Continued TPP Reimbursement Critical to Preserving Long-Term Solvency of Highly Impacted School Districts Situation Analysis State budget proposal eliminates Tangible Personal Property tax reimbursement to local schools. Ohio last collected local TPP taxes in 2008, with a commitment to replace lost revenues. In 2010, during economic downturn, TPP reimbursements were reduced to fill state budget holes. Current Ohio law calls for replacing remaining TPP reimbursement revenues permanently. Budget proposal to eliminate t reimbursement is a crisis for local school districts. Throughout Ohio, school districts face a serious financial threat due to a renewed effort to eliminate Tangible Personal Property tax reimbursements included in the Governor s FY 16-17 budget proposal. In 2008, the majority of general business taxpayers in Ohio paid their final TPP tax bills, reducing the tax obligation on businesses without providing a replacement mechanism for school districts that had collected those critical local tax dollars. Instead, legislators included a provision requiring the state to make hold harmless reimbursement payments to affected school districts in the amount the districts were collecting from those local taxes in 2004. Now, despite several years of awareness building, negotiating, lobbying and citizen contact with legislators and the governor, this group of significantly impacted school districts are again poised on the edge of a financial crisis over which they have no control. The biennium budget passed and signed into law in summer 2011 resulted in all Ohio school districts absorbing a 2 percent TPP reimbursement loss in fiscal 2012 from their operating revenue and an additional 2 percent in fiscal 2013. This shared sacrifice by Ohio school districts helped close the state s budget hole at the time. Subsequently, the FY 14-15 biennium budget enacted in summer 2013 retained permanent reimbursement to the Ohio school districts that are most heavily reliant on TPP reimbursement. A total elimination or substantive change to the reimbursement would be devastating and jeopardize the long-term solvency of these districts. The economic impact of lost TPP reimbursements would equal more than 10 percent of some districts operating budgets and as much as 18 to 21 percent in other districts. Revenue losses of that magnitude would be impossible to recoup by shifting the tax burden through additional operating levies. Many of the affected districts are Ohio s highestperforming districts, strictly meeting the state s standards for educational and fiscal accountability.
History TPP tax in Ohio began in 1846 and evolved to cover business inventory, equipment and machinery. The TPP, or tangible personal property tax, originated in 1846, when the Ohio General Assembly passed legislation requiring that all property, whether real or personal unless exempted, shall be subject to taxation. Until that time, Ohio had not taxed most personal property, such as tools and machinery. In 1851, the newly ratified state constitution required the taxing of all real and personal property. Eighty years later, a constitutional amendment limited the principle of taxation by uniform rule to real property rather than all property, narrowing the tax on tangible personal property to personal property used in business. The tax base for tangible personal property used by Ohio businesses included machinery, equipment and inventories. During the 1970s and 1980s, the Ohio General Assembly enacted additional TPP tax changes, adjusting taxable value amounts and exempting the first $10,000 of taxable value from taxation. Finally, in 2005, the General Assembly enacted House Bill 66, phasing out the TPP tax by 2008. For nearly all Ohio businesses, this meant the tax ended completely in September 2008. Some utilities continued paying the tax through 2010. The tax TPP tax revenues were collected locally until 2008 and went directly to schools. TPP taxes were levied locally and the revenues generated stayed in those communities. The tax revenue was distributed to the counties, municipalities, townships and school districts based on the taxable values and total millage levied in each community. Statewide, school districts received about 70 percent of the total TPP tax revenue. The start of state TPP reimbursements TPP tax was eliminated as a relief to businesses and replaced by the broader-based Commercial Activities Tax. Schools supported the TPP elimination only with the understanding that a solution would be developed to replace the lost local TPP revenues. When the proposal to eliminate the TPP tax was introduced 10 years ago, school districts agreed that Ohio s TPP tax was harmful to the overall state economy and posed a competitive barrier to attracting new businesses to Ohio. School district representatives worked in good faith with legislators to change that tax policy with the understanding that schools would not bear the brunt of this meaningful tax relief for the business community.
To stave off the serious economic impact to school districts losing that local tax revenue, the legislature created the hold harmless clause, directing state funds to school districts to make up for the business tax relief. The reimbursement was based on projected revenues from the initial year of the hold harmless plan and frozen at that amount, not allowing for any revenue growth in subsequent years. As good community partners with Ohio businesses, school districts supported the positive changes in the taxing structure, with the understanding that the entire responsibility of making up lost revenue from eliminated TPP taxes would not rest solely with school districts and local taxpayers. The Commercial Activities Tax and education State commitment to use CAT revenues to reimburse local schools for lost TPP revenues. CAT revenues go to state general revenue fund, not local communities. CAT generates more than twice the amount needed to continue TPP reimbursements to schools. When the Commercial Activities Tax was enacted to broaden the state s tax base, the TPP hold harmless reimbursement payments were and still are made using these tax revenues. Unlike the former TPP tax, however, CAT revenues go directly to the state s General Revenue Fund. The eliminated TPP revenues stayed in the local communities in which they were generated. Due to a variety of factors, including the state s economic condition, the CAT began its existence under-performing and revenues were below projections. But now, with Ohio on sound financial footing, the CAT is performing well and collecting more than double what is needed to continue the TPP reimbursements to highly impacted districts. Reimbursement cuts in FY 12-13 biennium budget As a result of the state s budget crisis, school districts absorbed cuts in TPP reimbursement. State law codified permanent TPP reimbursements to the most highly impacted school districts. With input from school districts and local citizens, the fiscal 2012-13 budget bill, House Bill 153, changed both the public utility tax reimbursement and TPP tax reimbursement programs. The basic concept underlying House Bill 153 was that continued replacement payments should be based on a measure of relative need for school districts, JVS districts and local governments. School districts that received less than 2 percent of their resources from TPP reimbursement, lost that reimbursement in fiscal 2012. School districts with more than 2 percent reliance on TPP reimbursement, lost 2 percent in fiscal 2012 and an additional 2 percent the following year.
Schools still receiving reimbursements in 2013 would continue to do so at that same level in perpetuity. These are the most highly reliant school districts. Severe economic impact in local communities Eliminating TPP reimbursements in the districts that still receive them would be devastating. Districts would be forced to make severe program cuts or go back to the ballot with large operating levies just to keep pace. Any further elimination of TPP hold harmless reimbursement will increase reliance on residential and business property taxes in the affected school districts. In many of these communities, the combined loss of business tax revenue and reduced hold harmless payments already amount to annual revenue decreases as high as $1.2 million each year. Losses of this magnitude have been significant for school districts. Every year, the loss is compounded, meaning additional school district cuts, including staff position reductions, need to be made just to keep pace with the lost revenues. These communities have done their part to support their schools financially by passing school operations and facilities levies as needed. The districts have implemented serious expense reductions to increase efficiency. They did their part in helping right the state s economy by absorbing the reimbursement cuts outlined in HB 153. But further budget gaps created by additional reductions to the hold harmless payments would be unsustainable for these communities. Citizens and school representatives in these communities understand the severe constraints legislators face in crafting a workable budget compromise every two years. But the impending budget process must include a commitment not to deal school districts a crippling financial blow. Not a Business vs. Schools scenario These communities have already experienced significant shifts in their property tax burden. The same businesses that TPP elimination was to help would face increased property tax obligations. Businesses that didn t receive TPP relief now pay the CAT and would face those same increased property tax obligations, Although this situation would seem to pit school districts against businesses, that is not the reality. In the most affected communities throughout Ohio, school districts have both recognized the need to elimination the TPP tax and supported additional tax relief for businesses through tax abatement packages. In fact, despite the lost revenue to schools, districts have supported abatement grants given by cities because they are keenly aware that a business friendly climate is vital to the overall strength of their community.
Today, businesses that had eagerly awaited the benefits of the eliminated TPP in the most affected communities will face a new financial challenge if TPP reimbursements are not preserved in law. School districts would have no choice but to go on the ballot to recoup at least in part that lost revenue. In addition to residential property owners having to shoulder an increased tax burden, local businesses in those communities would also face steep increases in their property tax bills. This would nullify the benefit of the TPP elimination in some cases and greatly increase the tax exposure for other smaller businesses that are now paying the CAT and didn t reap much of a financial gain from the TPP tax elimination in the first place. TPP reimbursement is not a rich district issue The TPP reimbursement issue impacts districts of all types. These communities continue to support the infrastructure of these business centers. The idea that TPP reimbursement is a rich district issue could not be further from the truth. Ohio school districts most heavily reliant on TPP reimbursement are vastly different. Some are small, others are large. Many are urban, while others are suburban. What ties them together is the fact that the reimbursement for lost local TPP tax revenues comprises a significant percentage of their bottom line. Without the continued TPP reimbursements, these varied districts all around Ohio would be forced to slash educational programming or pass on tax increases through operating levies to their local taxpayers to balance their budgets. These communities continue to support the infrastructure of the businesses that previously paid TPP taxes. Citizen engagement and avoiding financial crisis Students and educational programming should not be hurt due to tax reform and business tax relief. Current law mandating permanent TPP reimbursements to schools must remain untouched. Many of the most onerously affected school districts have the highest student achievement results in the state and are not rewarded for that success. In fact, the opposite is true. Due to the positive reputation of these districts, many businesses and families look to relocate to those communities. Unlike businesses that receive financial gains for results at the top of their industry, high achievement results in education yield no in increased revenue. These communities were purposefully developed with significant industrial zones to balance their tax bases. The elimination of the TPP gutted that balance and the budget gaps created by reductions in hold harmless payments would be unsustainable. Citizens in the districts most adversely affected by the elimination of TPP reimbursement are astute and hold their school boards and administrators accountable for results academically and financially.
Citizens and school representatives in these communities understand the severe constraints legislators face in crafting a workable budget compromise. But at the same time, this year s budget process must include a commitment to avoid creating gaping holes in these district budgets. There are no easy answers. Yet it is critical to craft a fair and rational solution to keep permanent what remains of the TPP reimbursement.