Economics 147

1
Economics 147

• Winter 2005
• Lecture 12

2
Outline for today

• Types of centralized school finance
• Power equalization
• Empirical research on effects of
  intergovernmental grants
• Empirical research on effects of school finance
  equalizations (SFEs)

3
Power equalization (PE) aid,a.k.a. guaranteed
tax revenue (GTR) aid

• Foundation aid guarantees a floor, not
  equalization
• Extreme form of PE can actually equalize
• State sets tax rate tG
• District i sets tax rate ti tG
• State guarantees tax base vs on first tG mills
  of ti
• mill 1/1000th
• Districts own tax base used for remaining ti -
  tG mills
• Per pupil revenuei tGvs (ti -tG)vif(vs-vi)
• f gt 0
• f(0) 1

4
Challenges of redistribution across jurisdictions

• Intergovernmental revenue doesnt fully stick
  to intended spending area
• Knight, 2002, highways
• Gordon, 2004, Title I
• Local expenditures outside the targeted area may
  respond to grants/mandates
• Cullen and Loeb, 2001, Michigan SFE
• Unfunded mandates for the poor get funded at the
  expense of other programs for the poor
• Baicker, 2001, Medicaid

5
Conditional block grants
Exp on pvt goods
Y total income in the town
YBG
Y
Exp on educ
Y
YBG
actual change in E
change in E without any crowding out
6
Does California generalize?

• SFE under Serrano decision in CA decreased
  education spending
• CAs SFE was extreme
• What are effects of other state SFE plans?
• Not all SFE plans are the same, so their effects
  are different too (Hoxby)

7
Effects on mean educ revenue and spending (Evans,
Murray and Schwab)

• Mean state revenue (all rev and exp PP) rises
• Local revenue responds to state revenue
• Net effect mean total revenue rises
• Mean spending PP at state level rises

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Effects on distribution of revenue and spending

• Court-ordered reforms reduce inequality within a
  state
• by raising the bottom of the distribution
• Little effect on the top
• Evans, Murray, and Schwab specification
• Ysqit Ditaq µqi ?qt esquit
• Ysqit average per-pupil revenues from source s,
  income quartile q, in state i, year t
• D dummy var for court-ordered SFE

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Evans, Murray, and Schwab Table 3-5Ysqit
Ditaq µqi ?qt esquit
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Evans, Murray, and Schwab Table 3-6