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Published: Monday, 2/13/2006

Tax reform could alter area school finances

BY IGNAZIO MESSINA
BLADE STAFF WRITER

Washington Local Schools has been among just a few school districts in Ohio that have been able to stay off the ballot with frequent levy attempts, but its leaders fear Ohio's 2005 tax reform - meant to encourage business growth - will change that.

"It was unbelievable. I was surprised, and you have to look close, because the devil is in the details," district treasurer Jeffery Fouke said in regard to the eventual phasing out of tangible personal property taxes on businesses in Ohio.

The tax is assessed against manufacturers, warehouse operators, and other businesses based on the value of their inventory, equipment, furniture, and other items, said Gary Gudmundson, spokesman for the Ohio Department of Taxation.

Starting this year, businesses will pay 25 percent less each year in tangible taxes until 2009, but the state has promised it will make up the difference through 2010 using the commercial-activity tax, Mr. Gudmundson said.

The reimbursements from the state will decrease annually until 2017, when they will cease.

Mr. Fouke said the 7,000-student district that serves Washington Township and parts of West and North Toledo could lose 22 percent of its total operating revenue when the state stops reimbursing the losses.

And every school district in northwest Ohio potentially is in the same situation.

Ohio government leaders have said a change in how business equipment and inventory is taxed should be good for everyone.

Area school leaders tend to say just the opposite about the state's replacement of personal property taxes with the new commercial activity tax.

Treasurers for many school districts in northwest Ohio are afraid the money they depend on to operate won't be there and that they will be forced to go to voters more to just stay above water.

"They hold us harmless through [2010] - well, why aren't we held harmless for even longer?" Mr. Fouke wondered. "As far as I know, the state of Ohio plans on having school districts after 2010."

The shift to a broader gross-receipts tax has been applauded by manufacturers who would no longer be taxed on equipment and machinery purchases. The tangible personal property tax is applied to machinery, equipment, and inventories - and businesses say it is outdated because companies must buy more equipment more frequently to remain competitive.

Although the state will provide the hold-harmless reimbursements, they will not increase for any new development that might occur within a school district.

Springfield Local Schools is seeking an operating levy of 3.5 mills in May, and Treasurer Robert Moellenberg says part of the reason has to do with reductions in tangible personal property tax income.

Mr. Moellenberg noted that there is a Wal-Mart under construction across McCord Road from the school administration offices, "and we'll never see a dime of that [tangible personal property tax] potential revenue."

Don King, superintendent of the Fremont City Schools, said the state's phaseout of tangible personal property taxes is part of the reason the district will be on the ballot in May with a five-year, 6.9-mill operating levy.

The tax, which would generate $3.6 million a year, would be the district's first property tax hike for operations since 1985.

Mr. King said his district, which includes numerous industrial employers, stands to lose millions of dollars in collections as the state gradually reduces payments to districts to make up for the tax cut.

In fiscal year 2007, the Fremont school system is projecting it will receive $2.1 million from the state - an amount it expects to drop to $267,000 by fiscal 2009.

The commercial activity tax was instituted as a substitute for the tangible personal property tax and the corporate franchise tax, both of which were abolished. But Mr. King said it's unclear how money from the new tax will be distributed to school districts, making it hard for officials to predict how much revenue they'll have in future years.

"I haven't seen any calculation of the way that's going to be disbursed back to the districts," he said. "We're required to do a five-year forecast, but it's really hard to plan. ... There's still so many unknowns with the commercial activity tax."

Sen. Teresa Fedor (D., Toledo), ranking minority member of the Ohio Senate Education Committee, criticized the changes.

"We have an unconstitutional school funding formula in Ohio and this is an empty promise," Senator Fedor said.

"We are running on empty in the state of Ohio under Republican rule."

A 1997 Ohio Supreme Court ruling and a 1994 lower-court case both said that the state's system of paying for public education is unconstitutional, partly because it relies heavily on local property taxes.

Toledo Public Schools Treasurer James Fortlage predicted the tangible personal-property tax phaseout would increase the tax burden on property homeowners.

The district collected about $17.8 million in tangible personal-property taxes during the 2004-2005 school year, about 14 percent of its general operation budget.

"In the short term, we are not affected," Mr. Fortlage said. "However, the hold-harmless payments would not apply to any levy in the future, so in essence, the value of a new levy goes down."

Toledo Board of Education member Larry Sykes had a gloomy outlook because of the tax changes.

"I hate to say it, but it may put a bigger burden on taxpayers," he said. "Once again it shows that we have to find a better way of funding schools."

Officials with the Lake Local School District, where district voters have defeated the district's last six attempts for new tax money, said that they are hoping new development and construction will help balance future budgets.

Board members are hoping the phaseout will have its intended purpose: more business in their community.

The school board decided this month to ask voters to consider a five-year, 8.75-mill tax levy on May 2. If approved, interim treasurer Jack Coffman said the levy would raise just under $2 million a year and would cost the owner of a $100,000 home about $268 annually.

"[Tangible personal property tax] will slowly disappear over five years and it has to be replaced," Mr. Coffman said.

"So beyond 2010, you're looking at something that, all by itself, is going to cause school districts all around the state of Ohio to put additional millage on the ballot."

The biggest fears, of course, are in school districts that have a substantial industrial tax base, such as Archbold, where Sauder Woodworking Co. is based.

In years past, personal property tax collections on the business equipment and inventory in those districts have put them in the richer half of Ohio school districts.

Now, however, they probably have the most to lose as changes are discussed.

But even in agricultural or residential districts without big business, there's fear.

In Liberty Center Local, a small district in Henry County that stretches into a tip of Fulton County, Superintendent Jack Loudin remains pessimistic about the chances of the commercial activity taxes flowing back to local school districts in significant amounts.

Liberty Center, Stryker, and Archbold as well as numerous other area school districts that might be affected by the tax change are expected to be on the May ballot with new operating levy requests.

Archbold's board agreed last week to ask for a 9.78-mill, five-year levy that would raise $2.4 million a year for the school district and cost the owner of a $100,000 owner-occupied home an extra $300 a year.

Perrysburg Treasurer Matt Feasel said the district's collection of tangible personal property tax is down about $38,000, or 1.5 percent, this year. The big hit will come in October, he said, as the tax starts to decrease by 25 percent a year.

"We'll probably see 25 percent of our collection of the $2.5 million disappear," he said. That's a decrease of about $623,000.

"We're going to pray a lot," he said half-jokingly.

The district is not planning on putting a levy before voters quite yet, he said, but will have to do so as the tax is phased out.

"Once that runs out, we'll be on the ballot."

Blade staff writers Jennifer Feehan, Mike Jones, Steve Murphy, Erika Ray, Jane Schmucker, and Elizabeth Shack contributed to this report.

Contact Ignazio Messina at: imessina@theblade.com or 419-724-6171.



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