The Third Rail: States Are Beginning to Rethink Who Pays for School

State K-12 funding formulas typically do two main things. They determine how much each public school system should receive, usually based on the enrollment and needs of the students served. And they determine how much of that amount comes from the state versus local revenue.

That second piece, the state-local share, matters a lot. Student needs and local tax capacity are not perfectly correlated. A well-designed state-local share policy can enable the state to use its resources fairly and efficiently by assessing how much a local community’s tax base can reasonably support, and then focusing state funding on districts that can’t generate the resources they need locally. But when states revise their formulas, they usually steer clear of major changes to state-local share. Five states that recently made major changes — Tennessee, Mississippi, Alabama, Delaware, and Pennsylvania — did so without significantly changing their state-local share expectations. The reasons are mostly political: A K-12 funding formula overhaul might be more achievable if local property taxes are not directly implicated.

That may be changing, though states are coming to the question for different reasons.

One approach focuses on property tax relief, combined with a push for more state investment. Property values and associated tax bills have grown substantially in many communities across the country in recent years, according to analyses from the mortgage industry and the news media. This has implications for housing affordability and taxpayer burden. We covered state limits on local property taxes in Issue Nine in March. Adjusting the state-local share for school funding is one lever policymakers have to lessen funding expectations on property taxes and make sure the state still provides a fair share of overall school funding. However, making this move bluntly can disproportionately benefit wealthier districts where property values are rising fastest. It could also weaken the stabilizing benefits of property tax revenues in the school funding mix.

Another approach focuses on state funds for greater efficiency and effect. For example, Rhode Island’s recent blue ribbon commission recommended that the state increase its total investment in education and require a minimum local share based on each community’s ability to pay, a change the state’s subsequent analysis suggests might cut some districts’ state share of formula aid to $0. And Connecticut’s blue ribbon commission has been given the explicit charge to “consider the responsibilities of the state, local governments, and school boards with respect to K-12 education and make recommendations on funding strategies, potential areas of efficiency, and accountability measures to maximize the impact of funding on student outcomes.” Connecticut’s commission members recently discussed strategies to adjust state funding to better account for varying local ability to pay.

Property tax policy can’t be separated from school funding policy. State leaders need to strike the right balance between meeting state obligations to fund public schools and fairly accounting for local communities’ differences in wealth and ability to generate funds. This is a tall order in inherently political debates that typically pit the interests of wealthy communities against those of less wealthy ones, and the needs and preferences of taxpayers and homeowners against those of students.

There is tremendous opportunity to improve how K-12 funding systems work and how fair they are for students and communities by examining state-local share policies. Too often, that opportunity is overlooked. Amid plateauing state revenues, mounting pressure from taxpayers to reduce property tax burdens, housing affordability challenges, and more states looking to address persistent gaps in student outcomes with better-targeted resources, the state-local share in school finance is getting harder to ignore, no matter how complex or politically fraught.

—Bonnie O’Keefe and Jennifer O’Neal Schiess

Don’t miss these new and upcoming resources from Bellwether’s education finance experts:

• Krista Kaput updated Bellwether’s “Fortifying Funding“education finance tool with new fiscal year (FY) 2024 data and found that per-pupil funding rose in 39 states even amid declining enrollment in 42 states, as state dollars filled the gap left by the winding down of federal COVID-19 relief. She also examined FY24 special education funding data and how flat federal dollars are interacting with rising numbers of K-12 students receiving special education services.

• Lynne Wells Graziano and Carrie Hahnel dug into the implementation of Alabama’s new funding policy. They documented what happened in the state’s districts in the early years of its Renewing Alabama’s Investment in Student Excellence (RAISE) Act implementation, which introduced new student-based funding elements and included perspectives from districts as well as lessons for other states seeking to ensure that funding reforms can translate into better student outcomes.
• John Bellaire and Paul Beach examined how states fund school facilities in “Building for Fewer Students” and found that state support varies widely. Fifteen states provide no dedicated state revenue for K-12 facilities. As a result, districts losing students, and the formula dollars that come with them, still carry much of the cost of maintaining and modernizing aging buildings. The report lays out three strategies for state leaders: improve monitoring of building needs, quality, and usage; align state facilities funding with enrollment realities; and help districts adapt buildings to changing enrollment.

The Big Picture: Trends We’re Watching

Special education spending continues to climb as a share of school budgets nationally, and one driver is a steady, multiyear rise in the population of students with  disabilities. Nationally, the number of students identified for special education services grew 16% between FY16 and FY24, rising from 6.7 million to 7.8 million students. As overall enrollment declines, students identified for special education services also make up a greater proportion of the public school student population.

The reasons behind this upward trend are complex and not fully understood. Some observers worry that funding formulas encourage schools to overidentify students with disabilities. However, the financial incentive for schools to overidentify students appears limited. Districts carry a strong legal obligation under federal law to meet the full, individualized needs of every identified student, and meeting those needs almost always costs more than what state and federal funding provides. A 2026 analysis by Bellwether’s Krista Kaput for the Center on Reinventing Public Education’s (CRPE’s) “Unlocking Potential” project found no reliable relationship between how much a state spends on special education and how many students it identifies for services. A parallel CRPE analysis by S. Sana Fatima similarly found no overall link between funding incentives and identification, though she noted that changes to funding formulas, such as adjustments to “intensity tiers,” can shift identification rates. This suggests higher funding alone doesn’t account for differences in identification rates, but changes to funding structures may alter identification patterns.

If schools were aiming to identify students for special education services to get more state or federal funding, that would be a very risky strategy, legally and budgetarily: Costs for special education fall disproportionately on local budgets. Bellwether’s 2024 analysis of FY20 spending across 5,694 districts in 24 states found that districts spent $38.8 billion on special education while receiving only $14.6 billion combined in dedicated state and federal revenue — a $24.2 billion gap averaging $8,160 in local responsibility per identified student. Seventy-one percent of districts studied spent a disproportionately larger share of local funds on special education than on overall noncapital spending.

Research points in directions beyond funding incentives. One factor may be court rulings, which have underscored the legal necessity of accurate student identification: A 2026 study found those rulings have measurably affected how, and how often, students are identified for special education services. Additional studies point to adjacent contextual factors: States with lower pupil-to-teacher ratios show lower identification rates, and identification rates run higher in states with higher median incomes and greater school choice enrollment, suggesting that resources and parental capacity to advocate may also shape who gets identified. Still other factors (e.g., reduced social stigma around special education or universal screening initiatives) suggest more opportunities for students with disabilities to get the supports they need, which is a step in the right direction.

There is no single research-backed approach to funding special education effectively. The answer likely combines funding reform that better aligns dollars with a wide range of student needs (e.g., tiered weights) and improvements in instructional and systemic practices, so that additional dollars translate into better outcomes. And forthcoming research may help answer some persistent questions about cost: A federally funded study led by the American Institutes for Research aims to produce the first comprehensive national picture of special education spending in decades. Results are expected in the next few years. But states will still need to adapt that national research to their own state context and changing student populations, all while schools and students need equitable and sufficient and fair resources today.

Spotlight on States: Notable News From Statehouses

• Missouri: The State Board of Education sent its budget request to lawmakers. It seeks flat funding for K-12 schools, instead of asking for the additional $300 million the state’s school funding formula calls for. This is the first time the board has not recommended full funding of the formula. The board did so in anticipation of a tighter state budget environment as revenue growth slows.
• New Hampshire: On Nov. 3, voters will be asked whether they want to cap their local school taxes and administrative costs. The measure would create a two-year, inflation-based cap on local school revenue if 60% of local voters approve, paired with a 6% cap on administrative budgets. Ballot language asserts that caps would not affect classroom instruction; the state Supreme Court recently denied a challenge to that claim.
• Indiana: In a recent survey conducted by the Indiana Coalition for Public Education, many superintendents said they’re cutting teaching and support staff to cover budget gaps resulting from a property tax overhaul enacted in 2025. That law created a new property tax credit for homeowners, exempted many companies from business personal property tax, and changed taxes on farmland. Forty-six percent of superintendent respondents said they’re cutting teaching positions, and 50% have already cut support staff, with many more reporting considering similar moves.

Follow the Money: What We’re Reading

• The Public School Forum of North Carolina looked at a possible shift to weighted student funding in the state, the product of a two-year study group process that included Bellwether.
• EducationCounsel released a summary of the U.S. Department of the Treasury’s proposed regulations for the Federal Scholarship Tax Credit, including takeaways for states, scholarship granting organizations, taxpayers, and students.
• Regional Educational Laboratory Midwest released a study conducted in partnership with the Indiana Department of Education examining how schools used federal funds to support COVID-19 pandemic recovery. The researchers found that most funds were used for tutoring, staff, technology, and mental health supports, and that there were few differences in how “high-recovery” schools used their dollars compared with “low-recovery” schools.
• Matthew Lee and Benjamin Scafidi, both of Kennesaw State University, examined district finances from 1998 to 2019 and found that districts with declining enrollment saw larger per-pupil funding increases than growing districts, not smaller ones.
• The New York Times’ Upshot asked 37 academics and researchers to rate a range of education reform ideas for both effectiveness and cost. A few cost-effective options, such as teaching aligned with the science of reading, rose to the top. Researchers emphasized the importance of strong implementation across all promising ideas.
• Zahava Stadler identified “trapdoors” for equitable state funding within and outside K-12 funding formulas, such as rules governing local revenue generation, the state-local share, and the allocation of funds from districts to schools, in a recent New America report.
• Christopher Cleveland and Dylan Lukes, a Brown University assistant professor and an independent researcher, respectively, looked at the long-run effects of redlining on school finance and found that districts with a legacy of redlining still raise less local revenue and rely more heavily on state and federal aid.