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PLAIN ECONOMIC SENSE
For release after March 29, 1999
Column 374
Is Iowa's Local Option School Tax Constitutional?
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
An article in the January issue of Governing magazine highlights two states -- New Hampshire and Vermont -- that are responding to 1997 state supreme court decisions that declared state funding distributions for elementary education unconstitutional.
Vermont's case -- like most of the 17 states that have been placed under school finance court orders in the past two decades -- is an "equity case." At the time of the decision, the poorest 5 percent of the school districts were spending $3,732 per pupil per year. The richest 5 percent were spending $5,964 -- 60 percent more. "Children who live in property poor districts," the court said, "should be afforded a substantially equal opportunity." Equity has been the traditional constitutional test used in many states.
New Hampshire had disparities similar to those in Vermont, but the court decision there focused on "adequacy." Although the decision made reference to tax burdens that were four times as high in some towns, its fundamental point was that in the poorest communities the public schools were not meeting the test of a "constitutionally adequate education to every educable child."
According to the article, "In recent years, more state school systems have been invalidated on grounds of adequacy than on grounds of equity. Kentucky, New Jersey, Ohio, West Virginia and Wyoming are all struggling to meet a court declared adequacy standard similar to New Hampshire."
Would Iowa's emerging school finance system meet similar tests? Recent Iowa school finance trends may provide some reasons to wonder. Iowa's foundation formula distributes the bulk of funding for school operations on an equalized property wealth basis. Districts with high property wealth per pupil receive less state aid than districts with low property wealth per pupil. Contrary to what some may think, the "wealthy" districts include some rural and urban districts and the same is true for "poor" school districts. So it's not a rural-urban issue.
Increasingly however, additional school aid is being distributed outside the foundation formula. Violations in health and safety standards by a third of Iowa's schools were highlighted in the recent gubernatorial campaign. Whether correlations exists between poor school districts and defeat of school bond issues under 60 percent voting requirements hasn't been researched. In addition, school districts now have authority to increase local option sales taxes for financing school facilities. The General Assembly's perspective was that local option sales taxes are more favorably received than proposals for using state taxes to provide for school infrastructure assistance.
As an aside, I was somewhat surprised by the recent defeat of the local option school ballot in Polk County. Research on local option sales taxes from several states shows taxing unit beneficiaries of retail sales leakage typically are first to adopt local option sales taxes. College towns, cities along interstate highways, and retail trade centers typically are first to adopt the measures because compared to property taxes, nonresidents pay a larger share of the tax burden.
While there is nothing inherently unconstitutional about local option sales taxes for other purposes, they become part of the potential standards of "equity" and "adequacy" when they are linked to school finance. Recently Ken Stone, Iowa State University economist, calculated 1997 county-by-county amounts of sales taxes that potentially could be raised per pupil by imposing a one cent local option sales tax. The state average was $494 per pupil. However, the amounts ranged from $904 per pupil in Polk County to $87 per pupil in Louisa. This is more than a 1,000 percent disparity.
While 14 counties had less than $200 in sales tax wealth per pupil, eleven counties had more than $600 in sales tax wealth per pupil. Students in the 10 percent of Iowa's counties with the most sales wealth have access to 300 percent more revenue per pupil than students in the 10 percent of Iowa's counties with the least sales wealth. The disparity for this single tax is substantially greater than the unconstitutional overall school funding system disparity in Vermont or New Hampshire and it will likely increase Iowa's overall school system disparity over time.
Is Iowa's school funding system unconstitutional? As one of the few students of Iowa's Constitution who correctly predicted the recent Supreme Court decision declaring nuisance suit protection unconstitutional, I conclude that some conditions increasingly appear to be in place for a similar school funding decision. The courts may not agree with the proposition that school facility adequacy is totally a local responsibility under unequalized wealth conditions.
More problematic in winning a court challenge, however may be a lack of explicit language on educational equity or access in Iowa's Constitution. There is no explicit principle in Iowa's Constitution guaranteeing equal access to a minimum standard of education for Iowa's school children. The only education specific section that came close was repealed by amendment in 1984. It said, "money shall be distributed to districts in proportion to the number of youths."
Iowa's Constitution does contain a more general provision that may provide some basis for a decision. Section 6 of Article 1 states, "all laws of a general nature shall have a uniform operation; the General Assembly shall not grant to any citizen, or class of citizens, privileges or immunities, which, upon the same terms shall not equally belong to all citizens." Whether this is a sufficient basis for rendering a decision on school funding constitutionality remains to be seen.
Edelman is a professor of economics and an extension public policy specialist at Iowa State University.
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