gilmore proposed phasing out most of the city and county property taxes on cars and trucks, while reimbursing those local governments from state revenues. In the General Assembly, much of the debate has centered on how the localities would be reimbursed if the legislation were passed. Various reimbursement proposals have split the legislators along both partisan and regional lines.

Meanwhile, local officials worry that the biennial budget process will fail to generate the reliable flow of funds needed to make up for tax revenues foregone. To reduce uncertainty, local governments may be willing to accept reimbursement plans that require the Commonwealth to assume responsibility for its share of locally-funded services that have statewide benefits. One example of a possible reimbursement method involves funding for a portion of Virginia’s public school teachers.

State funds already pay 56 percent of the cost of almost 48,000 teachers, and the Governor has submitted a budget amendment that would provide state funding for 56 percent of the cost of adding 2000 more teachers to elementary school classrooms. However, local governments pay all of the cost of the nearly 25,000 teaching positions “in excess” of the number that is needed to keep average pupil-teacher ratios near 25 to 1 in most grades.

If Virginia assumed responsibility for funding 56 percent of the cost of just the teachers needed to maintain average class sizes of 17 in the primary grades, 19 in grades 4-6, and 22 in the secondary grades, that would relieve localities of an annual $179 million burden. If the Standards of Quality were amended and funded to produce that result, a future stream of reliable car tax reimbursements would flow to local governments.

The goal of this issue paper is to highlight one way to address both equity and efficiency considerations raised by the car tax reimbursement issue. Taken alone, the approach outlined here could have a substantial impact. If it also provoked others to think of analogous partial solutions, real progress could be made on this issue. In addition, the partnership between the Commonwealth and local governments, in terms of revenue and service responsibilities, could be strengthened.

The Car Tax Cut IssueSoon after taking office in January 1998, Virginia Governor Jim Gilmore proposed tax reform legislation that would phase out most of the locally-levied personal property taxes on cars and trucks, while providing local governments an offsetting future stream of revenues.In the General Assembly, heated debate on this issue has centered on how the localities would be reimbursed if the legislation were passed. Alternative methods of calculating the amounts to be returned toeach locality have split the legislators along both partisan and regional lines.Meanwhile, county and city officials are battered by winds of uncertainty that appear eternal. They worry that the legislative bargaining that takes place in each biennial budget session will fail to generate funds sufficient to replace their “lost” revenues on a consistent and reliable basis.Uncertainties due to partisan and regional politics are only part of their concern. Adding to the ambiguity is the difficulty in estimating both future

reimbursements “deserved” by each locality as well as future state revenues.The perpetual uncertainty facing local governments may be as big an issue to them as the exact amount of annual reimbursements. Counties and cities might be willing to accept a settlement that is less than their “best case” reimbursement scenario if the Commonwealth assumed responsibility for its share of services funded entirely by localities but having statewide benefits.A Virginia Tradition:State and Local Cost-SharingUnder a formula designed to reflect each locality’s “ability to pay”, state funding already accounts for about 56 percent of the statewide cost of about 48,000 of the teachers in local school divisions. At an average cost of $41,000, including salaries and benefits, the total outlay for those teachers is nearly $2 billion. The state’s share–56 percent–is over $1.1 billion.1The number of teachers for which the Commonwealth pays its share is driven largely by Virginia’s Standards of Quality regulations that set maximum pupil-teacher ratios for school divisions close to 25 to 1 in the elementary grades and in all Englishclasses.2 In addition, there is cost-sharing for about 2800 teachers added in recent years to reduce pupil-teacher ratios in grades K-3 for schools with high percentages of “at risk”students.3In January, the Governor submitted a budget amendment that would provide state funding for 56 percent of the cost of adding 2000 more teachers to elementary school classrooms in order to reduce the averageclass size in all elementary schools.4Thus, the Commonwealth has a tradition of funding a substantial portion of the cost of hiring enough teachers to meet class size goals that it has established.A Gap In the TraditionHowever, teachers hired that are “in excess” of the number needed to meet state class size guidelines are funded entirely bylocal governments in Virginia. Failure to share the costs on at least some of those teaching positions has opened a gap in the state and local tradition.Cost-sharing on all 25,000 teachers currently paid for entirely out of local budgets would cost the state 56 percent of about $1.03 billion, an amount equal to $574 million. However, the implicit goal of the state and local cost-sharing partnership has been to fund enough classroom teachers to maintain class sizes at levels likely to optimize student achievement, rather than fund all teachers hired locally. Clearly, the state funding program should not work like a federal entitlements program where every local decision to hire a new teacher causes a check to be mailed from Richmond.On the other hand, evidence from studies in several states suggests that the optimum class size is much lower than 25.Even the K-3 “at risk” program established in 1994 by the General Assembly set maximum class sizes in the 15-20 range, depending on the poverty level of students in the school.Studies in Texas and Virginia found that student performance was significantly better when elementary class sizes were close to 18 rather than larger. Students in classes much smaller than 18 did not display significantly greater achievement. This suggests real benefits in lowering elementary class sizes down to 18 (and maybe a little lower for the primary grades), but little or no additional gain from much smaller classes.In Virginia, the difference between 25 elementary students per class and 18 per class is about 9400 teachers, the vast majority of which are already working in Virginia’s elementary classrooms.Only about 1900 teachers need to be hired in about half of Virginia’s school divisions to lower their average K-6 elementary class sizes down to 18. And the 2800 teachers in the K-3 “at risk” program are already part of the cost-sharing arrangement. However, the remaining 4700 of the elementary teachers needed to take class sizes from 25 down to 18 are being funded 100 percent by local governments.In Fairfax County, for example, it takes well over 1000 additional elementary

teachers at a cost exceeding $40 million to maintain pupil-teacher ratios closer to 18 to 1 than 25 to 1, and that has been done at local expense. On a smaller but no less relevant scale, Roanoke County schools have used local money to hire about 100 extra teachers at a cost of over $4 million to keepelementary class sizes closer to 18 than 25.6Some school divisions have not reached the 18 to 1 ratio yet, but have incurred substantial costs to maintain lower class sizes despite rapidly rising enrollments. Chesterfield County, for example, has over two hundred trailers on school grounds to keep up with its student population growth, and has managed to keep its average elementary class size closer to 21 than 25 at an additional teacher cost of over $4 million in local funds.7In addition to the 4700 elementary teachers already working at local expense, it is estimated that localities have hired about 2700 secondary teachers to reduce class sizes . from 25 down to about 22, a level that is arguably optimal for secondary studentachievement.8Taken together, this amounts to 7400 teachers that localities have hired on their own to reduce average class sizes to levels that should significantly improve student achievement. The cost of maintaining those teachers is about $303 million—a cost borne 100 percent by local governments despite the clear statewide impact resulting from the high relocation rate of our students upon graduation from public schools.The cost of adding the 1900 elementary teachers needed to make sure that all school divisions in Virginia have pupil-teacher ratios in grades K-6 close to 18 to 1 would be an extra $78 million.In summary, paying for enough teachers to get average class sizes down from about 25 to optimal sizes requires about 9300 teachers at a cost of about $381 million. And what is striking is that only $78 million of that amount constitutes “new” spending. The rest-$303 million—is already being spent by local governments from local revenue sources, including the car tax.Closing the Gap with Car Tax ReimbursementsThe “gap” in the state and local tradition of hiring enough teachers to achieve state goals should be closed. And it should be closed by amending the Standards of Quality and by sharing the costs of teachers necessary for maintaining an average class size of 18 in grades K-6 (with an average of 17 in grades K-3 and 19 in the upper elementary grades), and an average of 22 in the secondary grades.Governor Gilmore has, in effect, already asked the General Assembly to continue the tradition by funding 56 percent of the cost of the 2000 new elementary teachers. In fact, a targeted distribution of those teachers where they are needed most would take care of getting about half of the school divisions down to the optimal class size in grades K-6.9The rest of the gap could be closed by shifting 56 percent of the $303 million funding responsibility from the localities to the state. By paying its share of the teachers that have already been hired to get class sizes close to optimal levels, the Commonwealth would lift a $179 million burden from the shoulders of local governments.That would take care of at least $179 million in car tax reimbursements owed to local governments, assuming the car tax is cut. In the aggregate, local governments could “afford to do without” $179 million in car tax revenues because that much spending responsibility would have been assumed by the state.What’s more, this refund method has a built-in growth feature as teachers’ salaries rise, thus allaying at least some of the local officials’ fears that car tax reimbursements would not account for growth in future car tax revenues.Finally, and very importantly, such a reimbursement mechanism has a high degree of stability. From the local perspective, this way of refunding the car tax revenues would be more reliable since future Standards of Quality amendments reversing this action would be less likely than biennial changes in more discretionary categories of spending.

ConclusionIf Virginia assumed responsibility for funding 56 percent of the cost of all teachers needed to produce optimal class sizes of 18 in the elementary grades and 22 in the secondary grades, that would relieve localities of an annual $179 million burden that they now shoulder alone. Amending the Standards of Quality in this way would create a future stream of car tax reimbursements that local governments could count on.Next WeekIn the Virginia study, excessive absenteeism was found to have a significant detrimental impact on test results.10 Next week’s issue paper will examine incentives for improving student attendance.

^The state’s share of the cost varies from one school division to another, according to a composite index that is intended to reflect each locality’s “ability to pay.” The state share ranges from a high of 75-80 percent in some localities to a low of 20 percent in others, and the weighted average is 56 percent. Superintendent’s Memo No. 15 (January 29, 1998), Department of Education, Attachment D.

^The Standards of Quality mandate maximum average pupil-teacher ratios for school divisions for the 1st grade (24 to 1), grades K-6 (25 to 1), and English classes in grades 6-12 (25 to 1).

^Based on the percentage of students qualifying for the federal free lunch program. The 2800 number is part of the 48,000. ^Superintendent’s Memo No. 15 (January 29, 1998), Department of Education, Attachment D.

^See “Does Class Size Matter?” US News & World Report, October 13, 1997, for information on Project STAR in Tennessee and a RAND Corporation study in California. R.F. Ferguson’s Texas study is detailed in “Paying for Education; New Evidence on How and Why Money Matters,” Harvard Journal on Legislation (1991). Virginia findings are contained in the author’s Understanding Virginia’s Report Card: Why Standardized Test Scores Vary from One Community to Another (Thomas Jefferson Institute for Public Policy, November 1997) and 2000 Teachers: Where Are They Needed Mostl (Thomas Jefferson Institute for Public Policy, February 1998)

6Superintendent’s Annual Report, 1995-96.


^Estimate of 2700 secondary teachers derived from three assumptions about relationships between numbers of elementary and secondary teachers: (a) that the number of secondary teachers is about 2/3 the number of elementary teachers, (b) that the amount of “excess” hiring was proportional for the two teaching levels, and (c) The assumption of 22 as an optimal class size at the secondary level (based on personal teaching experience) means that the “distance” from 25 to 22 is 3/7 the distance from 25 to the optimal elementary size of 18.

Therefore: (9400 elem. tchrs) times (2/3 sec tchrs/elem tchr) times (3/7) = 2686 = approx. 2700 sec. tchrs.

92000 Teachers: Where Are They Needed Most? compares the targeted approach and the proportional approach. The difference between the 1900 teachers here and the 1500 cited in that issue paper is due to different grade level assumptions.

10Understanding Virginia’s Report Card.

About the Author

I. David Wheat, Jr. is a strategic planning consultant and the author of Understanding Virginia’s Report Card: Why Standardized Test Scores Vary from One Community to Another and 2000 New Teachers: Where Are They Needed Most?* (Thomas Jefferson Institute for Public Policy).

He is president of Wheat Resources, Inc., a consulting firm established in 1981 that specializes in helping clients organize and analyze data they use in making strategic decisions. He received his Master’s Degree in Public Policy from Harvard University’s Kennedy School of Government in 1972, and then served three years as a White House staff assistant specializing in economic and energy issues. Later, at the University of Houston, he served as Director of Federal Relations and designed and taught a graduate course on public policy implementation.

His education policy consulting work is enhanced by several years of nationally recognized classroom instruction experience in Virginia public schools, as well as by service on the Governor’s Commission on Champion Schools, where he participated in the upgrading of the history and social science Standards of Learning for Virginia’s students. He also teaches political science at Virginia Western Community College.

♦Copies of both available from the author (540-966-5939) or the Jefferson Institute (703-690-9447).

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