Michigan governors submits school plan with tax increases, revenue sharing cuts.

CHICAGO - Gov. John Engler of Michigan yesterday unveiled his school financing plan that calls for increasing taxes, instituting new ones, and eliminating about $774 million in state revenue sharing for local governments.

The plan would raise an estimated $6.6 billion for public schools.

Engler also called for fundamental changes in the educational system, including the ability of parents to choose which public school their children will attend, the creation of charter schools, and a guaranteed annual per pupil spending level of $4,500.

In a speech to the Legislature, Engler said it was time to deliver a "better education" for children and a property tax cut for residents. The tax cut was made possible when the Legislature in July eliminated about $6 billion of property taxes levied by elementary and secondary school districts for operating purposes. On Aug. 19, Engler signed the measure into law, trumpeting it as a "historic opportunity" for his state to rethink the way education is delivered and financed.

The measure eliminates property taxes for operating purposes as of July 1, 1994, the start of fiscal 1995 for the schools. Property taxes levied for unlimited tax general obligation debt were left intact by lawmakers.

Engler's plan to replace the property taxes includes:

* Increasing the state sales tax to 6 cents from 4 cents, to raise $1.8 billion.

* Raising the single business tax by 0.5%, to raise $419 million

* Imposing a statewide property tax of 16 mills on business, second homes, and non-residential property, to raise $1.2 billion

* Instituting a 4% real estate transfer tax, to raise $479 million

* Hiking the cigarette tax by 50 cents a pack, to raise $350 million.

The governor also called for eliminating about $774 million in state revenue sharing to local governments. In its place, Engler proposed a constitutional change that would allow cities, counties, townships, and villages to levy without voter approval two to six property tax mills to make up for the revenue loss.

"The replacement revenue package I am proposing is fair and responsible; it spreads the burden of paying for our schools so that no one sector of our population gets stuck holding the bill," Engler said in his speech. "And it provides the means to pay for high-quality instruction throughout our state, so that every school can bring a world-class education within reach of its children."

Nick Khouri, Michigan's chief deputy treasurer, who helped craft the governor's plan, said that voter approval is required for the sale tax increase, the business and non-residential property tax, and the replacement property tax mills for local governments. He said that if approved by a two-thirds vote in each legislative chamber, those measures would be placed on the Feb. 8 ballot in the form of one constitutional question.

Khouri said that the sales tax increase would be in effect only until November 2000, when voters would have to renew the increase.

Last June, voters defeated a bipartisan plan that would have raised the state sales tax to 6 cents, cut school operating millages from an average of 34.6 mills to a maximum of 18 mills, and used the $1.8 billion a year from the sales tax raise to reimburse schools and equalize state funding of schools. In November 1992, two other measures to cut property taxes and limit assessment growth were also turned down by voters.

Rating agency officials raised questions about Engler's proposal.

"The key to the plan is still convincing voters to accept it," said Claire Cohen, executive vice president of public finance at Fitch Investors Service.

Paul Devine, a vice president and assistant director of the Great Lakes Region at Moody's Investors Service, said the plan is "notable for the multitude of issues it raises."

One problem area is Detroit, which even with the replacement mills proposed by the governor will fall short of the amount of revenue sharing it has been receiving from the state. Khouri said the governor will support a plan to appropriate $190 million a year to make up for the city's shortfall.

Devine said that Detroit has sold debt secured by an intercept of its state revenue sharing. He also raised questions about replacing school property taxes for tax increment financing bonds, as well as how schools will operate under the structural changes envisioned by the governors.

In July Moody's said the ratings of 60 school districts are in jeopardy due to the elimination of property taxes for operating purposes.

Joe O'Keefe, a director at Standard & Poor's Corp., said that while all governments in the state would be affected by the plan, "it is difficult to assess the effect on the individual governments."

A spokeswoman for Senate majority leader Dick Posthumus, R-Alto, said that the senator "applauds the governor for action in moving the state forward in the area of charter schools."

In the area of financing, Posthumus encourages the state lawmakers to consider other cost-cutting measures instead of levying a tax on single businesses, the spokeswoman said.

She said that Posthumus will be working with both House and Senate members to complete action on the governor's plan by the end of November. Legislation is expected to introduced next week, she said.

House Democrats in a press release accused the governor of "playing a shell game" with his proposal to eliminate revenue sharing, which they say will force local governments to raise taxes to provide the same services they provide today.

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