No. 82 Local Property Tax-Based Funding of Public Schools (summary html)

The best and most stable method of providing public schools is a system where schools are organized into small districts and most funding is derived from local property taxes. It is not possible to maintain the good qualities of local control while increasing the state's role in raising school funds.

1. Effective local control of schools depends on local funding of schools.

Local property tax funding of education gives all of a community's residents, not only the parents of school-aged children, an incentive to monitor the local public schools and see that they provide a good education. Homeowners in districts with successful schools are rewarded with rising property values, whereas residents in districts with unsuccessful schools experience falling property values.

Each resident has an individual incentive to either support the status quo if it is producing good results, or work for change if it is not. Local property tax funding thus gives school personnel an incentive to provide high quality and efficient schools. School districts also must compete with one another or risk losing students, as well as tax dollars, to better-performing districts.

2. Financing schools with local property taxes is more fair than relying on statewide taxes.

Property taxes, because they are calculated according to property values, take into account the quality of local schools more effectively than can statewide taxes. Moreover, because property tax rates are set locally and often by referenda, they reflect the ability and willingness of local taxpayers to pay for public schools. No statewide tax--be it a statewide uniform property tax rate, or an income- or sales-based tax--could be as fair.

A family that wishes to invest a high share of its income in educating its children is willing to pay more for a house in a highly perceived school district. In a system of local property tax finance, such families are accommodated: They pay more for their house, but they get to send their children to a high-quality school.

3. Support for public schools is stronger when control and responsibility for funding are in local hands.

If the burden of school funding shifts from local property taxes to a statewide tax, families would be taxed for schools at the same rate regardless of where they live. Families that place a high value on education may choose to live in a school district with low property taxes and only average public schools, and then compensate by purchasing computers, paying tutors, or otherwise investing in education-enhancing items for their school-aged children. Or they may move their children from public schools to private schools to get the higher quality of education that the public schools could no longer deliver. Both reactions would undermine the public school system by lowering support for higher levels of funding and by lowering enrollments.

Both of these reactions occurred in California between 1980 and 1990, when reliance on state aid rose by 21.4 percentage points. Spending per pupil rose only 6 percent, and the share of students attending private schools jumped 56 percent. New Hampshire, by contrast, did not increase its reliance on state aid. Spending per pupil rose 25 percent, and the share of students attending private schools fell by 11 percent.

4. Empirical data confirm the theory: More state aid means less effective schools and less public support for public education.

The tables that follow compare the performance of schools in the state of New Hampshire, where the state's share of school funding was just 7.0 percent in 1996, to that of states that rely more heavily on state aid. Public support for public schools is measured by per-pupil spending and share of students who attend private schools. School quality is evaluated on three measurements of school output: college graduation rates, student earnings, and student unemployment rates. To control for differences in demographics, the percentage change between 1980 and 1990 is examined for in each variable, not their absolute values.

In the first table, New Hampshire's school performance is compared to the six states that increased their state share of school funding the most between 1980 and 1990. Regarding the two measures of public support, New Hampshire outperformed every comparison state in the share of students attending private schools, and beat four of the six states in growth in per-pupil spending.

Regarding the three measures of school outputs, New Hampshire beat every state in change in college graduation rate, beat five states and tied with one on student earnings, and reduced the percent of students who are unemployed more than five states but less than one. Overall, New Hampshire's locally funded schools were clearly providing superior service and, in return, enjoyed greater public support, than schools in states that increased their reliance on state aid.

Across the country, states that did not increase their reliance on state taxes performed better during this period than did states that increased their reliance on state taxes. In Table 2 on the next page, all fifty states are classified according to whether or not they increased their state share of school funding during the 1980-1990 period. The same variables measuring public support and school outcomes are calculated.

The results show that New Hampshire is not unique. States that moved toward state-level funding for schools experienced nearly three times as great a shift toward private school enrollment as did states that did not increase the state's share, while their per-pupil spending rose just one-eighth as much. The unemployment rate of students increased twice as fast, student earnings grew more slowly, and college graduation rates rose significantly less in states that increased their reliance on state aid to schools.

How state aid is distributed to local school districts also influences measures of school output. States that use flat grants or foundation aid formulas should see less negative effects on public support for public education, since families can still choose to live in communities that spend more than the rest of the state, and schools can still be held somewhat accountable to local property owners. By contrast, states with aid schemes that attempt to "equalize" spending regardless of local property values should see declining public support and school outputs. States that rely entirely on state funding should see the worst results.

The evidence dramatically supports those hypotheses. Table 3 on the next page classifies all fifty states by their major state school aid program. The table shows that states in all categories fall short of New Hampshire's success, with only one exception--a tie--out of 25 variables. Schools in "Flat Grant" and "Foundation Aid" states tend to be more effective than those in other states, as expected, but they do not appear to enjoy more public support. States that provide "Full Funding" of public schools performed worst on college graduation rate and student earnings, second worst for change in student unemployment rate, and worst for both measures of public support.

Finally, Table 4 tests the hypothesis that greater local control enhances education outcomes. Local control is deemed effective where the school districts are small relative to the population of a metropolitan area, and where enrollment is spread more equally among school districts. A Herfindahl index, which measures enrollment concentration, was used to divide metropolitan regions into four groups with high, medium-high, medium-low, and low degrees of local control. College graduation rate and hourly wages are used to reveal school quality, and per-pupil spending and share of students attending private schools reveal public support.

The results shown in Table 4 generally support the theory. College graduation rates and hourly wages are highest for metropolitan areas with high degrees of local control and lowest (second lowest for wages) in areas with low degrees of local control. Per-pupil spending for regions with high, medium-high, and medium-low local control supports the theory, but regions with a low degree of local control show the highest, rather than lowest, level of spending. Given the low quality of public schools in many metropolitan areas, their high per-pupil spending levels are likely to stem from the absence of accountability to taxpayers, rather than a high degree of public approval. The share of students attending private schools is highest in regions with low degrees of local control and lowest in regions with high and medium-high degrees of local control, as the theory would predict.

Based on Heartland Policy Study #82, “Local Property Tax-Based Funding of Public Schools,” by Caroline M. Hoxby Ph.D. Printed copies are available from The Heartland Institute for $10 each. You can also download the full text, free of charge, in Adobe's PDF format; click here.

Copyright 1997 The Heartland Institute. Nothing in this Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of any legislation. Permission is hereby given to reprint or quote from this Executive Summary; please send tearsheets to The Heartland Institute, 19 South LaSalle Street #903, Chicago, Illinois 60603.

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