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.

As we will see in the next two sections, the tax prices actually produced by different states’ guaranteed tax revenue formulae vary greatly. Here, let us examine just two extreme cases. California’s guaranteed tax revenue scheme produces tax prices that are approximately infinite for every district since the only way that a district could increase its local expenditure by raising more revenue would be through the self-funding constraint. The typical district in California would see less than a 0.001 dollar increase in its per-pupil expenditure if it raised an extra dollar of revenue per pupil. Even the district with the most pupils in California (Los Angeles Unified) would see only a 0.14 dollar increase in per-pupil expenditure by raising an extra dollar of revenue per pupil. read only

Given the extreme incentives contained in California’s scheme, we expect rather dramatic lowering of property tax rates (to the state’s minimum level), no further capitalization of education tastes in house prices, large decreases in certain house prices due to the large penalties on capitalized tastes, capitalized productivity, and binding constraints how high local spending can be. We also expect feedback effects through the self-funding constraint. In fact, the two predictions not only came true, but came true almost immediately because voters reacted by passing Proposition 13.

The guaranteed tax revenue scheme given by equation (6), for instance, produces the following tax prices:
New Jersey, on the other hand, has tax prices less than or equal to one for every district. Under the New Jersey formula given by equation (9), a district with per-pupil valuation above 90 percent of the 85th percentile in the state faces a tax price equal to one. A district with per-pupil valuation below this cut-off (and sufficiently low per-pupil spending) has a tax price given by: