11/11/04 Economics

Role of the states in school finance

School funding:

Local property tax

Efficiency

2 reasons

Tiebout sorting

Analogous to free markets for individual-level consumption choices. Argues that families make choices based at least partically on the local public goods (education, parks, etc.) This then leads to efficient production of those goods.

What’s nice about the market is that it lets people choose.

Oversight

Problems with local funding

Efficiency and equity (equity is perhaps more important.)

Effiency

Capital market failures

Community that doesn’t currently have the funds wants to invest in education; it will have the funds in the future, after the investment, but can’t invest now.

Externalities or spillovers

Other communities may be impacted by a community’s decision of how much to invest.

Poor information

Can lead to over or under investment

Non-trivial moving costs

Zoning (keeps people out)

Corruption

Think about what the core problem is: if the problem is poor information, a state takeover isn’t the answer, education might be better.

Equity

Horizontal equity: Similar people get/pay the same (students everywhere should receive the same funding)

Vertical equity: Different people should be treated differently (rich and poor shouldn’t have to pay the same)

Role of the government in equity

Choice

Give money to poor communities

Increase education spending in poor communities

Are you talking about equity? Or about adequacy, a base level or a common level?

How states Fund Schools

2 tools:

Budget constraints

First consider at the family level (and assume the local area operates in much the same way, Income (I) = $10,000.

They buy Education (E) Pe=1

They buy all other goods (AOG) Paog=1

This family can spend Pe(E) + Paog(AOG) <= I (budget constraint)

If income rises, demand curve shifts to right. If E and AOG are “normal” the family wants more when income goes up.

If Pe falls to $.67 (you can now purchase 15,000 units of ed with I) Then demand curve shifts right – same amount of AOG, more ed…the slant becomes more shallow than steep. Income effect à AOG goes up, E goes up. AND Pe falls in relation to Paog. AOG goes down in relation to E.

Hope tax credits

For first $1000 spent of education, $1000 credit

Next $1000, get a $.50 credit per dollar for a max of $500

You have to spend $1500 in taxes for this to be useful at all! For people with enough income – poorest do not benefit.

Phased out at $80,000, so rich do not benefit either.

What does this do to people’s decision-making process?

Grants from the state:

Revenue sharing grant (foundation)

State gives $200 to the districts

Indifference curves