School Finance Reforms and Property Tax Limitation Measures

One of the most controversial issues related to U.S. fiscal federalism is the financing of local public schools through property taxation. In theory, the system follows the principle of matching expenditures on public schools with preferences of local residents to pay property taxes for the services. If a home buyer wants a specific type of education for her children, she may buy a property in a neighborhood where the school system provides the desired education, financed by homeowners’ property tax payments. Although this scheme may match preferences with expenditures and link the benefits of the services to costs, it is likely to lead to unequal access to quality education. Children of poor households that cannot afford to buy a home in affluent school districts may be excluded from their preferred school choices.

In response to this unintended outcome of fiscal federalism, movements have emerged to centralize the finance of education at the state level. Daniel P. McMillen and Larry D. Singell Jr. examine two major measures— property tax limits and school finance reforms—and analyze how these policies affect real expenditures per student and average class sizes across school districts based on 1990 and 2000 data from 48 states. They find that the combined effect of property tax limits and school finance reforms led to a greater equalization of real expenditures per student across districts, with the 1990s policies having more profound distributional effects than did the policies implemented in the 1970s and 1980s.

McMillen and Singell also assess the effects of the two measures on real expenditures per student and average class sizes separately. In terms of real expenditures per student, the joint effect of property tax limits and school finance reforms led to a reduction in the number of districts with low expenditures, yet tax limitation alone increased the number of low-expenditure districts. The implication is that school finance reform provided a stronger impetus to equalize school expenditures by pushing spending across school districts toward the mean.

Regarding average class sizes, for policies implemented before the 1990s, both tax limits and school finance reforms made average class sizes more equal across school districts. In addition, school reforms (without tax limits) as adopted in the 1990s created more districts of similar average class sizes. In contrast, with no school finance reforms, the 1990s tax policies increased in the number of districts with large average class sizes. Overall, the estimates produced by McMillen and Singell indicate that centralization of public school finance in the United the nexus of fiscal decentralization and land policies States by means of property tax limits and equalization of school spending led to a more equal distribution of resources across school districts.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2007 and is Chapter 6 of the book Fiscal Decentralization and Land Policies.