Effects of Reducing the Role of the Local Property Tax in Funding K-12 Education

Between 1989 and 2018, while national reliance on local property taxation to fund K-12 education remained quite stable, 24 states increased reliance on the local property tax, while 25 states decreased their reliance. We review the literature and explore four states that decreased reliance on the local property tax (Michigan, Kansas, South Carolina, and New Hampshire), analyzing the impact on school funding during recessions, the level and growth of per pupil school spending, and the equity of per pupil school spending. We find that reliance on the local property tax makes school funding more stable in recessions but the ability of the local property tax to support K-12 education over the business cycle can be hampered by stringent stateimposed property tax limits. There are conflicting results in the literature as to whether centralizing school funding by substituting state aid for local property tax increases or decreases per pupil spending. Among our case study states, the two that rely most heavily on state aid (Kansas and Michigan) had the slowest growth in per pupil spending over the last three decades. With respect to progressivity of state-local school spending—defined as higher levels of spending per pupil in school districts with larger shares of low-income students, one component of school funding equity—New Hampshire, which relies most heavily on the local property tax, scores the worst among our case study states, but Michigan, with below average reliance on local property taxation, scores second worst. We interpret this to mean that although substituting state aid for local property taxation can improve equity of school funding, there is no guarantee of this result.