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?

(ii) Relative to the scheme previously in place, does the SFE scheme affect tax prices? If so,

(a) what would the effect of the SFE scheme be if it were, instead, a matching 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 matching grant categorical aid scheme with the same redistributive goals?
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Under local property tax finance, a district must raise one dollar of revenue to spend one dollar. That is, the tax price is one. Local property tax finance provides for no lump sum revenue transfers among districts. Flat grant categorical aid schemes set the tax price equal to one and create lump sum transfers that depend on factors that reflect residents’ ability-to-pay (but not on their education tastes per se or their actual spending choices). Matching grant categorical aid schemes create similar lump-sum transfers but also make tax prices depend on factors that reflect residents’ ability-to-pay (but not on their education tastes per se or their actual spending choices).

Theoretical predictions about whether categorical aid schemes level up or down compared to local property tax finance are ambiguous. Whether the outcome is leveling up or leveling down depends on the relative shape of preferences for education in districts that contain poor people and districts that contain poor people. If rich and poor people have identical preference maps for education versus other goods, and if education is a normal good, then categorical aid will tend to level up.

At the other extreme, even matching grant categorical aid schemes that lower tax prices for poor people can level down if rich people have much higher tastes for education than poor people. Fernandez and Rogerson (1998) analyze several categorical schemes, and they calibrate their theoretical analyses. (They claim to analyze SFE schemes, but since the schemes they consider are based on income and income taxes and have nothing to do with property values or property taxes, they actually analyze categorical aid schemes.)