2. Educational Finance (O’Sullivan, Ch. 15) © Allen C. Goodman, 2006

3. Inequalities We’ve seen that there may be inequalities in educational opportunities. Why? –There may be sorting by income -- rich in one district, poor in another. –Richer districts have more money, spend more. –Higher incomes may imply more supportive families, more productive peers. –More productive schools.

4. Funding problems Schools have typically been financed through property taxes. What happens if some districts have more valuable property? Spending on Education Poor: $50,000 Rich: $100,000 1 2 3 500 1000 1500 2000 2500 Poor Rich Property tax rate

5. Funding Problems At a rate of 2%, poor district raises $1,000. Rich district raises $2,000. 1 2 3 Poor Rich Property tax rate If poor district wants to raise as much as rich district, it must double tax rate. 4 Spending on Education 500 1000 1500 2000 2500 Poor: $50,000 Rich: $100,000

6. Funding Problems So, what’s wrong with a higher tax rate? –Affects business location. –Increases user cost of housing –Increases rents 1 2 3 Poor Rich Property tax rate 4 Spending on Education 500 1000 1500 2000 2500 Poor: $50,000 Rich: $100,000

7. Flat Grants Give each district a grant. Will allow each to spend more. They may also reduce taxes. Probably won’t reduce inequality much. 1 2 3 Poor Rich Property tax rate Spending on Education 500 1000 1500 2000 2500 Poor: $50,000 Rich: $100,000 ? ?

8. Guaranteed Tax Base Suppose state average is $75,000. You substitute this for the local tax base. So, if poor district taxes @ 2%, it gets $1,500, rather than $1,000. 1 2 3 Property tax rate Spending on Education 500 1000 1500 2000 2500 Poor: $50,000 Rich: $100,000 Average: $75,000

9. Guaranteed Tax Base What has happened is that the price of $1 of spending has fallen to $0.66 (= 50/75). In principle, for a rich district, the price of $1.00 in spending has risen to $1.33 (=100/75), BUT Most GTBs don’t penalize rich districts much. 1 2 3 Property tax rate Spending on Education 500 1000 1500 2000 2500 Poor: $50,000 Rich: $100,000 Average: $75,000

10. Michigan GTB fundamentally explains the 1994 Proposition A here in Michigan. Substituted State of Michigan for local taxes. In places which got tax relief, home values rose. Why? Rich communities may still increase public education through private supplements. Examples of private supplements ?

11. Addressing Segregation What happened when courts mandated that you shouldn’t have separation by race … or by resources? People react! –Some switch to private schools. –Some move. Often you end up with resegregation, in new locations, or even within schools.

12. Voucher Alternatives Loosen linkage between home location and school. Presumably provide market forces. How do they work?

13. Voucher Alternatives Each child gets voucher with given face value. Voucher is used at a qualifying school. Public schools compete with others. Establish certain qualifying criteria, for schools to be eligible. Families can supplement vouchers with own funds. Gov’t provides information for informed choice.

14. Voucher Advantages Bring competition to the provision of education. Poor schools won’t attract students. Might encourage diversity, experimentation. Promote more efficient production of education.

15. Voucher Disadvantages May perpetuate some inequality. Wealthy families may supplement vouchers. This could lead to income segregation. Might lead to more income and class segregation than we currently have. Could lead to subsidies for religious schools (church v. state problems), or for schools that some groups find objectionable.

16. Voucher Disadvantages They induce schools to try to please the parents and no one else. God may know that “C programming” and Mandarin are good for students, but parents might not. This wouldn’t be a problem if children were a private good that parents owned … but they aren’t. If they were, we wouldn’t be subsidizing education.

17. Vouchers in Michigan, 2000 Plan to take portion of school aid (about $2,000 per student) and put it into vouchers. Those in favor argued that it provided choice. Those against argued that it would drain resources from public schools.

18. Analysis Was $2,000 enough? What were the impacts at the margin? –Helped those who already sent kids to private schools –Didn’t help those who were very poor. What about public schools? Ultimately, it was voted down.