The Great Tax Switch After years of painful maneuvering, Michigan may have found a better way to finance public schools

By DAVID VAN BIEMA

Back in the 1640s, when the current method of financing public schools was developed, if a man had money, he put it into his land. There were no IRAs or Social Security. With property the best gauge of wealth, it made sense to pay for public schooling out of property taxes. Nor did anyone wonder about the wisdom of yoking schools to local real estate values; if nothing else, taxpayers knew exactly how their money was being spent.

After 350 years, however, methods have finally changed. Or so believes John Engler, the Governor of Michigan. After years of debate about school finance, his state's voters took what may be a historic step. Under Engler's leadership, they replaced property taxes almost completely as a means of funding their 3,286 public schools. Instead, by a 69% majority, they agreed to raise the state sales tax from 4% to 6% and to increase the tax on a pack of cigarettes from 25 cents to 75 cents. At the same time, they adopted the Governor's proposal to raise the minimum amount the state's schools must spend per pupil from $3,277 to $4,200.

On one level, the vote was simply the latest machination in Michigan tax politics, which resembles nothing so much as a billion-dollar game of chicken. Engler, a Republican, won the governorship in 1990 by less than 1% after promising in the campaign to cut property taxes 20%. His attempts to do so -- and to replace the revenues by increasing the sales tax -- were rejected by the voters until last summer, when state Democrats, in an apparent act of political grandstanding, proposed to do away with education-funding property taxes without naming any alternative revenue source. To the applause of some onlookers and the horror of others, Engler took them up on it, promising to find some way to make up the money. Until the vote last week affirmed his method, the possibility loomed that public education in Michigan, penniless, might screech to a halt -- along with Engler's political career.

| And yet the Michiganders' decision also has tremendous national resonance. It presented itself at a moment when property-tax funding of education had become a multistate catastrophe. Fairness is the issue. Owning a valuable dwelling, for example, is no longer the sign of a hefty income. Homeowners angry at being repeatedly dunned on the basis of a long-paid-for house have become the nucleus of a nationwide anti-property tax rebellion whose most jarring manifestation occurred, as it happens, in Michigan. In March 1993, public schools in the town of Kalkaska shut down after citizens rejected the school levy. Just as alarming are potentially crippling court cases in more than 40 states provoked by the ghettoization that results when only districts with high real estate values can finance decent schools.

In such desperate straits, Engler's radical solution became attractive. After the vote last week, Ernest Boyer, president of the Carnegie Foundation for the Advancement of Teaching, declared, "One thing is clear. A more equitable and stable method of financing public schools must be found, and Michigan has clearly taken a bold step in that direction." Officials in Rhode Island, South Carolina, New Hampshire and Vermont all asked for detailed projections of Engler's plan.

Not everyone was so enamored of it. Sales taxes are regressive: poor people who exhaust their earnings on taxable goods and services will be hit harder than the well off, who spend less of their disposable income. And although the per-student minimum gave it the appearance of egalitarianism, that impulse seems offset by a loophole exempting the state's 40 wealthiest districts from limits on per-pupil spending. Furthermore, sales-tax revenues are notorious for sudden plunges when consumer spending slows down during a recession. Warns Raymond Mackey, a regional director of the American Federation of Teachers, which opposed the measure: "There will be fiscal problems in the future. That's not a warning but a fact."

Indeed, Michigan voters, who had turned down five previous sales-tax hikes, voted for this one only because Engler had arranged that if it was defeated, the automatic alternative would be a dreaded income-tax increase. If enough voters felt whipsawed by this unappetizing choice, their next chance to express it would be when Engler runs again this November.

Nonetheless, a close aide of Engler's described him as "ecstatic" at his plan's victory, and a referendum-night party at the Sheraton Lansing Hotel < turned into a noisy rally for his re-election. For 20 years something of a Republican hatchet man in the state legislature, he risked a rap for callousness during his first gubernatorial year when he abruptly eliminated the state's nonfamily-welfare program: the following winter, several former recipients froze to death, homeless. Last week's deal, which was supported by Detroit's mayor Dennis Archer, a liberal Democrat, made Engler look more statesmanlike. It also seemed to put him on the side of the children, which to a politician is like being on the side of the angels. Last week some of his supporters in the conservative wing of the Republican Party began mentioning him for national office.

With reporting by Andrea Sachs/New York and Joseph R. Szczesny/Detroit