December 6, 2022

How Should States Address Local Wealth Inequity in Education Finance?

By Indira Dammu

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The way communities across the U.S. raise and distribute educational funding is inequitable. Most states give local communities broad authority to raise local funds for their own schools, mainly through property taxes. Property taxes are more stable than sales or income tax, which make up most state-level education revenue sources. However, reliance on local property taxes for local schools widens educational and taxpayer inequities between wealthy and less wealthy communities and can undermine equitable intentions in state education funding formulas. Differences in access to local revenue among districts mean that students in less wealthy communities often don’t have access to the same resources and opportunities as their wealthier peers.   

What can states do to close revenue gaps between wealthy and less wealthy communities? In Balancing Act: How States Can Address Local Wealth Inequity in Education Finance, Bonnie O’Keefe, Jennifer O’Neal Schiess, and I build on prior research to offer three policy approaches states can take to more equitably allocate state and local revenue to schools by:  

  • Accurately calculating and incorporating measures of local wealth into funding formulas: Better estimating how much a local district can raise toward their total formula amount, which enables state funds to be allocated more efficiently and equitably. 
  • Allocating additional funding to less wealthy districts: Guaranteeing similar revenue-generating powers for less wealthy districts or requiring districts to share money raised in excess of formula expectations with the state. 
  • Exerting state control over property tax policy: Replacing a local property tax with a statewide uniform property tax, distributed by the state, or placing a cap on local property taxes. 

States across the country are making progress in implementing more equitable ed finance policies in distinctly different ways, including Georgia and Texas. Where Georgia relies on an additional revenue stream specifically for less wealthy districts, Texas mandates that a portion of local funds raised by wealthy districts in excess of formula expectations be paid back into the state system and shared. Although the mechanisms employed by these two state examples may be different, the goal is to reduce wealth disparities between districts and allocate more equitable funding to students who need it the most.  

When determining which of these three approaches states should consider implementing, five design principles shape policymaking options:  

  • Equity: How well does the policy level the playing field between districts and taxpayers in wealthy and less wealthy communities?  
  • Transparency: Does the policy make it clear which government entities are responsible for education revenue?  
  • Feasibility: Is there local buy-in and a policy environment enabling effective implementation of the policy?  
  • Efficiency: Does the policy enable efficient use of state resources to fund all public schools?  
  • Stability: Does the policy rely on a predictable funding source that is less susceptible to economic events such as recessions and that enables predictable planning over time? 

Policymakers should balance these design principles with the unique political and policy dynamics within each state when considering how to close revenue gaps. We recommend the adoption of a statewide uniform property tax to reduce disparities between wealthy and less wealthy districts. Taking local variance out of property taxes and creating a uniform, statewide tax rate with revenues collected by the state and distributed via the state formula can drive down funding inequities. A statewide uniform property tax also increases transparency and predictability of school funding and local taxes. Of course, enacting a statewide uniform property tax rate requires political will and commitment from local communities to support changes to the tax system, even when those changes don’t directly benefit their schools. For these reasons, a statewide property tax may not be feasible for some states and pursuing other strategies — placing a cap on local taxes, for example — may be a step in the right direction.  

If we’re serious about closing educational equity gaps among students, states must play a larger role in tackling the way local communities raise and distribute funding to schools. Disrupting these inequities will help ensure that all students, regardless of where they live or go to school, get the resources they need to be successful. Although there isn’t a one-size-fits-all education finance solution, states have a variety of policy mechanisms at their disposal; inaction shouldn’t be one of them. 

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