Property Taxes and Education in Alabama

0:00I'm here to speak about property taxes in Alabama and education, but I also want to tell you a little bit about the Mises Institute, the Ludwig von Mises Institute, that's where I now work. I'm a senior fellow there, which is basically a research and writing position. But the Mises Institute is the building that's right next to Mama Goldberg's. A lot of people don't – haven't heard of us. We were affiliated with Auburn University for a number of Years. We're an economic education foundation where we look into topics on economics from the perspective of the namesake of the Institute, Ludwig von Mises, who was a very important 20th century economist from Austria. And he looked at things in terms of how capitalism or free markets basically created society and civilization as we know it. He's the one who showed that socialism was impossible and he also discovered the source of the business cycle in the economy.

1:06So he was a very important economist who fled Austria with the rise of the Nazi regime and came to the United States where he worked for more than a quarter of a century producing over 25 books and hundreds of articles and our Mises Institute is dedicated to promoting Economic Education from his free market perspective. We've been here at Auburn for 25 years promoting economic education in terms of publishing books, journals, publishing articles, having conferences for students, for the regular citizens and for academic economists and other researchers.

1:54Our web page, which is www.mesis.org, it's the largest economic web page and the most trafficked economic web page in the world. Sometimes The Economist magazine beats us in terms of traffic, but generally speaking we're higher in terms of economics than any other web page in the world, and it involves all sorts of topics, even forestry and any topic in the world is dealt with on there, So if you're doing a paper or trying to look something up, you can always go to our webpage and do a search for that particular topic and I'm sure you'll find an interesting perspective. Now my main topic today is taxation, specifically the property tax and how it relates to education in the state of Alabama.

2:45And as Alabamians and as students at Auburn, these are really two of the most important and Contentious Political Issues in the state and have been so for a long time and will probably continue to be so for a very long time. There's two perspectives on taxation. One is that taxes are too low, that we don't have enough revenue, that taxes aren't encompassing enough to provide for basic goods and services. The other perspective is they're too high. that taxes are simply too high overall at various levels of government, local, state and federal. And these two perspectives are easy to identify.

3:32Usually the people who think that taxes are too low are people who receive the tax revenues in terms of their own particular salaries and budgets. And those who think that taxes are too high are usually the ones that are paying those same taxes. So it's a fairly clear-cut issue and it's an ongoing issue as I said, tax reform in Alabama is more or less a permanent issue, as a matter of fact it was raised in one of the local newspapers today that taxes are too low and there's shortfalls coming and so forth. And we've had tax reform movements in the state of Alabama, we've had constitutional reform movements which are basically to reform taxes, we've had the whole issue of the Lottery in order to fund government and education.

4:23Most recently we had Amendment 2 to the Constitution which was in order to rewrite the Constitution but it was also a measure to basically, in a backhanded way, to increase funding for public education. So this is an important and ongoing problem politically in the state of Alabama, something you're all going to have to deal with. One of the things that's probably the most important divisive issue is the property tax in the state of Alabama and the claim that property taxes are too low in the state of Alabama. Well, the simple fact of the matter is that property taxes are low in the state of Alabama.

5:11And by some measures, they're the lowest in the country. And from this perspective, that the property tax is too low, the claim is then made that there's not enough money for state government, and therefore there's not enough money for for Public Education, and therefore the problems of public education are the result of the property tax being too low. Now I'm a big advocate of education. I've been in it my entire life either as a student or a professor or a researcher, and I'm kind of actually an advocate of the property tax as a funding mechanism for public education. But most of What you're going to see here today for me is going to be fairly new material.

6:00It's going to be bucking the trend because from my perspective, yes, property taxes are low in the state of Alabama, but the rest of the dialogue about not enough resources, not enough money going to public education is basically a myth. When I was working for the state government, I was asked to do a study of the situation when it came up in the state legislature and my research was eventually published in the Troy State University Business and Economic Review. Basically what I did here was I took the state of Alabama and I compared us to all of our neighbors, Mississippi, Tennessee, Georgia and Florida and I did that because I don't I don't think a national coverage or study would really be an accurate one.

6:56Comparing Alabama with states like Rhode Island, Alaska and California just doesn't make sense. But comparing us to Mississippi and Tennessee, Georgia and Florida I thought did make sense because the conditions are very similar, income in the states are reasonably similar, the history of the region is fairly similar. So I thought that that made for the best type of comparisons and the editors of the Troy State University Business and Economic Review agreed with that. And so what I did was I looked at taxes per capita, the amount of taxes paid on average by an Alabamian compared to citizens of those other states. and what I found was I looked at the period 1992 to 1996 and then later on I looked at 1997 to 1999 and I actually did a sort of a back-of-the-envelope calculations for the most recent years and basically the results stay roughly the same over time.

7:58Taxes in the state of Alabama were about 90 to 95 cents compared to every dollar paid in taxes in our surrounding states. So taxes in Alabama are relatively low compared to our neighboring states. In general, I think that's a good thing. That's one of the things that new industry cites as reasons to come to the state of Alabama because taxes are low. But then I looked at state revenues, and you might ask, well, aren't taxes revenues? Well, they are revenues, but there are other sources of revenues for state governments in all states. So here you take taxes and you add user fees and other state revenues.

8:46And when you look at the comparison between Alabama and the other surrounding states, What you now find is that Alabama actually had the highest per capita state revenues, roughly $1.05 to $1.10 per every dollar in the four surrounding states. So we went from one of the lowest to one of the highest in the states reviewed. roughly $200 a person more revenues in the state of Alabama for state revenues compared to our surrounding states. Then I looked at general revenues and these categories become more encompassing as we go through them. General revenues compares state revenues, the previous category, with intergovernmental transfers. This is money from the federal government, money from local governments Looking at the net amount of flows between governments that adds to state resources.

9:44So, in general revenues, it also turned out that Alabama was the second highest of the five states studied, roughly $1.05 to $1.07 per dollar in the other states. And then we also took total revenues, which was the previous category of general revenues. And then we added the money from public utilities and trust funds, such as the insurance trust funds. And this is the broadest measure of revenues in the state, and again, Alabama was above the regional average, ranking second of the five states, coming in at $1.02 to $1.06 per dollar in the other states. And also looked at total expenditures.

10:33Generally speaking, these things should balance out, so it's not surprising that total expenditures in Alabama were higher than the regional average and second highest of the five states, coming in at $1.05 to $1.08 per dollar in the other states. So the idea that the property tax is low is correct, but the idea that we don't somehow To now have enough revenue going into state governments is basically a myth. Well of that money that goes into state governments, does it go to education? Well Alabama spends the largest percent of their budgets on education.

11:21The sales tax in the state of Alabama and the income tax in the state of Alabama are earmarked into the Education Trust Fund. So they have very large sources of revenue that go into the Education Trust Fund and Alabama spent the largest percent of its overall budget on education. If you look at spending on a personal income per capita basis, Alabama fits neatly in in between the state of Florida and the state of Tennessee. So there's nothing out of the ordinary going on with respect to spending on education in the state of Alabama, except to the extent that Alabama spends a very large proportion of its budget on education.

12:09So again, it's a myth that somehow there's not enough taxation and revenue on an income basis going into education in the state of Alabama. The one thing that does stick out in the Alabama budget figures, it's really a glaring figure, is how much is spent on capital versus how much is spent on labor. In other words, how much money do we put into structures, buildings, technology, machinery, computers in government versus how much do we spend on labor? the wage bill, the fringe benefits, retirements, and so forth, for state workers.

12:59Alabama's expenditure on capital compared to the regional average was only 66 percent or two-thirds of the regional average. In other words, our surrounding states are spending much more of and more of their budgets on capital goods, and our labor bill was 25% higher than the regional average, so we're spending much more on paychecks, fringe benefits, retirements, and so forth with respect to state workers in the state of Alabama than the regional average. And this is very important in an economic sense. And the reason is, is that capital makes labor more productive. Taking an example from forestry, if you go out and hire somebody to chop down your trees, and you say, well, I'll give you this hatchet.

13:49You go down and cut down my trees. How many trees is that person going to be able to cut down in one day versus a chainsaw? You give them more capital and that person can cut down more trees per day. If you give them a motorized vehicle that simply goes out with giant scissors and cuts the trees down one after the other, that person is going to cut down a lot more trees. So capital spending is important for productivity. You get more production out of your workers and therefore you can justify higher wages if you're given more capital and that simply isn't the case here in the state of Alabama where we spend much less on capital and much more on labor.

14:44If we look at education, are there any other ways of solving the problem of education in the state of Alabama? Well, here the problem of labor versus capital does come into play. Enrollment in public education, in public schools in the state of Alabama, what would What would you say enrollment has done over the last 35 years? How much do you think it's gone up? Doubled? Quadrupled? No. Enrollment in public schools in the state of Alabama over the last 35 years has actually declined by 15 percent.

15:31That's the number of students in Alabama public schools has actually declined over the last 35 years, however, employment, isn't technology great, no that's fine, I was talking about cutting down trees, so I mean it went, the magic of technology, yeah, so the number of When our students is down, the employment in public education is up by 40 percent. We have now 40 percent more education workforce than we did in 1970.

16:17Salaries in the state of Alabama are above average compared to the regional average, and I think now even the national average. Research. So when I took a look at this, what I found was that since the early 1970s, that if you adjust everything for inflation and you put it on a per student basis, so how much does it real resources cost to educate a student in Alabama on an annual basis, and I found that Spending Has Increased by 150%. Now, I put that fact to the state superintendent of education.

17:04And he said, well, buses used to cost $5,000, and now they cost $50,000. But remember, I said that I've adjusted this for inflation already. So you can't justify something by saying prices have gone up, because I've adjusted that for inflation.

17:28I think there has been some improvement in education in terms of the quantity of education that's undertaking, but I think the quality of education in the state of Alabama has actually been declining despite the fact that we're spending more money. In other words, it's not how much students are learning, it's what they're learning. A lot of the basic components of education, reading, writing, math skills, things of that nature are down. I know that if I get a freshman student and they've never written a paper, they can't write legibly, they can build a web page for me, so they are learning certain things.

18:14They know the names of all the dinosaurs, everything that's ever gone extinct, things Literacy is declining in the state of Alabama as well as in a number of other states. In the state of Massachusetts, before mandatory education laws went into effect, literacy was almost 100 percent, it was recorded at 98 percent. Senator Ted Kennedy noted that literacy in the state of Massachusetts was down to 92%. The problem with public education is it's not consumer driven.

19:02It's bureaucratically driven, and that's very important. You think private schools are expensive. They're too expensive for a family to provide a private education, but public schools actually get twice the amount of money as private schools do. And the reason they are so expensive, and I'm adjusting for quality, adjusting for location, these studies have been done over and over and over again, and they basically come generally to the conclusion that public schools are twice as expensive as private schools. And it comes down to the fact that private schools are consumer driven, where public We've also seen a number of studies that show that generally speaking, this is not true in all cases, but generally speaking, spending more money on education doesn't necessarily improve achievement.

19:55The U.S. spends the second most amount of money on education worldwide on a per-student basis. The U.S. spends the second-most amount of money on education worldwide on a per-student basis, but we come in 18th on achievement tests. Even on our own national assessment test, less than 25% of students were proficient in all areas of the test. The solution is difficult to these types of problems, particularly in the state of Alabama because it basically requires a turning education upside down. Instead of being locally driven, because I think public schools could get better if they were better organized, but public schools originally were locally driven, where the money was raised in a locale, spent in a locale, in a locale, and the school board was basically held responsible for spending money.

20:59But in Alabama, the state drives most of the solutions, most of the decisions, excuse me, in terms of how the money is spent. And the federal government plays an increasing role. And the average citizen has absolutely no chance of influencing federal education or for State Education Policy compared to local educational policy where you can actually have an effect. You can actually go to a school board meeting, get up and start screaming about why the education for your son or daughter is not adequate. Some of the solutions would occur naturally if the local population controlled revenues and expenditures.

21:53And they would no doubt include the following. First, increase teachers as a percentage of the education workforce from just over 50 percent. In other words, teachers make up only 50 to 60 percent of the education workforce. That could be increased to 90% by eliminating the bureaucracy that now pervades public education. It would also include increased instruction time during the educational day. There's a lot of new reforms, all of which tend to be bad, one of which wants the students to be in school year round to increase the amount of instruction time. But you could increase instruction time by reducing extracurricular activities, study halls, things of that nature.

22:44So you wouldn't have to increase any of your expenditures. There's certainly a need to raise standards and to allow for the removal of non-performing students. There certainly is a need, an obvious one, for performance review of teachers. These are things that can be done without increasing expenditures very much. In other words, the solutions to the problems would be, would occur with a private schooling situation with local control of education. They're probably not going to happen with state and federal control, but the fact is that they could be changed. There's obvious ways in which they should be changed without any need for increased revenues. Thank you very much.

23:30quick question that wouldn't go over well with dr. Hubbard I mean and because the state controls all the revenues the unions of the union has a better access Do you think we'll ever have thousands of students eventually coming to a real gauge of what schools are at that time?

24:20Do you think we'll ever have a voucher? I think so. Because eventually, the total will be able to pay for the school. I think so. I think there's an increasing knowledge and acceptance of reforms in that direction, of vouchers and special schools and things that would occur in the private sector naturally and mimic the private sector naturally. Naturally, I think everybody's always concerned about education for their children, and as just a citizen without children, you want a better educated workforce. We need it for economic development. We can't man some of the new factories because our workforce doesn't have a high school education, in many cases, is not literate enough, and that's a stumbling block to economic development Is this information on your website? I mean, if you get this, I'd like to read it from my hand.

25:35I can I can send anybody a copy my email address oh you do okay just send me an email message and I can email you a copy of the published report some of the facts that I've given you here today on the later period and the most recent period Oh yeah, the number of teachers has increased far less than the supervisors and the bureaucracy and the other aspects of the employment, not just educational, in the schools themselves.

26:41There's been a big increase, and that's true in Alabama and elsewhere as well. Thank you very much.