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School Funding Part II: More Money Doesn’t Mean More Equity

Tarsi Dunlop's picture

There are few things as complicated as funding when it comes to our nation’s public schools. But a basic understanding on the part of policy-makers and voters can be a significant contributor to the vitality of public schools and our democratic society. This week, as much of mainstream media zeros in on the Presidential race and key competitive Congressional races, it’s worth remembering that on November 7th, governance will continue with policy decisions and consequences playing out on the local level, especially for education. As we continue our pre-election examination of school finance policies, we focus on the second half of the Center for American Progress (CAP) report, The Stealth Inequities of School Funding: How State and Local School Finance Systems Perpetuate Inequitable Student Spending.

If there’s one thing that people know about public school funding, it’s that a majority of the money comes from local property taxes.  They don’t know just how little comes, on average, from the federal government (~8%), but they are aware that certain districts with better schools are often home to wealthier families with higher property values that feed additional resources into public schools. This perception, according to the report’s findings, is not providing the full picture.

Consider all the mechanisms a state uses to generate education dollars, and the rules, parameters and institutions that oversee how dollars are raised. There are tax instruments – property, income and sales – as well as limitations on those mechanisms. Each revenue source is negatively related to poverty, with property taxes being the most important contributor to inequities. While nationally property taxes represent 62 percent of all local revenue, they constitute 80 percent of the inequality in local revenues per student. Six of the 10 states with the most inequity in school funding also land on the list of the 10 states with the greatest local revenue sensitivity to property tax collection. 

A key takeaway from this report is how an appropriately progressive system of state aid can offset this variability in property tax. Massachusetts and Ohio are two exemplar states; their local share of combined revenues is higher than the national average, and variability in local revenue is closely tied to property taxes. They successfully avoid the list of most inequitable states due to their state aid policies, which effectively offset the variability in local resources. Other case study states, highlighted in the report, provide examples of policies that are in need of reform: Illinois, Missouri, North Carolina, New York, Pennsylvania and Texas. A closer look at two examples showcases just a few of the challenges posed by state revenue and property tax formulas.

More than 80 percent of inequality in local revenue by student in Missouri is attributable to property taxes. The report explains the state foundation formula’s initial level is set at $6,117 per student; state aid is the portion of this foundation not collected locally from property taxes, intangible taxes on financial institutions and state-assessed railroad and utility taxes. In Missouri, the lowest-poverty districts have the highest tax rates (.38 percent), and the highest-poverty districts have the lowest tax rates (.322 percent). Thus, revenue for the lowest-poverty districts is $4,500 per-pupil compared to $2,450 for the poorest. With regards to other sources of local revenue, the lowest-poverty districts receive $871 per student, compared to $562 per student in the highest poverty districts, further contributing to the inequality. The report notes that “with the exception of the intangibles tax, these differences in resources are not equalized through the general state aid formula.”

In Texas, property taxes contribute disproportionately to the variation in local revenue (94.2 percent). The state has a minimum foundation amount per student, varying by district, and a two-tier foundation program that combines both state and local revenue towards that minimum foundation. Tier I covers the foundation, requiring a minimum tax rate of 1 percent (or a ‘compressed’ tax rate* if it is lower) and the money goes towards basic education purposes, supplemental programs and transportation. Tier II is a guaranteed tax base style program allowing districts to raise extra revenue. The average tax rates for operating purposes, such as maintenance and operations are similar across groups, but the tax rates for all school purposes, including capital, prove problematic in terms of equity. As in Missouri, higher-poverty districts have lower tax rates compared to the low-poverty districts. When combined with the variation in property values, these rates ultimately produce lower yields for higher-poverty districts than low-poverty districts – at $3,830 compared to $8,300 per-student. Finally, the state makes a minimal contribution to school facilities funding and plays a small role in supporting capital outlays, which does little to offset the vast inequity that is a result of tier II tax rates for higher-income districts.

When people go to the ballot stations next week and cast their vote for school funding ballot initiatives, they may cast their ballot as a ‘yay’ vote. In doing so, they will be showing a commitment to funding one of our most valuable institutions, public schools. Most districts are struggling under financial burdens, and additional funding is often at the foundation of maintaining essential services and resources. If these ballot initiatives fail, budget cuts will force public schools’ hands in making more tough decisions, and it may take decades to recover if they do at all.

However, as the CAP report reveals, even if these initiatives pass, they won’t benefit all students equally. The intersection of state aid and local structural policies create a perfect storm of systematic funding inequities. It will take more than lip service to reform these institutions, but if the voters reject giving more money to the public school system in their state, they should at least demand a re-evaluation of policies that are systematically disadvantaging key demographics of students. There is always a ‘next’ fight and cause to take on.

*For more information on the compressed tax rate, see pages 34 and 83 of the CAP report


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