FY16-17 Phase-out of Tangible Personal Property Tax (TPP) Replacement Payments to Ohio School Districts

In the late 1990s deregulation of natural gas, electricity and telephone markets led to the reduction of the property tax assessment percentages on natural gas, electricity generation, and new telephone personal property from 100% or 88% to 25%. The assessment percentage reductions resulted in the loss of significant local property tax revenue for schools and other local governments. In 2001, Senate Bill (SB) 3 and SB 287 created the Kilowatt Hour Tax and Natural Gas Distribution Tax in order to provide revenue streams that could be used to reimburse schools and local governments for the lost Public Utility Tangible Personal Property tax (PUTPP) revenue.

In 2005, House Bill (HB) 66 was passed which included a package of comprehensive tax reforms. Among these reforms was the phase-out over four years of the business tangible personal property tax. Business TPP included inventory, machinery and equipment, and furniture and fixtures and amounted to over $1.6 billion in local taxes of which roughly $1.1 billion went to Ohio public schools. House Bill 66 called for a five-year hold harmless period (Fiscal Year (FY) 06-FY10) where schools and other local governments would receive replacement payments equal to the lost local property tax revenue. The hold harmless period was intended to allow the legislature time to develop an allocation mechanism by which 70% of the revenues from the newly created Commercial Activity Tax (CAT) could be permanently distributed to Ohio school districts by way of compensation for the lost TPP tax revenues. 

However, the onset of the recession in 2009 and the ensuing precipitous drop in state revenues led to a tabling of the discussion of a more permanent replacement revenue formula for schools. As a result, SB1, the FY10-11 state budget (and the final budget of Governor Strickland), contained an extension of the TPP hold harmless period for schools though FY13.

After John Kasich’s defeat of Ted Strickland in the 2010 Gubernatorial election, the FY12-13 budget (HB 153) modified the original phase-out schedule for both the PUTPP and TPP replacement payments. Reimbursements for “fixed rate current expense property tax levies”  (i.e. “regular” operating levies) were to be reduced by a maximum of two percent of districts total state and local resources per year. PUTPP and TPP replacement payments were considered separately, so a district receiving both types of reimbursements could lose a maximum of four percent of total resources in both FY12 and FY13. Reimbursements of fixed rate non-current expense property tax levies” (mainly permanent improvement levies) were reduced by 25% per year in both FY12 and FY13. However, these levies comprise only a small fraction of the total TPP reimbursements. 

Because the FY10-11 state budget had extended the hold harmless period for school TPP replacement payments through FY13, Ohio school districts were decidedly unhappy with HB 153’s modified reimbursement formula. In response, the Administration argued that reductions in the replacement payments were necessary in order to bring the state budget into balance in the wake of the recession and the elimination of Federal stimulus funding. They also explained that the new “percent of total resources” method of phasing out the TPP payments that took into account ability-to-pay was more equitable than the original method that reduced all district’s reimbursements by the same pre-determined percentage. Of course, districts that experienced larger reductions under the “two percent phase-out” plan than they did under the original phase-out schedule did not find the new formula equitable at all.  Furthermore, the two percent reduction plan also meant the end of the original intention to provide an on-going replacement mechanism using 70% of CAT revenues.

Further Reduction in TPP Replacement Payments in FY16-17 State Budget

While the FY14-15 state budget froze TPP and PUTPP replacement payments at FY13 levels, Governor Kasich’s FY16-17 budget (HB 64) proposed the resumption of the phase-out of TPP replacement payments initially begun in the FY12-13 budget. The House, Senate and Conference Committee versions of HB 64 all retained the TPP replacement payment reductions. The HB 64 TPP reimbursements work as follows:

• Fixed Rate Current Expense (Operating) Levies – In FY16 and FY17, a single calculation will be made for combined business and public utility TPP replacement payments (as of FY15 there were only five districts that received PUTPP payments). This calculation will work as follows:

• • Districts in the lowest (poorest) property wealth quintile will see TPP replacement payments reduced by a maximum of one percent of total resources.
  • Districts in the highest (richest) property wealth quintile will see TPP replacement payments reduced by a maximum of two percent of total resources.
  • Districts in the three wealth quintiles in between will see TPP replacement payment reduction of 1.25%, 1.50%, and 1.75%, respectively. 

As a result of the declining percentage of total resources, the FY16-17 TPP reduction formula treats lower wealth school districts more favorably than did the FY12-13 reduction formula where all school districts could lose up to two percent of total resources. 

Importantly, HB 64 specifies that the TPP replacement payment phase-out will continue beyond FY17, at the same percentage rates described above.(Note that once the Ohio Department of Education (ODE) makes the official quintile calculations for FY16, the quintiles will NOT be recomputed each year. 

• Fixed Rate Non-Current Expense Levies (mostly Permanent Improvement Levies) –

In FY12 and FY13 replacement payments for fixed rate non-current expense levies were reduced by 25% each year so that districts receive 50% of the FY11 payment amount in FY13, FY14 and FY15. The FY16-17 budget provides that districts receive 25% of FY11 payment amounts in FY16 and no payment in FY17. Replacement payments for these levies totaled roughly $13 million in FY15. 

• Emergency Levies and Bond Levies – The FY16-17 budget provides that replacement payments for emergency levies be phased out by FY22. Prior law called for these payments to be eliminated in either FY17 (PU TPP) or FY18 (Business TPP). TPP replacement payments relating to bond levies will continue to extend until bonds are retired as was the case under current law in FY15.

TPP Replacement Payment Bottom Line

In FY11 total TPP replacement payments to schools were $1.129 billion. By FY13 total TPP replacement payments had been reduced to $510 million and remained at that level in FY14 and FY15. The Office of Budget and Management’s (OBM) original February 2015 estimates indicated FY16 payments will be $360.9 million, and FY17 payments will be $249.8 million. (These figures will change slightly however as ODE finalizes the total resources calculations with current data.) Thus the estimated FY17 TPP replacement payment amounts represent a 78% reduction in total TPP replacement payments to schools since FY11. 

When only current expense (operating) levies are considered, the governor’s proposal would reduce replacement payments from $420.1 million in FY15 to $282.5 million in FY16 and to $182.4 million in FY17. In FY11 these TPP payments were $985.9 million. Thus the estimated FY17 TPP replacement payment amounts for operating levies represent an 81.5% reduction in total TPP operating reimbursements to schools since FY11. 

Table 1 below provides a summary of school fixed rate operating levy TPP replacement payments from FY11 through FY17. FY16 and FY17 estimated amounts are based on the original February 2015 OBM quintiles and may change slightly once ODE computes the final FY16 quintiles. (These figures are shown in italics to indicate they are estimates.)

Table 1: FY11-FY17 School TPP Fixed Rate Operating Levy Replacement Payments

Source: Ohio Department of Taxation, Office of Budget and Management and Legislative Service Commission

Table two below shows the total fixed rate operating levy replacement totals from FY11-FY17 along with the number of districts receiving payments each year. The FY18 and FY19 figures are rough estimates prepared by Howard Fleeter based on the FY16 and FY17 amounts. These estimates are intended to provide a general sense as to how the TPP replacement payment phase-out will play out in the years beyond this budget.

Table 2: FY11-FY19 School TPP Fixed Rate Operating Levy Replacement Payment Amounts and # of Districts Receiving Payments

Source: Ohio Department of Taxation, Office of Budget and Management and Legislative Service Commission.  * FY18 and FY19 estimates prepared by Howard Fleeter for OEPI.

TPP Supplement: Temporary Hold Harmless from Replacement Payment Cuts

Finally, the House version of the FY16-17 budget included the “TPP Supplement” – an add-on to the state foundation aid formula designed to ensure that no district received less total state formula aid plus TPP replacement payment funding in FY16 and FY17 than in FY15. Rather than reversing the TPP replacement phase-out proposed in the executive budget, the TPP supplement worked by filling in any gap between additional state aid provided by the formula and reductions in TPP payments resulting from the phase-out.  For example, a district that received $500,000 less in TPP replacement payments in FY16 than in FY15 and received $300,000 more in state formula aid from FY15 to FY16 would also receive a TPP supplement of $200,000 in FY16. 

The Senate and Conference Committee retained the TPP supplement proposed by the House, and Legislative Service Commission (LSC) estimated the following fiscal impact:

FY16: 120 districts receiving a total TPP Supplement of $52.9 million

FY17: 109 districts receiving a total TPP Supplement of $84.2 million 

Governor Kasich retained the FY16 TPP supplement, but he used his line-item veto power to veto the FY17 TPP supplement. Because the HB 64 bill language approved by Conference Committee did not specify any provisions for the TPP supplement beyond FY17, the impact of the Governor’s veto is that the impact of the TPP replacement payment reductions will be felt one year earlier than intended. The 109 districts adversely impacted by the veto of the FY17 TPP supplement are distributed across the ODE school district typology groups as follows:

• 6 poor rural school districts ($2.0 million)
• 2 rural school districts ($156,000)
• 27 small town school districts ($5.9 million)
• 11 poor small town school districts ($4.0 million)
• 32 suburban school districts ($25.4 million)
• 22 wealthy suburban school districts ($25.9 million)
• 7 urban school districts ($5.2 million)
• 2 major urban school districts ($15.6 million)

The General Assembly has the power to over-ride the veto of the FY17 TPP supplement with a 3/5 super-majority vote by both the House and the Senate. However, at this time it is unclear as to whether the General Assembly will attempt to over-ride the veto or not.