The McCleary Debacle and The Upcoming Institutional Crisis

by John Stafford

INTRODUCTION

Once again, it appears that the State Legislature will fail to comply with the demands of the McCleary decision, which requires a significant increase in K-12 funding. I believe it is likely that this is about to lead to the biggest political crisis in the state in decades. I acknowledge that predicting policy outcomes is perilous, but I also believe that it is important to attempt to infer where this critical policy road is leading.

This article makes six claims — a mix of assertions, predictions and speculations. First, the Legislature will do nothing (as in zero) substantive in the 2016 Session to address McCleary. Second, the funding solution for McCleary is absolutely obvious. Third, this obvious solution won't be implemented by the Legislature. Fourth, due to the Legislature's inaction, the State Supreme Court will impose major (as in mind-boggling) sanctions at the end of the 2016 Session. Fifth, this will lead to a maelstrom of cross-institutional disparagement — Democrats against Republicans; Republicans against Democrats; Republicans against the Supreme Court; and the Supreme Court against Democrats and Republicans. Both parties will attempt to utilize this denunciation affair for political advantage in the 2016 State Elections. Sixth (pure speculation on my behalf), Democratic Party Leadership has decided, behind closed doors, to partially abet this descent into chaos, in order to expedite the Supreme Court's implementation of massive sanctions. That is, I think it is likely that Democratic Party leadership has decided to no longer challenge Republican anti-tax intransigence in order to spur the Supreme Court to do the work that the Legislature, left to its own devices, has proven unwilling to do.

This article seeks to defend the reasonableness of these claims. There are five sections: background on McCleary; Washington State tax history; tax reform as the obvious solution and the reasons it won't be enacted; the upcoming Supreme Court dispensation; and closing observations.

McCLEARY BACKGROUND

In 2012, the Washington Supreme Court ruled that the State was failing in its paramount constitutional duty — to amply provide for a general and uniform system of public schools, and it ordered the State to fully comply with its decrees by 2017. In 2014, the Court found that the Legislature was making inadequate progress toward compliance, and held the State in contempt (but without sanctions). In 2015, the Court made the same findings, but this time imposed sanctions (a $100,000 per day fine, which is still in effect). Then, just prior to the 2016 Legislative Session, the McCleary plaintiffs (anticipating another year of non-compliance) made two requests to the Court. First, they asked the Court to establish a fixed time schedule to rule on whether the Legislature has achieved compliance. Second, they asked the Court to consider severe sanctions if the Legislature fails to achieve compliance: closing the public school system, and/or repealing the state's tax exemptions to provide the funding necessary to comply. The Court has set a fixed time schedule for determining compliance, but not commented on what additional sanctions (if any) it will impose for non-compliance.

It is important to note that in prior years, the Legislature has added some funding (just over $2 billion per biennium) to partially address McCleary. However, much more funding is necessary (State Senator Reuven Carlyle estimates the amount at roughly $3.5 billion per biennium). The Court wants the Legislature to create a plan describing where this money will come from, how the responsibility for educational funding will be shifted from localities to the state, and how funding will be equalized across districts.

What has the 2016 Legislature done to satisfy the Court's demand for a plan? Very specifically: essentially nothing. Governor Inslee established a bipartisan task force — not to create a plan; but rather to create a plan for how to create a plan. This "plan for a plan" was promulgated in two companion bills (HB 2366 and SB 6195). Now, however, there is disagreement (over deadlines, etc.) between the parties over these bills. One might say that there is now the need to create a plan to resolve the obstacles necessary to pass the bills required to establish a plan to create a plan to comply with McCleary. This absurdity is compounded by the Legislature's proclamation that it now needs more data to create a plan — a startling revelation of ineptitude given that it is being made four years (not days) after the original McCleary decision. Thus, at just the time when the Court appears justifiably poised to escalate sanctions, the Legislature is engaging in silly, inconsequential machinations that will make no progress toward compliance.

Everybody knows the underlying reason for this McCleary debacle: Republican enmity toward the idea of new taxes in Washington State. This orientation is highly problematic, because the solution to McCleary is obvious: the introduction of new taxes in Washington State.

RECENT WASHINGTON STATE TAX HISTORY

Washington State's recent tax history has been astonishing. Economists often compare states on their total level of taxation (state and local combined) as a percentage of personal income. This quantifies the percentage of residents' income the state takes in taxes (the national average is about 10%). Based on this measure, over the past 25 years, Washington has been transformed from a high tax state to a low tax state.

The exhibit below shows the percentage by which Washington State was higher or lower than the national average in state and local taxes as a percentage of personal income, from 1990 to 2012 (the last year available for this dataset). Thus, in 1991, Washington State taxes were 8% higher than the national average (the data are $121.75 per $1,000 of personal income for Washington versus the national average of $112.67). Then, after a prolonged period of decline (driven by a series of decisions to reduce taxes), Washington emerged in 2012 with taxes that were 8% lower than the national average ($96.82 for Washington versus a national average of $105.24). The situation was even more pronounced in 2013 (using a slightly different dataset) — Washington State was more than 10% below the national average.

The implications of this rapid decline in taxes relative to personal income for the state's budget are enormous. If Washington merely moved back to the national average taxation level relative to personal income, it would lead to $3.4 billion more in revenue per year, or $6.8 billion per biennium — a huge figure, given that the state's two year operating budget is $38 billion. Since the cost of fully complying with McCleary is roughly $3.5 billion per biennium, the following statement can be made: by raising taxes, Washington State can fully comply with McCleary without even having to become a state with an average level of taxes relative to its personal income. Does this imply that Republican opposition to new taxes is dead wrong at this point in our state's history? In my view: yes.

It is important to understand that there are tremendous inefficiencies associated with trying to run a high-income state (Washington was 12^th in the nation in 2013) on a tax base that is low relative to its personal income. It leads to lawsuits regarding the under-provision of services (in addition to McCleary, Washington State has faced legal challenges over its mental health capacity and DSHS staffing levels), and to the use of inappropriate policies not used by other states in order to save money (e.g., the incarceration of youth for truancy and other "status offenses" — a deplorable practice used in Washington but seldom elsewhere, as recently reported by the Seattle Times¹). In short, it is expensive (both financially and in terms of peoples' lives) to operate a low-tax state.

THE OBVIOUS SOLUTION AND WHY IT WON'T BE IMPLEMENTED

Thus, the solution to the McCleary mandate is obvious: the state should institute significant new progressive taxation. This could be via any of a number of forms (income tax, capital gains tax, repeal of tax exemptions, etc.), but a capital gains tax on high income individuals is perhaps the most attractive at this juncture because it has the most political momentum. This would enable Washington to:

• Fully fund K-12 education.
• Fully comply with McCleary, eliminating existing and further potential sanctions.
• Move closer to the national average in state and local taxes as a percentage of personal income.
• Partially reduce the appalling level of regressivity in the state's tax code (Washington State has the most regressive tax system in the nation).
• Further diversify its tax system (over 40 states have a capital gains tax).
• Free up the Legislature to address the myriad other policy issues that require attention.

Governor Inslee proposed both a capital gains tax, and a cap-and-trade proposal to reduce carbon emissions that would generate new taxes for the state in 2015. Neither of these passed. There will not be a new tax in 2016, nor will there be a legislative commitment made in 2016 to institute new taxes in 2017 or 2018. But unfortunately, McCleary cannot be addressed without new revenue.

THE PENDING SUPREME COURT INTERVENTION

As noted previously, it is interesting to speculate on the strategy that Democratic Party leadership is currently adopting in this ongoing struggle. At his "2016 State of the State" address in January, Governor Inslee asserted — to an audience that included the State Supreme Court Justices — that the State will not be able to make significant progress on McCleary this year. This, coupled with the lack of any significant 2016 Democratic proposal to raise taxes, can be interpreted as representing a major shift in Democratic strategy on McCleary. Rather than continue to propose tax increases (and suffer the political damage from doing so), only to have them thwarted by Republicans, why not cease trying to make progress in the Legislature, and let the Supreme Court intervene and issue sanctions — possibly even a massive repeal of the state's tax exemptions? This approach could auger in the tax increase necessary to comply with McCleary without the expense of Democratic Party political capital. I speculate that this is the approach that Democratic Party Leadership has now adopted to deal with McCleary. It is worth considering that Republican Party Leadership may be relying on the same strategy (but in inverted form): force the Supreme Court to institute the tax increase, rather than capitulate to Democrats.

It is a virtual certainty that the Supreme Court will again find the State in 2016 to be in non-compliance on McCleary. It also seems likely that they will respond with escalated sanctions, possibly including a school shutdown and/or massive tax exemption repeal. If and when this happens, the sky will be the limit for acrimonious exchange between the parties and the Court. Representative Matt Manweller (R, Ellensburg) has already invoked World War II metaphors to criticize the Court's dissatisfaction with the Legislature's 40% funding of McCleary: "We could give them Czechoslovakia — it wouldn't appease the Court." One can only imagine the extent of the vitriol if the Court requires a massive repeal of tax breaks to fund the rest.

CLOSING COMMENTS

Several closing comments are in order. First, as suggested in the above analysis, McCleary is primarily an indictment of Washington State's tax system, not its education system. Washington has an appalling tax system — very low taxes relative to personal income, the most regressive system in the nation, and an insufficiently diversified array of tax sources. It is remarkable that this system exists in a state that is widely seen as progressive. Second, the McCleary dilemma is frozen — McCleary can't be addressed without raising taxes; Republicans won't allow taxes to be raised. Third, I argue that this is not a debate with two valid sides. Washington State should not be financed at a level 10% below the national average in terms of taxation relative to personal income. The state is paying a tremendous price for this misguided, low-tax orientation. Fourth, therefore, it appears increasingly likely, and appropriate, for this conflict to be decisively resolved by the Supreme Court. There should be no more "plans for plans"; instead, there should be an imposed new form of taxation introduced in Washington State. Fifth, this political phenomenon — the inability of legislatures to make progress due to deep ideological divide, and the ensuing action that must be taken — either at a higher level (the executive branch), or a lower level (e.g., via citizen initiative) — is playing out in other states and at the national level as well. Finally, although some of the predictions made in this article may not come to pass, it is difficult to see this McCleary crisis ending in anything other than tumultuous fashion.

John Stafford is a senior substitute teacher for Seattle Public Schools, and a former partner with Strategic Planning Associates, a management consulting firm in Washington, D.C. He was a candidate for State Senate in the 37^th Legislative District in the 2014 elections.

Note 1: See the Seattle Times' recent columns on Youth Homelessness for a discussion of responses to issues of youth truancy in Washington and other states.

Source of Data on Taxation in Washington State: Washington State Office of Financial Management.