I. Introduction
School finance equalization (SFE) has affected American
schools in the areas of school spending, private schooling, and achievement for
over 30 years. Economists have become interested of SFE because optimal social
investment in human capital depends on how school spending is distributed
across students. However, in spite of its importance, SFEs are still poorly
understood in practice.
State courts and legislators are confused, not on their
goals or legal issues, but on how to implement such goals. States have relied
on lawyers rather than economists for the implementation of programs. Owing to
this, the schemes became manifestations of legal rhetoric of equalization
rather than economic logic about taxation and redistribution. As such, equalization debates and court cases
recur and states have started to give up understanding school finance to
identify trial-and-error methods of finding suitable schemes.
SFE schemes sometimes bring results that were not intended.
They can reduce total school spending even if it is divided evenly (levelling
down). Hence, greater equality in spending also brings lower average spending.
In extreme cases, spending may possibly drop even in districts that were meant
to be beneficiaries. Several commentators from the famous California SFE
argued, however, that the spending reduction that they experienced was not a
result of levelling down and was not associated with SFE.
II. School Finance Schemes
A. Pure Local Property Tax Finance
The core of most state systems remains to be local property
tax finance. Districts spend their local property tax revenue and households
divide their disposable income among property taxes, housing consumption and
other consumption.
B. Categorical Aid
Before SFEs became popular, categorical aid was the most
famous method of redistribution among school
districts. Unlike SFEs, categorical aid is financed by state income or sales
taxes. It is also manifested on one or more district attributes – like mean
household income or poverty rate – but not on property values as with the case
of SFEs. This type of aid seeks to help school districts that are liquidity
constrained or those that have children that are expensive to educate. With
flat categorical aid, the disposable income of households is reduced by a
school-related tax on income. Each district then receives a grant for each
student that is a function of the income and demographics of households.
Meanwhile, matching grant categorical aid schemes matches spending that were
raised locally[1].
C. Foundation Aid
The most common type of SFE scheme is the foundation aid
(FA). FAs are like flat grant categorical aids except that they redistribute
not on socio-demographic characteristics of households but among districts
based on per-pupil property values. FAs are usually self-funding, so that total
foundation taxes that are paid equates to the total foundation grants
disbursed. Moreover, FA programs are more stringent in states where the
foundation grant is higher relative to per-pupil spending.
D. Power Equalization/Guaranteed Tax Revenue Schemes
Guaranteed Tax Revenue (GTR) and power equalization schemes
are often used by states who intend to employ stringent equalization. These
schemes attempt to make the same tax rate yield the same revenue for each
school district in the state. Many GTR schemes provide equal revenue for each
school district in the state. They also offer stronger redistribution for
districts that have higher tax rates. These schemes are self-funding at times,
where tax rates and guarantees are selected to make sure that contributions
from high property value per pupil districts help those that have low property
value per pupil. To prevent districts from bailing out of GTR schemes, states
require a minimum local tax rate. GTR schemes make each district's tax price –
the amount of revenue it has to raise in order to spend an extra dollar – a
positive function of its per-pupil valuation. A district's tax price can be
derived by differentiating its budget constraint with respect to its local tax
rate.
III. School Spending Under Various School Finance Schemes
School finance schemes are not always mysterious. They can
be characterized by a few variables that summarize their income and price
effects. It was observed that they level down compared with categorical aid
schemes that are supposed to achieve the same amount of redistribution. This is
one of the consequences of having a scheme for redistribution among
jurisdictions based on assets whose prices rest on how people regard the
jurisdictions. If the few crucial variables are used, the conflicting evidence
on the effects of SFE can be settled.
Both categorical aid and SFE can decrease the distribution
of spending. Theory, however, does not indicate how categorical aid and SFE
affect spending significantly. Whether categorical aid levels are up or down
compared with local finance is still an empirical mystery. Even though GTR or
matching grant categorical aid can influence tax prices, almost all actual
variation in tax prices is generated by GTR schemes.
IV. Beyond the Direct Effects of Equalization on Spending
Beyond the direct effects of SFEs, it was observed that the
consequences of SFEs can be capitalized. Also, some SFE schemes have integrated
feedback loops that augment the chance of leveling up or down. Meanwhile, Silva
and Sonstelie (1995) mentioned that an SFE may begin with mean state spending,
but the target will eventually move towards the median level of preferred
spending in the state because of the decisiveness of the median voter.
Households are having a hard time enrolling to their desired
schools after an SFE may shift to private schooling. They might send their
children to private schools or create local educational foundations that
privatize parts of local schooling. SFEs may also affect student achievement by
changing school resources and schoolmates.
It was detected that achievement is likely to increase more
among low-performing students than among high-performing ones. Lastly, even an
equalization that initially levels up can level down as it ages if voters
respond to the SFE by constraining the state (through property tax limitations
and targets that are strictly tied to inflation) so that future adjustments in
the formula cannot further utilize their property wealth.
V. Data
Data on expenditure, enrolment, property values, property
tax rates, socio-demographic characteristics, and information about each
state's school finance laws were derived from the following sources:
- Census of Government Data (1972, 1982, 1992)
- Census of Population And Housing data summarized at the school district level
- Consolidated districts and special districts
- Property values from statistical abstracts as well as data from the Census of Population and Housing
- The Public School Finance Programs series I derived basic information on school finance laws from the
- Series of Public School Finance Programs (1968-1969, 1970-1971, 1978-1979, and 1987-1988 school years)
VI. Facts about School Finance Equalizations
Close examination of SFEs from 1970 to 1990 reveals
interesting facts. First, the incentives imposed were not accurately revealed
by the categorization into court-ordered, legislative, and "no
equalization". It was also observed that the majority of states in the
"no equalization" category have equalization activity. This activity
suggests that judicial or political situations can make an SFE known, even if
it is more modest than other states' routine changes to their school finance
laws. Furthermore, some court-ordered and legislative "equalizations"
change parameters in an anti-equalization direction.
Such behavior makes one doubt whether a dummy variable for
equalization will correctly represent the economic content of school finance
schemes or the usefulness of an empirical strategy with two dummy variables.
VII. Estimation Strategy
The values of the school finance variables were calculated
for every district in the United States in 1970, 1980, and 1990. This brought
all of the schemes into a common framework. Regression analysis was utilized to
estimate the effect of SFE on the following outcomes:
· The
level of per-pupil spending
· Inequality
in per-pupil spending
· Property
values
· Private
school attendance
· Student
achievement
An education production function was estimated in the last
case using the high school drop-out rate as the measure of student achievement
and SFE as a shock to districts' spending. Endogeneity of the observed values
of the school finance variables was accounted by simulating the values each
district would face if it were to have remained at its pre-SFE tax rates,
spending, and property values.
VIII. Spending Results
Two important findings were detected:
1. Changing
the inverted tax price that a district encounters can cause dramatic changes in
spending (the magnitude of the effect of the inverted tax price); and
2. Flat
grant categorical aid has almost no potential to generate levelling-down
After calculating what mean per-pupil spending would have
been if no equalization scheme were in effect, it was observed that
equalization schemes have generated both levelling-up and levelling-down.
Meanwhile, results for the pupil-weighted coefficient of variation in per-pupil
spending for each state in 1990 reveal that the standard deviation of New
Hampshire's per-pupil spending would have been 5.6 percent more of its mean
per-pupil spending if there had been no equalization program. Furthermore, the
log 90-10 ratio[2] shows
that students at the ninetieth and tenth percentiles would face spending that
differed by about 59.3 percent if there had been no equalization scheme.
New Hampshire had a moderate FA scheme in 1990. Majority of
states have equalization experiences as moderate as that of New Hampshire.
However, although the most common equalization experience in the United States
is moderate, it is not necessarily optimal. Among states that experience
similar equalizing, there is still variation in whether the state is levelling
down or up.
The states with the most dramatic equalizing are all
levelling-down[3]. In
these states, the difference between spending at the ninetieth and tenth
percentiles would be almost 20 percent greater if no equalization program were
in effect. In the states with the greatest increases in mean per-pupil spending[4],
less dramatic equalizing was detected. In these states, the difference between
spending at the ninetieth and tenth percentiles would be only about 10 percent
greater if no equalization program were in effect.
Levelling-up schemes tend to have more simple equalizing
than levelling-down schemes because these states face little or no direct cost
when they set inverted tax prices close to zero but face substantial costs when
they set inverted tax prices higher. It is costly to bribe districts that would
prefer low spending into spending a lot but it is inexpensive to forbid high
spending.
Usually, courts and legislatures are required to achieve a
combination of equity and adequacy in school finance. To detect whether a
scheme is achieving a good mix of equity and adequacy is the criterion:
"Do no harm to poor districts." This means that if in pursuit of
equity goals, a scheme makes mean spending fall significantly that spending is
less sufficient in poor districts, it has almost certainly gone too far.
IX. Other Effects of School Finance Equalization
SFE schemes can change property values, both because SFE
schemes tax school productivity that has been capitalized in house prices and
because SFE schemes themselves can be capitalized. Meanwhile, the most extreme leveling
down schemes[5] raise
the share of students who attend private school by about 3 percentage points.
Furthermore, the private school share falls by about 1.5 percentage points in
districts that have the inverted tax prices of 1.5. In general, the private
school share will rise in "property-rich" districts and fall in
"property-poor" ones.
For dropout rates, it was found that that dropping-out is
affected only in districts that would otherwise be very low-spending. This will
only occur in districts that were forced to boost spending by the imposition of
the flat grant. Results imply that equalization enhances student performance
the most in schools that would have very low spending if left to their own.
X. Conclusion
The findings show that some spending equality can be
obtained with leveling-up or mild leveling-down. However, near equality of
per-pupil spending cannot be achieved without very strong incentives. In
theory, either leveling-down or leveling- up SFEs could incorporate such strong
incentives, but, in practice, they are included only in leveling-down SFEs
because it is cheaper to prohibit high spending but it is expensive to bribe
districts to spend more than they prefer to.
Surprisingly, there are poor districts in the United States
that might have higher spending if their state attempted to achieve less
complete equality. Because equalization schemes can contain feedback where they
reduce their own spending targets, underprivileged students can be worse off
under equalization schemes that are more generous than the categorical aid
schemes they replaced.
House prices drop in districts that are reprimanded for
having high property value per pupil. The converse is also true. Such
capitalization somewhat undoes the impact of a school finance equalization
scheme. Parents are persuaded to send their children to private schools in
districts that are penalized for having high property value per pupil.
Even though the estimated effects of equalization on student
achievement are weak, it appears that the drop-out rate falls in districts that
are constrained to increase spending by the imposition of a per-pupil spending
floor.
These results imply that states should be careful in
choosing their equalization schemes in order to move toward their equality and
adequacy goals. The outcomes also hint that school districts react like
economic agents to the incentives created by equalization schemes.
Additionally, school finance equalization schemes generate unintended
consequences because they centre redistribution among jurisdictions on assets
(property) whose prices rely on how households value the jurisdictions. School
finance equalization does not merely redistribute from people with greater to
people with lower ability-to-pay. Another consequence is that it redistributes
from schools that are more productive to schools that are less productive. It
can also redistribute from people with greater taste for education to people
with lower taste for education. Over time, its own formulation gets undone and
a feedback that amplifies its intended effect is generated. Categorical aid, on
the other hand, does not produce such unintended consequences.
Source:
Caroline
M. Hoxby, “All School Finance Equalizations Are Not Created Equal” Quarterly Journal of Economics, Vol.
116, No. 4 (November, 2001), pp. 1189-1231.
[1] The matching rate is a function
of district demographics
[2]
The log of the ratio of per-pupil spending at the pupil-weighted ninetieth
percentile and per-pupil spending at the pupil-weighted tenth percentile
[3]
California, New Mexico, South Dakota, and Utah
[4]
New Jersey, New York, Pennsylvania
[5] Schemes that lower the inverted
tax price from one to zero
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