Engler's Angle

How tax relief became school reform in Michigan

Derek Green from the August/September 1994 issue

For many years, Michigan was like most other states when it came to public-school reform: There was a lot of talk, a little legislation, and no real progress on the issue. Even after the Kalkaska School District in northern Michigan made national headlines in 1993 by going broke and closing its schools partway through the academic year, legislators still couldn't find the wherewithal to overhaul the state's inefficient and widely despised 100-year-old system of funding education through property taxes. Property taxes were a major problem in their own right: They increased three-fold from 1972 to 1992. And because there were no assessment caps in place, local governments could raise property taxes with relative ease.

"You can't imagine the level of frustration in this state," says Bob Wittmann, director of education policy at the Mackinac Center for Public Policy, a free-market think tank in Midland, Michigan. "The frustration was felt by everyone. No one liked the status quo, but every time someone tried to do something about it, something went wrong."

The frustration--and desperation--in the governor's office was especially keen. First-term Republican John Engler had squeaked through his 1990 election with a victory margin of one percentage point, campaigning on a platform loaded with tax relief and school reform. But after three years in office, Engler and company had nothing to show for their efforts. And with re-election worries on the horizon, few believed that education or tax reform would come to Michigan any time soon.

Last July, however, everything suddenly changed. In a 24-hour blaze of lawmaking, Michigan legislators stunned even themselves by passing a controversial bill abolishing the practice of funding schools with property taxes. By the end of December, a bipartisan package of school-finance plans and education-quality reforms had passed both houses and gone to the governor's desk for signing.

Somehow, in less than six months, Michigan's leadership had managed to reverse a quarter century of bitter partisan gridlock, dramatically changing the way schools will work in their state and, many are saying, providing a model for public-school reform across the country--one that includes a charter-school provision incorporating significant elements of school-choice logic. It's a story of political hardball and genuine bipartisan achievement that provides a lesson for every state faced with education reform.

Described by The New York Times as "the nation's most dramatic shift in a century" in public-school funding, the new plan essentially transfers the burden of paying for schools in Michigan away from local property taxes to an increased state sales tax and other existing levies. In addition to changing funding sources, the plan addresses the amount spent per student. Every district is guaranteed funding no lower than its 1993 budget, and all districts will now spend at least $4,200 per student, a $1,000 increase over the previous minimum.

A more controversial--and ultimately more significant--provision of the plan allows the creation of "Public School Academies," or charter schools. These "schools of choice" can be established by various entities, such as parent-teacher associations, school boards, departments of state government, and non-profit organizations.

Michigan is unique among states experimenting with charter schools because it has set no limit on their number. Supporters say the move will provide "borderless options" for parents and students unhappy with their own school districts, and spur much-needed innovation in a school system overgrown with regulation and bureaucracy. And because it introduces a significant element of competition into the state's public schools, the charter-school provision acts as a hedge against the spread of uniform mediocrity. When local property taxes largely determine the amount of money spent per student, there are typically good, well-funded schools and bad, poorly funded ones. But state-level funding often means running the risk of losing the good districts where taxpayers feel they are at least getting what they pay for. Competition for students means that good schools will continue to be rewarded and bad schools will either improve or go out of business.

"The system was in desperate need of improvement and flexibility," says state Treasurer Douglas Roberts who, as the official charged with rewriting the state's tax code, was greatly responsible for shaping the reform plan. Michigan's schools, by the state's own reckoning, were doing badly. Per-student school spending in real dollars had increased over 100 percent between 1982 and 1993, but there was little to show for the extra money. District spending per student varied by as much as $7,000, but students statewide scored abysmally on proficiency exams: 62 percent of 10th-graders were found to be deficient in reading; 77 percent performed below grade level in math; 54 percent of 11th-graders did not have acceptable science knowledge. "Not only did the issue of [funding] inequities have to be addressed," says Roberts, "but we had to find a way to inject market-like competition into the system. Something simply had to change."

That change finally came as the result of the toughest political struggle in recent Michigan history. It was a fight that had been brewing for more than two decades, drawing in politicians who had run out of places to hide, citizens fed up with one of the most burdensome property-tax systems in the nation, and powerful lobbying groups determined to protect their interests in the educational status quo. After the first few rounds, the fight became a showdown between an increasingly desperate governor and a deeply divided state legislature.

The level of discontent in Michigan over property taxes and education financ-ing can be gleaned from the number of ballot proposals dedicated to reform. Between 1972 and 1992 there were 11 state ballot proposals either to reform school finance or to reduce or abolish property taxes. Although all of the ballot initiatives failed--some by margins of 60 percentage points or more--there was continuing resentment at Michigan's disproportionately high tax burden: The state ranks eighth-highest in taxes in the country, even though it ranks only 15th in income. Most political observers attributed Engler's 1990 gubernatorial victory to his strong anti-property-tax stance.

But after taking office, Engler had come nowhere close to making good on his ambitious promises to cut taxes. His administration had proposed two more ballot measures, both of which had gone down at the polls. The second defeat, in June 1993, was especially alarming for Engler because prominent Democratic and Republican pols had supported the measure, which would have cut property taxes by 20 percent. In fact, even the Michigan Education Association, the most powerful state teachers' union in the nation and Engler's bitterest enemy, had offered lukewarm support.

But while voters desperately wanted tax reform, they weren't willing to sign on to any plan put in front of them. Deputy Treasurer Nick Khouri notes that the ballot proposal addressed neither the issue of lost revenue nor the cause of school reform. Voters were afraid that any cut in property taxes would simultaneously destroy the schools and be replaced by a huge boost in the state income tax. Khouri says voters were telling their representatives, "`We aren't going to decide this for you.' It was an unsustainable situation."

With elections looming in 1994, the Republicans decided to play rough. In July, backed by Engler, Michigan Senate majority leaders introduced a statutory bill to cut property taxes 20 percent across the board. Even though no provision was made to recoup the lost revenue, Republicans had the votes to ram it through the upper chamber. But since the House was split evenly between Democrats and Republicans (each party held 55 seats), it was not expected to survive there.

After a series of dead-end talks between the governor and Senate majority and minority leaders, the Democrats made a surprising offer: They wouldn't support the 20-percent tax cut proposed by Republicans, but they might consider going along with an amendment that abolished all property taxes. Debbie Stabenow, a Democratic state senator who is challenging Engler in Michigan's gubernatorial race this fall, proposed the new amendment on July 19.

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