ALL SCHOOL FINANCE: Categorical Aid as an Add-On 4

A very simple guaranteed tax revenue scheme with two guarantees might have a budget constraint like:
That is, regardless of how much local tax revenue a district raises and what its local tax rate is, it will always get the basic guarantee. California has a minimum tax rate of 10 mils so that districts cannot opt out of local public schools. Since there is no incentive for residents of a district to ever let themselves be taxed at more than the minimum rate and local schools do not benefit directly from increases in local property values, it is not surprising that Proposition 13, which makes 10 mils the maximum tax rate as well as the minimum tax rate and prevents house values from being reassessed for tax purposes so long as they remain under the same owners, was passed in a referendum soon after the Serrano II equalization scheme was put in place. Fischel (1989,1994) explains the political process by which the Serrano II equalization led to Proposition 13. Thus, for equation (8), r”m—r/”®*. California’s formula was not initially self-funding because the state started with a large budget surplus. It has been more or less self-funding, however, in most years of its operation.
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New Jersey’s recent guaranteed tax revenue formula is very different from California’s. An extremely simplified version of it is as follows:
The parameter v* is set at the 85th percentile of per-pupil valuation in the state, and/^ is usually set to be mean per-pupil spending in the state. For a district with per-pupil valuation that is at least 90 percent of v®, the above system is not much of a guaranteed tax revenue system. Such a district simply spends its own locally raised revenue (vt v,) plus O.lOf11. But, consider a district that has per-pupil valuation equal to only half of v*. Such a district spends 1.5 times its own locally raised revenue, up to a maximum of vivi+0.5fiJ. Note that, as in the basic guaranteed tax revenue system given by equation (6), a district will has to have low per-pupil valuation and high property tax rates to get maximum aid. Since every district receives at least some aid under the New Jersey formula, the scheme is obviously not self-funding. It requires substantial state revenues from income and sales taxes.

Some Useful Results from the Tiebout Literature with Local Property Tax Finance

Tiebout determination of school spending comes from households maximizing their utility by moving among different houses and among different districts, and voting on tax rates in the district where they reside.

In conventional Tiebout equilibrium, each district is subject to a district budget constraint given by local property tax finance: e= r,v,. See Epple and Platt (1997) for an exposition of Tiebout equilibrium with local property tax finance and households that differ both in income and tastes for education.