ALL SCHOOL FINANCE: School Finance Equalization Schemes 4

Guaranteed Tax Revenue/Power Equalization Schemes

Like foundation aid schemes, guaranteed tax revenue schemes systemically transfer revenues from districts with high capitalization to districts with low capitalization. But, in addition to this systematic income effect, guaranteed tax revenue schemes directly change the tax price for local school expenditure that each district faces. This is because guaranteed tax revenue schemes make the amount of local revenue that a district has to raise in order to have a dollar of local expenditure into a positive function of the district’s per-pupil valuation.10 Depending on the details of the scheme, this function may also be quasi-convex or quasi-concave in т.

ALL SCHOOL FINANCE: School Finance Equalization Schemes 3

Under a foundation aid system, the tax price is one, just as under local finance and flat grant categorical aid. Foundation aid creates lump sum transfers that depend on districts’ property value per pupil:
The middle term of (12) is a just tax on housing and land service wealth, but the right-hand term of (12) is a tax on education tastes and school productivity.

Let us compare foundation aid to flat grant categorical aid that attempts to achieve similar redistribution. This comparison not only clarifies the economic issues (because it holds the redistributive goals constant), it is also a practical comparison. As an historical matter, Foundation Aid schemes generally replaced categorical aid schemes. Districts that receive money under foundation aid that would not have received money under categorical aid are districts in which households prefer to spend an unusually small share of their incomes on schools.

ALL SCHOOL FINANCE: School Finance Equalization Schemes 2

State aid affect district budget constraints through two means: the tax price a district faces and the lump sum amount of tax revenue that a district gives to, or gets from, the state. When we want to determine whether an SFE scheme levels up or down, it is intellectually very useful to break the problem into parts, (i) Relative to the scheme previously in place, does the SFE scheme contain lump-sum transfers among districts? If so,

(a) what would the effect of the SFE scheme be if it were, instead, a flat grant categorical scheme with the same redistributive goals?

(b) what are the differences that exist because the scheme is an SFE scheme and not a flat grant categorical aid scheme with the same redistributive goals?

ALL SCHOOL FINANCE: School Finance Equalization Schemes

So far, I have been describing the asset that conveys the fiscal externality as tangible property, but the asset could equally be something intangible but persistent, like a reputation for spending each tax dollar more productively. That is, school productivity is not only capitalized, but school districts with high productivity attract households whose taste for education is high.

It is worth noting that empirical evidence suggests that households with an unusually high demand for school spending relative to their incomes live in districts that have property prices that are unusually high given the properties’ characteristics and tax rates that are above-average, but not dramatically so.

In short, property values in a district reflect not just housing services, but (1) the productivity of schools, (2) households’ taste for education, and (3) the degree to which state law constrains households from exercising their most preferred level of school spending and taxes. (State law can also make households less constrained, as I emphasize below.) Of course, we do not observe the division of each property price into the part that is payment for housing and land services and the part that reflects the local public goods equilibrium.