Is Tax Boon for Business A Bust for the Schools?

Mary Murphy doesn't have much patience with companies that negotiate their way out of paying local taxes used to support public schools.

The Cleveland teacher pays her taxes every year along with donating about $1,000 in school supplies for her students.

"We don't have the textbooks we need to do our job," says Ms. Murphy. "Now we're asking business to ante up to the table."

The request comes in the form of a landmark referendum before Cleveland voters on Aug. 5. It's the first time voters anywhere in the country have been asked whether to limit property-tax breaks meant to encourage economic development.

The Cleveland Teachers Union collected 33,000 signatures to get the measure on the ballot in a special election. If passed, it would require city officials to keep their hands off tax dollars designated for public schools.

Although Cleveland is blazing a trail on the issue, states such as Texas and Nebraska are also reconsidering corporate tax breaks.

The practice of abating property taxes has long roots in the competitive world of urban development. But school officials have just started to speak up.

"States are starting to take a closer look to see if this is having the intended purpose," says Scott Mackey, a fiscal analyst at the National Conference of State Legislatures in Denver. "They're asking whether these developments would have taken place without the [tax] incentives."

In the struggle to keep urban America alive, the battle lines are being drawn between advocates for the economy and supporters of public education. While city officials dangle tax deals in front of corporate leaders, educators see potential revenues fading into the distance behind glittering new office towers.

"Sure, we have a nice skyline now," Murphy says. "But if we really want to be the Comeback City, we also need the schools to come around."

While the downtown economy prospers, Cleveland public schools are foundering in a sea of debt. Two years ago, the state took over the system after it ran out of money halfway into the year. Just this month, the state legislature voted to give the mayor rather than the school board direct control of Cleveland's 72,000-student school system.

"We're losing $21 million a year, and there's no realistic end to it," says Richard DeColibus, president of the Cleveland Teachers Union. "What we're saying is: 'Leave your hands off our share of the property-tax dollars.' "

City officials agree the city has given overly generous tax breaks to corporations in the past. "We should not be creating a collision between economic development and school funding," says Jay Westbrook, president of the Cleveland City Council.

Mr. Westbrook supports limiting or banning tax breaks for economic development - but only if it's done statewide.

A ban in Cleveland alone would put the city at a disadvantage when competing with rich suburbs, Westbrook says. Corporations view tax abatements as an "entitlement," he adds. "With their mobility of capital, they play cities off of each other."

Cleveland is no longer offering abatements for downtown office or hotel space, Westbrook says. And the City Council has been looking for creative-financing deals.

When the city landed the Rock and Roll Hall of Fame, for example, council members cut a deal giving the schools 6 percent of admission-ticket revenue in lieu of property taxes. Last year's take was more than $450,000, but still less than schools would have received through property taxes.

For some state legislators, such deals don't go far enough. In Texas, state Sen. David Sibley (R) has proposed ending all school property-tax abatements. Schools don't get much benefit from new jobs created by luring companies into town, he argues. They would be better off gaining the tax revenue.

A bill backed by the Missouri School Boards Association would require a cost-benefit analysis before tax deals could be made. Officials would have to sign a statement that the project would not have happened without the tax break.

In an age when businesses are crying out for more skilled workers, Murphy views it as the "height of hypocrisy" for corporations to resist paying their share of taxes. She laughs at the corporate partnerships with schools. "When you have a business supporting your schools, and they're giving you pencils for your incentives, it's not anywhere near the millions of dollars that are needed."

Companies such as AT&T point to their $150 million initiative to help connect school computers to phone lines as an indication of their commitment to education.

Next month, Cleveland voters will have their chance to weigh in on the debate.

If the ballot measure passes, Westbrook says it will "result in an accelerated loss of jobs and cut deeply into the development of affordable housing."

Mr. DeColibus says a "yes" vote will secure the school district's financial future.