The case for regional school district tax reform
To the editor:
In 2017, two Massachusetts towns at opposite ends of the Commonwealth – Great Barrington in the Berkshires and Oak Bluffs on Martha’s Vineyard — passed the same resolution virtually unanimously: to petition the state legislature to change the method by which regional school districts (RSDs) apportion their assessments to member towns from one based largely on student headcount to one based solely on property values. Efforts to set up a study commission, a necessary precursor to legislation, have not yet gained any traction. This paper will present the rationale and benefits for making the proposed change.
Taxpayers in each of the towns in the 58 academic RSDs in the Commonwealth pay different property tax rates than their neighbors in other member towns in the same RSD, solely to support their RSD. In the most egregious example, in the Southern Berkshire RSD, a taxpayer in Sheffield pays a rate that is almost seven times higher than a taxpayer in Alford who has identically assessed property. Thirteen other RSDs have taxpayers in some towns paying more than twice the rate of taxpayers in other towns. In fact, all but 11 of the 58 RSDs have rate differentials of 10 percent or more among their taxpayers.
Why is this a problem? Fairness aside, it is grossly inefficient to tax aggressively some property owners while then “spending” an often significant chunk of those tax revenues to subsidize the low tax rates enjoyed by other property owners in neighboring towns. For example, since the formation of the Berkshire Hills RSD in 1965, property owners in Great Barrington and West Stockbridge have paid approximately $100 million more (in 2019 dollars) than they would have paid if a single rate had been in effect. But none of that extra money found its way into bolstering the schools. Every penny was offset by an equal amount of “subsidy” to the property owners of Stockbridge, who have benefited (without realizing the reason) from taxes that were $100 million less than they would have been had a single rate been in effect. In the current fiscal year alone, Stockbridge property owners “underpaid” their RSD assessment (compared to a single district-wide rate) by over $4.4 million.
However, that $4.4 million is a relatively modest number compared to the $245 million that all 58 RSDs “left on the table” in this fiscal year: the difference between what they would have received if all property owners had paid the same rate as the highest rate paid in each RSD and the total amount that they actually received.
The problem of the current assessment method extends beyond tax inefficiency, however. The current formula is quite convoluted and difficult to understand even for financial professionals. Student headcounts — and therefore RSD assessments — can vary meaningfully among member towns from year to year, adding unpredictability to town budgeting forecasts. Feelings about “fairness” can run high, injecting discord into relationships among neighboring towns that are otherwise quite harmonious. Merger discussions among school districts, which might make great sense from the standpoint of operating efficiencies and educational outcomes, face major obstacles over wrangling about “Who pays?” in the absence of a universally applicable yardstick.
However, no RSD can solve this problem on its own, because district agreements can only be amended by consent of the town meetings of the member towns, and no town meeting would approve a change in the assessment method that would disadvantage its taxpayers.
All 351 cities and towns in the Commonwealth are “creatures of the state,” meaning that state law can direct towns (162 of which belong to academic RSDs) to amend their agreements to comply with a new statutory method of assessing member towns.
Transitioning to the end result — a single school property tax rate in each RSD — should be smooth and completely transparent. As approved in the 2017 town meetings in Great Barrington and Oak Bluffs, each member town would pay the same dollar assessment that it had paid the previous year plus each member town paying less than the single rate would pay their proportional share of the budget increase. Eventually all towns within each RSD would be paying the single rate. The length of time to achieve the full transition might take one year or 20, depending on the severity of the tax differential to start and the rate of future school budget increases.
One might ask how the RSD tax rate is calculated, since unlike almost everywhere else in the U.S. except New England, Massachusetts school districts don’t send out separate property tax bills to finance their operations, but rather assess the member towns, which, in turn, send out a single tax bill to property owners to finance not just the school assessment but also all other town expenses. It’s simple: Divide the town’s RSD assessment by the total taxable assessed property value of the town — that gives the town’s actual RSD tax rate. To calculate what the rate would be if all member towns in the RSD paid the same rate, take the total assessment to the member towns and divide it by the total taxable assessed property value of the member towns. Use that rate to calculate what a town would be assessed (after the transition period) if the new method were required by statute. Within each of the 58 RSDs, the amounts actually paid that are above the single rate amount are always exactly equal to the amounts that fell short of the single rate amount.
There are three prongs to the case for this reform proposal: Principle, policy and politics. The argument that a single rate is good public Policy has been made above, but what about principle and politics?
PRINCIPLE: The bedrock financing principle of public education — as opposed to that of private education — is that all children are entitled to a free education paid for by all members of their community in proportion to their ability to pay, not on how many children they have, if any. Because the lion’s share of public K-12 education is funded by local property taxes, taxable assessed value is a “perfect” measure of ability to pay. (Although state income taxes rather than local property taxes might be a better method of education finance, there is no realistic prospect of changing that in Massachusetts or anywhere else in the U.S. in the foreseeable future.)
However, the current method of apportioning the RSD assessment among member towns is largely based on student headcount, not ability to pay. Not surprisingly, it systematically favors taxpayers in towns that — relative to other towns in their RSD — have higher per capita property values, a higher percentage of students sent to private schools, or a higher percentage of second homeowners or all of the above. It systematically penalizes taxpayers in towns that are relatively “kid-rich, property-poor.”
The argument used by taxpayers in towns that benefit from the current method is invariably the same when talking about this subject with taxpayers from towns that are penalized: “X percent of the district’s students come from your town. It’s only fair that you should pay X percent of the district’s total assessment.”
The fundamental flaw in that argument is that it assumes that towns pay taxes. They don’t; they collect taxes. Property owners pay taxes to enable the town to pay the RSD its assessment. To see clearly the principle involved, imagine that you live in Great Barrington and your next-door neighbor lives in Stockbridge, because your common property line is also the town line. You have identical financial profiles and neither of you have any family members attending the local schools. Your properties have identical assessed values. You will have paid 3.5 times more in taxes this year than your neighbor to support the RSD in which you both reside.
The practical effect of the proposed statutory change in the method of apportionment would be to bring the tax situation of all taxpayers in regional school districts in line with the other 84 percent of the Commonwealth’s taxpayers who already live in school districts where they pay the same rate as all of their neighbors in the district. (Only seven of the 100 largest public school districts in the state are regional districts containing more than a single local taxing authority.) Would a resident of Beacon Hill argue that because his upscale neighborhood only accounts for, say, 5 percent of Boston’s public school students, he and his neighbors should only pay for 5 percent of the Boston school budget?
The problem this proposal addresses has its roots in the history of regional school district formation, in which each town originally had its own school system and at some point decided to merge with neighboring towns. At that point, the towns no longer had direct authority or responsibility for K-12 education because they had ceded that to the newly formed RSD. However, the merger was incomplete, because it didn’t grant the new RSD financial independence. In effect, the towns contracted with the RSD to educate their young citizens and, initially, one can understand why student headcount seemed like a fair way to start off accounting for the allocation of expenses. But it failed to take into account that the town line was no longer the relevant boundary for calculating taxes — the school district line was.
When setting tax policy, it is important to be consistent within the relevant boundaries. For federal income taxes, you will pay the same rate whether you live in Massachusetts or California. If you live in the Commonwealth of Massachusetts, you will pay the same amount of state income taxes whether you live in Great Barrington or Oak Bluffs. If you live in Great Barrington, you will pay the same property tax rate whether you live in town or in the woods. But if you live in the Berkshire Hills Regional School District, that principle of tax rate uniformity — like in all other Massachusetts RSDs — does not apply.
POLITICS: Eight-four precent of registered voters in Massachusetts live in cities and towns that have their own school districts and therefore would not be directly affected by the proposed reform. One could argue, however, that they would receive an indirect benefit from the reform because enabling RSDs to be more tax-efficient would reduce somewhat the annual pressure on the state budget to increase subsidies to those districts. For the registered voters in the 162 towns that do belong to RSDs, 55 percent would benefit from the reform and 45 percent would not. One could argue that in the long run, everyone would benefit from more soundly financed public schools and from having removed the major reason for RSD discord, but realistically, almost everyone votes his or her pocketbook regardless of his or her professed politics.
I will gladly forward a copy of my spreadsheet analysis upon request.
Great Barrington, MA