Estimating the Effects of School Finance Reform: A Framework for a Federalist System

Abstract

This paper models the impact of state finance systems on the distribution of spending levels across districts. The paper assumes sorting of residents into districts based on demand for school spending rather than income, as most previous studies have done. With this approach, I am able to utilize the true distribution of wealth across districts to estimate tax price changes and to predict changes in district spending levels in response to a change in financing rules. I look specifically at three forms of state finance: those in which districts receive a set per pupil grant from the state and are not allowed to raise additional funds, those in which districts are allowed to raise unlimited additional funds, and those in which this supplementation is capped. The model, as well as simulations, indicate that the ostensible benefits of a system with unlimited local supplementation -- that it retains much local control over funding decisions on the margin while insuring an "adequate" level of financing for all districts -- may not be sustainable because high wealth districts have no incentive to support state funding. A system with no local supplementation, on the other hand, may be politically difficult because it forces many voters far from their preferred spending levels. Capped supplementation may provide a balance between local control and spending equity.

JEL Classification: H52, H71, H70, H40