Tax notes

We’ll use this story to list some of the details behind the taxes which fund the state School Aid Fund. Having these kinds of facts available helps all citizens understand how the system works and the impact any changes would have. [Please be patient as we fill in the blanks.]

Contributors to the School Aid fund:
(excluding Federal funds)

Sales & Use Taxes
FY 2006 contribution: $5.29 billion, 48%
Sixty percent of the revenues collected by the first 4% of the sales tax go to the school aid fund; all of the money raised by the last 2% of the sales tax and the 2% use tax go to the school aid fund. [Michigan Constitution Art. IX, § 11, as amended March 1994] This convoluted formula emerged from the changes made by Proposal A in 1994. At that time, Michigan had a 4% sales tax, of which 60% went to school aid. Proposal A added 2% to the sales tax, and a companion use tax, which was entirely earmarked for school aid.

Real Estate Transfer Tax
FY 2006 contribution: $298 million, 3%
The real estate transfer tax is a tax paid when property changes owners. The rate is calculated as $3.75 in tax for each $500 (or fraction thereof) of the property’s total value – effectively, 0.75%. These funds are earmarked by statute to the School Aid Fund. [State Real Estate Transfer Tax Act, Act 330 of 1993]

State Education Property Tax
FY 2006 contribution: $2 billion, 18%
Proposal A also created a state-wide property tax, levied on all property, of 6 mills ($6 per $1000 of property value). This tax replaced all local taxes on homestead property for school operating expenses, which were eliminated (with the exception of “hold harmless” millages — see below). [State Education Tax Act, Act 331 of 1993; MCL 211.903] There is also an allowed local property tax on non-homestead property which is collected locally but is regulated by state law and funds part of a district’s foundation allowance (see below).

Article IX, Sec. 3 of the Michigan Constitution specifies that changes to the maximum amount of property tax that may be imposed for school operating expenses beyond the limits in force in 1994 must be approved by a three-quarters vote of both houses of the State Legislature.

Income Tax
FY 2006 contribution: $2 billion, 18%
The portion of the income tax which is earmarked to the School Aid Fund has, since 2000, been determined by a formula that takes into account the current tax rate. The current formula sets the SAF’s share of income tax revenue equal to 1.012% divided by the current income tax rate for individuals. At the moment, that works out to 1.012%/3.9%=26%. The formula has the effect of making the SAF share shrink as the tax rate increases, so that if the total income being taxed remains the same, an increase in the tax rate is essentially offset by the reduction in the SAF share, leaving education funding the same. [Income Tax Act of 1967, PA 281 of 1967, Section 206.51(2)(c)]

Michigan Lottery
FY 2006 contribution: $688 million, 6%

Cigarette & Tobacco Taxes
FY 2006 contribution: $472 million, 4%

Other Taxes
FY 2006 contribution: $292 million, 3%
This includes the Casino Wagering Tax, the Liquor Excise Tax, and Industrial & Commercial Facilities taxes.

Local sources of revenue for schools
Overall, local school operating taxes (regulated by state law) provided 19% of local school district’s operating funds statewide in fiscal 2005, compared to 74% for direct state aid and 7% for Federal funds.

Tax on non-homestead property
The amended school code, which sets up and regulated the current system of school funding, sets limits on property taxes that local districts may impose on their own initiative. Specifically, districts are allowed to levy no more than 18 mills on local property, and that only on non-homestead property (with a few exceptions). While these taxes are local, they are counted as the local contribution toward the district’s foundation allowance, which the state then supplements to bring the total to the foundation allowance for the current year. [Revised School Code, Act 451 of 1976, as amended; MCL 380.1211(1)]

“Hold Harmless” levies
That same portion of the school code does make an exception to the amounts of tax that can be imposed locally on homestead property. For districts that were already spending more than $6500 per pupil in 1994, the law allows them to levy local taxes on homestead property to collect the exact amount of the difference. This is known as the “hold harmless” millage.

The $6500 figure was the maximum the state would pay out from its formula in the first year after Proposal A. However, districts which were already spending more than that were allowed to tax themselves to get back to the level they were spending just before Proposal A. This amount was fixed, however, at 1994 levels; so-called “hold harmless” districts have been allowed to collect precisely enough taxes to raise that additional per pupil amount each year. The amount is not indexed for inflation or otherwise adjusted; it remains the same as it was in 1994. One result is that the value of these “hold harmless” millages has decreased over time as their real value is eroded by inflation.