Making Money Matter Financing America's Schools (1999) / Chapter Skim
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8 Achieving Goal 3: Raising Revenue Fairly and Efficiently
8 Achieving Goal 3: Raising Revenue Fairly and Efficiently
Pages 232-262
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From page 232... ...
Two main aspects of revenue raising should be distinguished the particular revenue source that is used (i.e., property, income, or sales taxes) and the level of government (i.e., school district, state, or federal government)
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From page 233... ...
At the state level, the relevant major revenue sources are state income and sales taxes, with 41 states using income taxes and 45 using sales taxes. States traditionally have not made much use of state-level property taxes to finance education.
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From page 234... ...
In contrast to this emphasis on the inefficiencies of the tax, the benefit-tax approach emphasizes that the local property tax may generate efficient decisions, especially with respect to the level of education services. Particularly in large suburban areas where households can choose among many small, relatively homogeneous school districts, households gain access to the education services provided by a district in return for paying its local property tax.
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From page 235... ...
During that period, between 25 and over 30 percent of the respondents consistently rated the property tax as the least fair tax (compared with federal and state income taxes and the state sales tax) and typically much less fair than the main alternatives to property taxes for financing education, state income and sales taxes.
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From page 236... ...
Such complexity may well confuse local taxpayers and make them view the overall burden as unfair. Finally, the fact that property taxes are typically levied only once or twice a year makes them more visible than income taxes, which are largely collected through withholding, or sales taxes, which are collected in small amounts at the cash register.
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From page 237... ...
This observation suggests that a shift away from reliance on local property taxes (with their tax rate differentials that make the tax regressive) to a statewide property tax could well make the tax system fairer.
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From page 238... ...
It would eliminate most of the regressive element that arises from the differential tax rates across jurisdictions and would eliminate the spending disparities that arise from the variation in local property tax bases.4 A logical next question would then be whether further gains in equity could be obtained by shifting away from the property tax completely to other statewide taxes, such as income or sales taxes. However, the committee is well aware that some people would argue that any gains in equity (either in the fairness of the revenue system or in the form of a more even pattern of spending across districts)
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From page 239... ...
Alternatively, one could imagine modifying the local property tax by applying it to residential property alone or by sharing the revenues across communities within a metropolitan area. Local Income or Sales Taxes A somewhat stronger case can be made for replacing the local property tax with a local income tax than with a local sales tax, but even here the argument is not compelling.
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From page 240... ...
Revenue from sales taxes is typically quite unstable over the business cycle, and finally, sales taxes are not deductible under the federal income tax. Thus, the property tax appears to dominate the other main alternative broad based local taxes income and sales as a revenue source for school districts based on standard evaluation criteria for revenue sources such as equity, effi
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From page 241... ...
One particular characteristic of such a local tax provides some support for this view. In many jurisdictions, the local property tax is treated as the residual tax, in that its rate is the easiest one to increase when a jurisdiction finds that it has a shortfall between its planned expenditure and the revenue it will receive in the form of state or federal aid or from other tax bases subject to fixed tax rates.
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From page 242... ...
She concludes that the state would need to provide additional redistributive aid to poorer districts to make up for the lost revenue from the smaller tax base. If business property is disproportionately located in poorer school districts and the state aid system does not compensate, then equity would be reduced by such a proposal.
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From page 243... ...
Because of these characteristics, state personal income taxes are generally considered to be progressive, with the degree of each state' s income tax progressivity based on the level of exemptions, number of deductions, and marginal tax rates.5 Since the state income tax rates are in addition to the federal income tax, they can impose significant efficiency costs. After all, it is the total tax rate that affects individuals' decisions about the trade-off between work and leisure, not simply the portion that is paid to one level of government rather than another.
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The state sales tax is also not as stable over the short run or the long run as property or income taxes. The variability and growth of sales tax revenue depend on what items are included in the tax base.
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Alternative State Revenue Sources Such as Lotteries Although income and sales taxes are the workhorses of state revenue systems and are currently the primary generators of state revenue for education, many states also rely on a variety of smaller revenue sources for education. Included among these sources are lottery revenues and selected sales taxes on items such as cigarettes.
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From page 246... ...
Local governments provide almost 46 percent of all government revenue for primary and secondary public education and the local property tax accounts for over 95 percent of the local tax burden in those states served by independent school districts (see Tables 2-1 and 2-7~. Hence, if for equity or other reasons, it made sense to expand the state role, state-level property taxes will undoubtedly have to play a significant role.
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However, two qualifications are worth noting. The first is that if the increase in state taxes is achieved through heavier reliance on state sales taxes (rather than state income or property taxes)
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Implications for Raising Achievement (Goal 1) A larger state role in school finance could affect the education system's ability to raise overall student achievement and the efficiency with which it is produced in at least three ways.
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The higher the progressivity of a tax, the lower would be the price to the median voter and the greater would be the willingness of that voter to support education. Because state income taxes are likely to be more progressive than local property taxes (yet both are deductible)
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From page 250... ...
Those explanations start from the observations that prior to Proposition 13 housing values were rising very rapidly, that property tax assessments were rising almost as rapidly but in an uneven manner as only one-third of the residential properties were reassessed each year, that local public officials did not lower nominal property tax rates in proportion to the increases in property tax assessments, that the rapid rise in housing prices resulted in some shifting of the local tax burden away from business property onto residential property, and that the state had a large surplus with which it could have provided tax relief to local taxpayers. Together, these facts provided voters with plenty of reasons to be angry about their rising property tax burdens and to be frustrated with the local governments, the state government, or both.
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From page 251... ...
More sophisticated multivariate techniques are needed to sort out the causal impact on spending of the shift to a larger state role in the financing of education. In addition, his study focused roughly (depending on the availability of data)
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From page 252... ...
Contrary to these results, Hoxby (1996b) estimated that the average level of per-pupil spending fell with more effective equalization, as a result of the large disincentives on high-demand school districts that are contained in these plans.
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From page 253... ...
, the variability and growth of sales tax revenue depend on what items are included in the tax base. Retail sales taxes, including food purchases, vary over the business cycle in a manner similar to the personal income tax, but they vary much more when food 9Serrano v.
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From page 254... ...
are not as responsive to state income changes as the personal income tax, largely because they exempt spending on most services, which are the fastest growing part of the economy. Thus, in states like California, and more recently Michigan, where the state has become the primary financier of local school districts, local school districts find that their fortunes are tied to revenue sources that are arguably more sensitive to the business cycle than the property tax, and to revenue sources that they do not have control over.
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From page 255... ...
In evaluating the following evidence, it is important to bear in mind that to the extent that a larger state role is associated with more state control, it is difficult to sort out empirically the effects of centralizing finance from centralizing of governance. Several researchers have investigated the relationship between the state role in financing and student outcomes by including various measures of centralization as explanatory variables in a standard educational production function regression.
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From page 256... ...
will lead to greater achievement unless it is connected with policy changes designed to encourage that end. If state funding is not connected with such changes, the shift to a greater state share of funding may reduce the productive efficiency of the system, as local school districts may have less incentive to use their resources carefully given that fewer of those resources are coming directly from local taxpayers.
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From page 257... ...
One of the major justifications for a larger state role in education finance is that the state revenues can be used to offset what otherwise might be undesirable disparities in education spending across school districts. Court-ordered education finance reforms have frequently increased the state financial role and led to a more equitable distribution of spending than would have occurred in the absence of the reform.
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From page 258... ...
To minimize the negative side-effects of the decisions of high-demand families on the overall level of support for education, states could (1) prohibit or severely limit local districts from supplementing state aid from local taxes (as was done in California)
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From page 259... ...
For example, consider a large city school district with a large percentage of economically and educationally disadvantaged students. Given that it costs more to provide a given level of education to those than to other students, the city would have to spend significantly more per pupil than other school districts.
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From page 260... ...
Although the federal government took the lead role in creating these programmatic emphases, it has never funded them at their fully authorized level. For IDEA in particular, this underfunding has created large financial burdens for states and local school districts.
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From page 261... ...
An adequacy rationale at the state level leads to a foundation type of school finance structure; the state ensures that each district has an adequate level of education revenues so a district can educate an average student to specified performance standards and then would adjust this foundation amount by a factor that accounts for the higher costs of both students with special educational needs and geographic price differences for the educational inputs purchased. Each district would need to contribute financially to such a foundation base by making a required minimum tax effort.
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From page 262... ...
Of most importance for harnessing education finance to the broader goals of education policy is the need for policy makers to pay close attention to ensuring that changes in financing mechanisms do not weaken the incentives for districts or schools to be vigilant about the productive efficiency of the system and that intergovenmental aid programs are carefully designed to promote the goal of reducing the nexus between family background and student achievement.
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