How ‘Equalizing’ School Funding Hurts Students and Taxpayers

With the assistance of Manhattan Institute Judge Glock, AIER submitted amicus briefs in the New Hampshire Supreme Court cases Rand v. State And ConVal v. Statedealing with the equalization of school funding.

Why did we do this?

Economic facts and logic show why the push to “equalize” school funding, which affects every state in the U.S., is based on misconceptions and creates perverse consequences for students and taxpayers. It is important to bring economics into the legal debate because the courts have been the primary means of forcing legislatures to centralize and equalize public school funding.

The fallacy is this: It would be “unfair” or “disproportionate” for some cities to be able to tax at a low rate because they have a higher property value per student, while other cities must tax at a much higher rate because they have a lower property value per student. This seems intuitively right, which is why so many supposedly intelligent state judges have believed it.

Here’s what’s wrong: Local governments compete for residents based on tax rates and quality of services, so systematic differences in property valuations are as much, if not more, the result different tax rates and different school qualities cause Some cities developed excellence in their public schools while keeping taxes low and thus achieved high valuations. Others allowed more commercial, industrial or apartment development in their zoning codes, which increased their tax base without bringing many children into the schools, which again allowed low tax rates. The cities were either inefficient, mismanaging their schools while wasting tax dollars, or chose to prevent development with restrictive zoning codes. As a result, their valuations are low.

When a family moves to a city with low local taxes or good schools, they will pay for that privilege by increasing their home price or rent. In fact, the value of the home includes the net present value of the future tax and quality benefits of living in that city. So adding even more taxes to this expense does not make things more equitable; on the contrary, it is unfair.

Similarly, some people prefer to move to cities with high property taxes or poor schools but low housing costs. These people have already reaped the rewards of living in such a city, and further subsidizing that choice by redistributing property tax revenues to them does not seem fair.

We found that these theoretical ideas are reality in New Hampshire. New Hampshire is the most fiscally decentralized state in the country, with about two-thirds of the total tax burden decided at the municipal level rather than at the state or county level. So households have a lot of choice about where they want to live, and they use it.

As a result, cities offer different packages to residents. Some cities offer a mix of low taxes and exceptionally well-funded public schools, at the cost of high housing costs and high taxes actually paid (e.g. Hollis, a suburb of Nashua). Even though tax rates are low, the actual taxes paid are high because property values ​​are very high. Hollis has many successful agribusinesses, so its values ​​are higher than its neighbor to the west, Brookline. Brookline is also wealthy, and housing costs and taxes are high, but because they have zoned for commercial development, their values ​​are low and taxes must be even higher than Hollis. Hollis would be a “donor” city under the trial court-ordered redistribution plan, while Brookline would be a “recipient” city, even though both are equally wealthy.

Other cities offer low housing costs and low taxes, at the expense of less well-funded public schools, and tend to have high tax rates (e.g., Allenstown, a working-class suburb of Concord). Low-income households tend to be attracted by low rents and affordable homeownership costs.

Other cities combine low taxes with high valuations because they benefit from significant industrial development (for example, Lebanon, a small town near Dartmouth College). Lebanon attracts many young workers from the health care and IT sectors, but it also has high poverty by New Hampshire standards.

These different combinations give households a wide choice in finding the situation that suits them. But if the trial court’s decision stands, Lebanon would be a donor city and Allenstown a recipient city, even though their poverty rates are not much different.

By forcing property-rich municipalities to redistribute money to the rest of the state, cities will be perversely incentivized not to become property-rich. They will be able to block growth through zoning ordinances. They will be able to evade the oversight of local officials to ensure that they are using taxpayer dollars efficiently. Moreover, it will redistribute money from poor cities like Lebanon to wealthy cities like Brookline. It will also increase property values ​​in cities like Allenstown, making housing less affordable for poor families in the future.

Our research shows that nationally, centralized school funding and equalization programs are strongly positively correlated with strict housing zoning regulations, even after controlling for a variety of other factors. And research by other economists shows that equalization programs that rely on redistributing property tax revenues destroy a large portion of property wealth. So these concerns are not just theoretical.

Rather than equalizing school funding with a Rube Goldberg-style redistribution system, the state could ensure students’ access to a quality education by expanding its Education Freedom Account program, currently available to families with incomes at 400 percent of the federal poverty level. It could expand the number of charter schools and enact an open enrollment law, allowing students to attend public schools outside of the district, with money flowing from the “sending” city to the “receiving” city for each student who exercises that choice. These solutions would retain all the benefits of New Hampshire’s unique decentralized school funding system while creating educational opportunities for all families.