Taxes, Teacher Wages & School District Resource Allocation in New Jersey

Taxes, Teacher Wages & School District Resource Allocation in New Jersey Bruce D. Baker

Recurring Media Claims • New Jersey is the most taxed state in the nation, • Our taxes are driving our economy into the ground and we’re falling way behind all other states, • Our teacher salaries which are completely out of control are the reason why our taxes are out of control, • School districts don’t have to cut teachers to get their budgets in line because school districts waste most of their money on administration anyway. • Of course, these last two claims are entirely inconsistent, but often spouted by the same pundits (primarily talk radio). If escalating teacher salaries were the cause of escalating costs, then teacher salaries – or teachers themselves – would need to be cut.

Part I New Jersey’s Tax Burden

Take Home Point • New Jersey is not, in fact, the highest taxed state in the nation. • Our property taxes are high, but our income and sales taxes are modest by comparison. • We’re also not number one in property taxes when all states are considered and when property taxes are measured as a percent of income.

State & Local Government Finance Data Query System. http://www.taxpolicycenter.org/slf-dqs/pages.cfm. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments (Years). Date of Access: (12-Feb-10 09:55 PM)

Part II Economic Productivity in New Jersey over the Long Run

Take Home Points • New Jersey remains high in gross state product (gross domestic product – state) per capita. • Our growth has been only modest, but some of those states in our region that have outpaced us in recent years are actually states with higher tax burdens (NY). This is obviously not causal – ONE WAY OR THE OTHER! • New Jersey also remains high in per capita income and has held pace over time despite apocalyptic claims that all of the state’s high income residents are exiting the state in droves.

Gross Domestic Product (state) per Capita New Jersey Data Source: Bureau of Economic Analysis, Regional Economic Accounts, http://www.bea.gov/regional/

Gross Domestic Product (state) per Capita(Northeast) Data Source: Bureau of Economic Analysis, Regional Economic Accounts, http://www.bea.gov/regional/

Personal Income per Capita New Jersey Data Source: Bureau of Economic Analysis, Regional Economic Accounts, http://www.bea.gov/regional/

Personal Income per Capita(Northeast) Data Source: Bureau of Economic Analysis, Regional Economic Accounts, http://www.bea.gov/regional/

Part III Teacher Wages – Out of control?

Take Home Points • Teacher salaries have actually declined with respect to non-teacher wages over time in NJ, even when comparing wages for the same number of hours and weeks worked, and at same degree level and age. • Despite a mythology that all non-teachers work every day of every week of the year and that teachers work about half the year, non-teachers actually report working about 48 weeks per year compared to teachers 42 weeks. Teachers worked about 87% of the weeks worked by other non-teacher workers in NJ. • Comparing different data sources (something I prefer not to do), teachers at specific experience and degree levels appear to earn an annual wage about 67% of that of their non-teaching peers – annually. Okay, but they don’t work as many weeks. So, they earned 67% of the wage for working 87% of the time. Still a significant disparity. • Teachers’ annual income return to experience (or age) is well less than that of non-teachers over much of their careers. Assuming teachers and non-teachers start at a similar wage at age 23 with a masters degree (around $50k), by age 40, the average non-teacher will be earning over $100k, while the average teacher will be approaching $80k . • Certified staffing salaries for public schools, as a percent of total state and local expense, have declined over time!

Teacher Hourly Wage as % of Non-Teacher HourlyStatewide Data Source: US Census 1990 & 2000, American Community Survey 2005 - 2007

Regression Model Estimates of Teacher & Non-teacher Wages Data Source: US Census 1990 & 2000, American Community Survey 2005 - 2007 Based on Statewide Model for worker 40yrs old, 40hrs for 40 wks

Hours Worked Last Year Data Source: US Census 1990 & 2000, American Community Survey 2005 - 2007

Annual Teacher Wages and Non-Teacher Wages at Fixed Age/ Experience, Location and Degree Level Data Sources: Non-Teacher Wages from US Census 2000, American Community Survey 2005 - 2008 based on regression model of wages controlling for age, location, degree level and year. Teacher wages based on NJDOE Personnel Files also using regression model controlling for experience, degree level, location, position type and year.

New Jersey Elementary and Secondary Certified Staffing Wages as a Percent of State and Local Expenditures Data Sources: A) NJDOE Certified Staffing files B) State & Local Government Finance Data Query System. http://www.taxpolicycenter.org/slf-dqs/pages.cfm. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments (Years). Date of Access: (22-Mar-10 09:55 AM)

Returns to Experience/Age for Teachers and Non-Teachers (at fixed degree level, location) Data Sources: Non-Teacher Wages from US Census 2000, American Community Survey 2005 - 2008 based on regression model of wages controlling for age, location, degree level and year. Teacher wages based on NJDOE Personnel Files also using regression model controlling for experience, degree level, location, position type and year.

Note regarding benefits & bias • Corcoran and Mishel point out here: http://epi.3cdn.net/05447667bb274f359e_zam6br3st.pdf that • “…overall K-12 teacher compensation was 27.5% greater than teacher wages alone, while overall professional compensation was 23.5% greater than professional wages. These differences in benefit shares translate into a benefits “bias”of 2.8 percentage points in 2006.” • That is, benefits would close little of the overall gap in wages, even if the bias is somewhat larger in NJ. • Costrell and Podgursky show about a 5% (slightly less) differential (10% non-teachers, 15% teachers) in the value of pensions, a portion of benefits. This too would close only part of the teacher to non-teacher wage gap in New Jersey, even if we assume New Jersey benefits for teachers to be much greater than other employee benefits.

Part IV District Resources and the Growing “Administrative Blob”

Take Home Points • Classroom instructional spending as a share of budgets has remained relatively constant over time, and poor urban districts are in line with other NJ districts in this regard. • Total administrative expenses as a share of school district budgets have remained relatively constant for nearly 15 years and large poor urban and Abbott district administrative expenses are in line with (and lower than) other districts. • School level administrators are a relatively small share of school personnel. Not shown here, but also relevant is the fact that school level administrative salaries are only marginally higher than senior teacher salaries. As such, it is highly unlikely that one can cut substantially close budget gaps by cutting “administrative fat” alone.

Percent of District Budgets Allocated to “Classroom” Instruction over Time Data Sources: Comparative Spending Guide reconciled with Annual Financial Report detail for NJ School Districts 1995 to 2006.

Percent of District Budgets Allocated to “Classroom” Salaries for Instruction over Time Data Sources: Comparative Spending Guide reconciled with Annual Financial Report detail for NJ School Districts 1995 to 2006.

Percent of District Budgets Allocated to Total Administrative (District and School Level) Expense Data Sources: Comparative Spending Guide reconciled with Annual Financial Report detail for NJ School Districts 1998 to 2006.

Percent of District Budgets Allocated to Total Administrative (District and School Level) Expense Data Sources: Comparative Spending Guide reconciled with Annual Financial Report detail for NJ School Districts 1995 to 2005. (not weighted for district enrollment)

Elementary School Staff per 100 Pupils Data Source: NJDOE Staffing Files 2006-07

Middle School Staff per 100 Pupils Data Source: NJDOE Staffing Files 2006-07

High School Staff per 100 Pupils Data Source: NJDOE Staffing Files 2006-07

Part V State Revenues, Expenditures and Debt over Time

Per Capita Revenue, Expenditure & Debt 2001-2002 revenue shock Data Source: State & Local Government Finance Data Query System. http://www.taxpolicycenter.org/slf-dqs/pages.cfm. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments (Years). Date of Access: (22-Mar-10 09:55 AM)

State General Revenues and Expenditures Data Source: State & Local Government Finance Data Query System. http://www.taxpolicycenter.org/slf-dqs/pages.cfm. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments (Years). Date of Access: (22-Mar-10 09:55 AM)

Per Capita Debt Across States Data Source: State & Local Government Finance Data Query System. http://www.taxpolicycenter.org/slf-dqs/pages.cfm. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments (Years). Date of Access: (22-Mar-10 09:55 AM)

Part VI Notes on Tax and Expenditures Limits

TELs & Student Teacher Ratios • David N. Figlio • SHORT-TERM EFFECTS OF A 1990S-ERA PROPERTY TAX LIMIT: PANEL EVIDENCE ON OREGON’S MEASURE 5 • National Tax Journal Vol 51 no. 1 (March 1998) pp. 55-70 • I use a comprehensive panel of school districts from Oregon and Washington, with annual data from before and after Oregon imposed its limitation in 1990. Controlling for unobserved heterogeneity, I find that Oregon student-teacher ratios have increased significantly as a result of the state’s tax limitation.

TELs & Teacher Quality • David N. Figlio and Kim S. Rueben • Tax limits and the qualifications of new teachers • Journal of Public EconomicsVolume 80, Issue 1, April 2001, Pages 49-71 • This paper examines the impact of local tax limits on new teacher quality. Using data from the National Center for Education Statistics we find that tax limits systematically reduce the average quality of education majors, as well as new public school teachers in states that have passed these limits. The average relative test scores of education majors in tax limit states declined by ten percent as compared to the relative test scores of education majors in states that did not pass limits. This relationship is strengthened if we control for school finance equalization reforms or examine tax limits passed in two different periods.

TELs & Student Outcomes • Downes and Figlio working paper: • http://ase.tufts.edu/econ/papers/9805.pdf • In this paper, we find compelling evidence that the imposition of tax or expenditure limits on local governments in a state results in a significant reduction in mean student performance on standardized tests of mathematics skills.

Massachusetts Prop 2 ½ • David M. Cutlera ,*, Douglas W. Elmendorfb, Richard Zeckhauserc • Restraining the Leviathan: property tax limitation in Massachusetts • Journal of Public Economics 71 (1999) 313–334 • Proposition 2 ½, a ballot initiative passed in Massachusetts in 1980, sharply reduced local property taxes. We examine why voters supported Proposition 2 ½, using data on votes for the Proposition and for overrides of it a decade later. We find two reasons for the Proposition’s support: people perceived agency losses from the difficulty of monitoring government, and people judged government to be inefficient because their tax burden was high. By the 1990s, people either regretted the severity of the Proposition’s constraints or felt that its mission was accomplished.

Massachusetts Prop 2 ½ • Phil Oliff and Iris J. Lav • HIDDEN CONSEQUENCES: LESSONS FROM MASSACHUSETTS FOR STATES CONSIDERING A PROPERTY TAX CAP • http://www.cbpp.org/archiveSite/5-21-08sfp.pdf • A tax cap won’t make government services cost less. A cap does not prevent employee health insurance costs, special education costs, or other costs beyond localities’ control from rising much faster than the cap allows. Nor does it hold down the cost of heating buildings, buying gas for police and fire vehicles, and operating schools buses when the world price of oil is skyrocketing. When these things occur, as they have in Massachusetts, other services have to be cut to fit total expenditures under the cap. • Claims that caps will produce large savings through “efficiencies” are overblown. There are fewer efficiencies to realize from squeezing down revenues than cap proponents generally suggest. One person’s “efficiency savings,” such as the elimination of a police or fire station, may represent the loss of a critical service for another person. Ultimately, a property tax cap is highly likely to lead to reductions in basic community services and a deterioration in the quality of life in many communities — particularly in communities that cannot routinely override it.

Massachusetts Prop 2 ½ • Phil Oliff and Iris J. Lav • HIDDEN CONSEQUENCES: LESSONS FROM MASSACHUSETTS FOR STATES CONSIDERING A PROPERTY TAX CAP • http://www.cbpp.org/archiveSite/5-21-08sfp.pdf • Tax caps can be particularly harmful if adopted during a weak economy. Proposition 2½ took effect during a period of extraordinary economic growth — the “Massachusetts Miracle.” State revenues were rising, which allowed the state to boost aid to compensate for constrained property taxes, and construction was expanding, which allowed communities to raise their property tax revenue by more than 2.5 percent per year. If a state were to adopt a property tax cap during an economic slowdown or a period of weak state revenue growth, a major sustained infusion of state aid would not be possible and property tax revenue growth would be more constrained. As a result, schools and other services dependent on the property tax would have to be cut much more severely than in Massachusetts. • State aid can’t be relied upon to fill the gap. Even when state policymakers fully intend to expand state aid to fill local funding gaps created by a cap, a recession or fiscal crisis will usually derail this plan. State aid to localities in Massachusetts has fluctuated greatly with the business cycle and with state policy decisions. In any other state that might implement a cap, local government and school budgets are likely to become more volatile.

Massachusetts Prop 2 ½ • Phil Oliff and Iris J. Lav • HIDDEN CONSEQUENCES: LESSONS FROM MASSACHUSETTS FOR STATES CONSIDERING A PROPERTY TAX CAP • http://www.cbpp.org/archiveSite/5-21-08sfp.pdf • Changes in school enrollment can have a big impact. The adoption of Proposition 2 ½ coincided with a decline in Massachusetts’ K-12 enrollment, allowing schools to operate with less revenue. If another state adopted a property tax cap during a period of steady or rising enrollment, it would be forced to impose much more extensive cutbacks in teachers, classes, and programs than those seen in Massachusetts. • Without effectively targeted state aid, low-income communities will fall even further behind. Massachusetts has a highly targeted system of aiding local governments. The influx ofstate aid seems to have shielded low-income communities somewhat from Proposition 2 ½’stendency to exacerbate differences in services between high- and low-income communities. Butwhen state aid has receded as a result of economic downturns or state policy decisions, thepoorest communities have had to make the largest budget cuts.In states that do not have a system of school aid that is targeted as effectively as Massachusetts’, students in low-income communities are likely to fall increasingly behind students in schools that have greater resources. • Wealthier communities will override a tax cap more frequently than poorer ones. This has contributed to a growing spending gap between local governments in high-income communities and all other communities, despite Massachusetts’ progressive system of state aid. This is likely to occur in other states that implement a cap.

Taxes, Teacher Wages & School District Resource Allocation in New Jersey