Supreme Court ruling to reduce school funding

Cedar Rapids and Iowa City school districts are expected to lose up to $100,000 each starting next year because of a U.S. Supreme Court decision reducing the amount of money districts can get for instructional and physical plant levies.

The Iowa Association of School Boards estimates 12 Iowa school districts will be hardest hit, with western Iowa border districts, such as Sioux City and Glenwood, losing up to $290,000 per year.

'It reduces the amount of income a district can base taxing on for the PPEL (Physical Plant and Equipment Levy) or the instructional levy,” said Galen Howsare, association chief financial officer. To keep the same funding, 'either they need to increase the surtax percentage or increase the property tax amount.”

The association sent an email to districts Friday explaining the change.

In a May decision in Comptroller of the Treasury of Maryland v. Wynne, the U.S. Supreme Court ruled Maryland's practice of prohibiting out-of-state tax credits from being applied to county tax liability violated the commerce clause.

Iowa has a similar practice of allowing school districts to impose a local income surtax, such as the Instructional Support Program, Educational Improvement Program or the voter-approved PPEL, the association reported.

The surtax is based upon the amount of state income tax a taxpayer owes. Like Maryland, Iowa allows a credit for taxes paid to another state for work done across state lines.

'The Iowa Department of Revenue's previous practice was to calculate the surtax before applying the out-of-state tax credit,” the email states. 'This produced a similar result to Maryland's; that is, Iowa's out-of-state tax credit was only being applied to state income tax liability, not local tax (surtax) liability.”

About 85 percent of Iowa school districts use an income surtax and are expected to be affected to some degree, Howsare said.

The districts estimated to lose $250,000 to $291,000 each starting in fiscal 2017 are Glenwood, Lewis Central and Sioux City - all on the Nebraska border. Eastern Iowa border districts, such as Davenport and Bettendorf, aren't affected because they don't use a surtax.

Cedar Rapids and Iowa City are in the next tier of nine affected districts with $50,000 to $99,999 potential loss in fiscal 2017.

Steve Graham, executive director for business services for Cedar Rapids schools, said the district will probably just absorb the loss, which is relatively small in its overall budget.

The Mount Vernon district is expected to lose $10,000 to $49,999 in surtax funding.

'Anytime you lose $10,000 to $40,000, it will have an impact,” Superintendent Gary O'Malley said. However, the district's certified enrollment is up 50 students from last year, which will help even out the loss with per-pupil funding from the state, he added.

How it works

This hypothetical example shows how a recent U.S. Supreme Court decision may affect school surtax funding.

Edgar Dykman lives in a school district that imposes a 6 percent income surtax for schools. Dykman also has an out-of-state tax credit of $99 for income tax he's paid to Nebraska.

Dykman has calculated that he owes $175 in Iowa income tax before applying the tax credit or calculating the surtax.

Calculation before the Wynne decision:

Tax owed: $175

Surtax amount (6 percent): $10.50

Apply out-of-state tax credit: ($99)

Total Iowa tax owed: $76

Calculation after the

Wynne decision:

Tax owed: $175

Apply out-of-state tax credit: ($99)

Total Iowa tax owed: $76

Surtax amount (6 percent): $4.56

Source: The Iowa Department of Revenue