Funding North Carolina’s Public School Growth — Are More Taxes Necessary?

Democrats and Republicans in the General Assembly are proposing legislation to increase sales taxes as high as 15 percent above current levels. The increases would be added on in the form of “local option” sales taxes at the county level and are being justified by the claim that counties cannot afford to pay their share of the state’s Medicaid burden while also paying for anticipated growth in public school enrollment. North Carolina is one of only three states that require counties to pay a share of Medicaid costs for all or most services.

Estimates from the Department of Public Instruction (DPI) show that we can expect an increase of 6.37 percent in the number of children in public schools statewide by 2011. The DPI also issued a “Five-Year Public School Facility Needs” report last year that outlined nearly $2 billion in spending per year on school facilities. Local governments and many state lawmakers claim there just isn’t enough money being generated from existing revenue sources (i.e. bonds, local taxes) to accommodate the anticipated growth. This leads to the question: What, if anything, needs to be done?

Medicaid Swap

In Senate Bill 1484 introduced by Senate Majority Leader Tony Rand (D-Cumberland), one-cent of the current local option sales tax revenues would be turned over to the state in return for the state assuming all of North Carolina’s Medicaid costs.

• This swap would save counties an estimated $517 million in Medicare funding, while providing roughly $1 billion to the state in additional sales tax revenue.
• A portion of the local option sales tax revenues are currently earmarked specifically for public school capital outlay — under Rand’s proposal that money would no longer be earmarked.
• Counties would have the option to then replace their lost one-cent sales tax revenues by adding another one-cent local sales tax option. This would increase the total sales tax rate to 7.5 percent, up from the 6.5 rate scheduled to start on July 1st of this year.

Local Option Sales Tax Increase

Several lawmakers are also eyeing a sales tax increase independent of the Medicaid swap plan. Currently, 18 counties — with representatives on both sides of the aisle — are requesting permission from the General Assembly to raise their local sales tax rate. Despite recent rhetoric, less than half of these plans earmark funds specifically to public school expansion.

• Of the 18 county proposals, only eight earmark the funds for public school capital outlay exclusively, with six others splitting the funds with other functions — primarily community college funding.
• According to the DPI survey, three of the counties (Watauga, Yadkin, Wilkes) earmarking the local sales tax revenues exclusively for public school capital outlay are expecting a decline in student enrollment over the next five years. Three others (Ashe, Swain, Gaston) expect growth of four percent or less.
• Three House bills would allow counties to levy additional taxes. HB 1317, sponsored by Representative Edith Warren (D-Pitt), and HB 66, sponsored by Representatives Douglas Yongue (D-Scotland), Linda Johnson (R-Cabarrus), Earl Jones (D-Guilford) and Marvin Lucas (D-Cumberland), authorize an increase in local sales taxes. The most extensive proposal is HB 153 sponsored by Representative Mickey Michaux (D-Durham). This bill would provide a menu of local taxes that counties could levy upon voter approval. Counties could choose to raise rates on any of the following: the sales tax, impact taxes, taxes on restaurant food, occupancy tax, income tax and a land transfer tax.

Are More Tax Dollars Necessary?

Before reaching deeper into taxpayers’ wallets, government officials should first look at the revenues already available for school construction:

• Local governments have seen a rapid increase in revenues over the last several years. In fact, local government revenues from taxes alone increased by 122 percent from FY 91-92 to FY 03-04.
• According to the House Select Committee on Public School Construction Funding, school bonds approved in 2006 valued more than $1.42 billion. This includes $970 million for Wake County, $250 million for Forsyth County, $184.5 million for Union County, $50 million for Lenoir County, and $20 million for Hoke County.
• Data from the State Treasurer’s “Report on County Spending on Public School Capital Outlay” reveals that local governments have more than $1 billion of unused funds earmarked for public school capital outlays already in their coffers (some of which may already be committed to specific projects).

North Carolina’s Sales Taxes are Already Among the Highest in the Nation

Even with the scheduled sales tax reduction set for July 1st, North Carolina consumers will face a 6.5 percent rate. (Note: Mecklenburg County adds an additional ½ cent)

• According to Tax Foundation data, only Tennessee has a higher average statewide sales tax in the Southeast (and Tennessee does not tax most forms of personal income).
• An increase in North Carolina’s average tax rate to 7.5 percent would make it sixth highest in the nation, and 50 percent higher than neighboring Virginia.

Appropriate Allocation of Funding

A closer look at the expected growth in student enrollment reveals that a more economical distribution of existing funds and revenues can help to avoid across-the-board tax increases.

• A large share of student population growth is concentrated in a few rapidly growing counties. According to DPI estimates, 58 counties are expected to lose students between now and 2011, while only 19 counties expect an enrollment growth rate of 10 percent or more.
• Many counties expecting to lose students are nonetheless asking for substantial funding for new schools and additions. Based on the Division of School Support “Five-Year Public School Facility Needs” report, the 10 counties expected to see the largest percentage drop-off of student enrollment are requesting significant amounts of funding over the next four years. Combined, they are expecting to lose nearly 4,000 students by 2011. Yet these same counties are requesting more than $145 million for new schools and additions — this figure does not include requests for renovations or equipment.

Cost-Saving Options

Government officials can also explore some cost-saving measures in order to accommodate the anticipated growth of student enrollment.

• MORE EFFICIENT CONSTRUCTION. Under Wake County’s proposed school facilities plan, new buildings would cost at least $20,606 per elementary school seat, $26,169 for each middle school seat, and $30,703 for each high school seat. Compare this to the average costs calculated for schools in the four-state region of North Carolina, South Carolina, Kentucky and Tennessee. The “School Planning and Management’s 2006 Construction Report” calculates the median cost for new schools was $17,417 for each elementary school seat, $22,094 for a middle school seat, and $23,917 for a high school seat (see chart on next page).
• BETTER USE OF EXISTING CAPACITY. A recent report by the John Locke Foundation discovered that nearly 4,000 student seats are currently available in Wake County public schools alone. Schools could absorb a significant share of student growth by maximizing the existing school capacity — as calculated by the county’s “Annual School Campus Capacity” survey.
• LIFT CAP ON CHARTER SCHOOLS. Because capital funds are not used by charter schools for construction, allowing more charter schools would enable counties to accommodate more students without additional capital outlay costs. According to the John Locke Foundation, there were 17 applications for new charter schools in 2006, but only three vacancies available under the cap.
• MORE EFFICIENT SCHOOL DESIGN. Several studies have examined the most efficient use of school buildings. A 1996 study by the Texas Performance Review recommended school buildings utilize 70 to 75 percent of the total building space for programmatic activities. This is space that can be assigned for classrooms and administrative offices. Non-assignable space, such as hallways, stairways, bathrooms, foyers, storage closets and mechanical rooms, are necessary but should be limited. The more non-assignable space that is eliminated, the more students a school building can accommodate. Various schools in Wake County demonstrate room for improvement: Jeffreys Grove Elementary School uses only 67.5 percent of its building space for programmatic activities; Wakefield Middle School uses 63.5 percent; and Knightdale High School uses only 64.1 percent.

Summary

• Lawmakers are once again looking to raise taxes on North Carolina citizens. Some proposals would increase the sales tax by 15 percent and give North Carolinians the sixth highest sales tax rate in the country, 50 percent higher than neighboring Virginia
• Counties are claiming they cannot afford to pay for both Medicaid and for anticipated growth in public school enrollment.
• The Medicaid “swap” would result in higher sales taxes on consumers, and actually decrease the amount of revenue earmarked specifically for public school capital outlay.
• Local governments have already enjoyed an explosion in tax revenues over the past several years — to the tune of a 122 percent increase from FY 91-92 to FY 03-04.
• Counties currently have more than $1 billion earmarked for public school capital outlay already sitting in their coffers.
• Several counties expecting an actual decrease in public school enrollment are nevertheless requesting significant amounts of tax dollars to pay for new schools and additions.
• A number of cost-saving options can be explored in order to more efficiently accommodate student growth. These include: more competitive construction costs, better use of existing school building capacity, lifting the cap on charter schools, and more efficient school design.