All School Finance Equalizations Are Not Created Equal

When compared to traditional categorical aid programs for school districts, equalization programs always cause leveling down in per-pupil spending.

Since the early 1970s, school finance equalization strategies have swept the nation. In an attempt to offer equality of educational opportunity to students, these programs level (or equalize) per-pupil spending between wealthy and poor school districts, But, do these different strategies achieve the same results from state to state? And, are there unintended economic consequences of school finance equalization? Most importantly, do school finance equalization plans achieve their educational goals?

In All School Finance Equalizations Are Not Created Equal (NBER Working Paper No. 6792) , NBER Faculty Research Fellow Caroline Hoxby finds that not all school finance equalization plans are alike. Plans can level per-pupil spending either up or down, but only those that level spending down result in nearly equal per-pupil spending across a state's school districts. Further, where financing is leveled down, more parents tend to send their children to private schools.

Under most equalization programs, poor school districts experience increased spending. However, poor school districts actually receive lower per-pupil school spending under equalization programs that level spending down a lot. This is evident from the experiences of California and New Mexico, two states with very stringent equalization programs. Further, this occurred even though California and New Mexico's equalization programs appeared to be more generous than the categorical aid programs that they replaced.

In terms of student achievement, which is the rationale for enacting school finance reform, equalization programs have weak effects. For example, in states where school finance equalization results in a leveling down of per-pupil spending, the high school dropout rate increases only slightly, Hoxby finds.

School districts often demonstrate a commitment to education through higher housing prices, which capitalize the benefits of unusually successful, productive schools. Because school finance equalization programs redistribute money among districts based on property value per student, they penalize districts with a demonstrated commitment to education. Hoxby finds, in fact, that property tax rates fall in communities with equalization programs that penalize school districts demonstrating a commitment to education through higher tax rates.

In short, the redistribution of funds is related negatively to a community's taste for education and to the school district's productivity in terms of student outcomes. That is, programs redistribute funds from communities whose residents have a higher taste for education to communities whose residents have a lower taste for it. According to Hoxby, these consequences of equalization programs are unintended. When compared to traditional categorical aid programs for school districts, equalization programs always cause leveling down in per-pupil spending: this is because equalization programs transfer funds to districts whose residents are only willing to spend a small share of their incomes on education.

Hoxby suggests that it is possible to minimize the negative effects of school finance equalization by combining elements of categorical aid with property taxes. This could be accomplished by redistributing funds among school districts on the basis of income and/or other demographic variables. For spending above and beyond state aid, districts could use local property taxes.

For this study, Hoxby examined nearly every school district in the 48 continental states which put into effect a school finance equalization plan for the years 1972, 1982, and 1992.

-- Lester A. Picker