Education Finance and Accountability Program
(EFAP)
 

Alex Stricker
William Duncombe
John Yinger

One of the best known empirical results in local public finance is that the value of property in a community depends on the local property tax rate and on the quality of the local public services.  This phenomenon, known as tax and service capitalization, is widely recognized, but many of its implications have not been recognized.  One implication that is important for school aid programs, but that has not appeared in the literature on school aid, is that any aid program that influences local tax rates and/or performance levels will lead to changes in property values.  Because aid formulas typically are based on property values, among other things, these changes in property values will have a feed-back effect on the aid each district receives.  In short, a state can control the aid formula, but it cannot control the aid amount, which is simultaneously determined with property values.  This project will use a New York state school data set, supplemented with housing information, to estimate the impact of local tax rates and school performance on property values.  These estimates will make it possible to incorporate property-value effects into an analysis of school aid programs.  The project will then determine the extent to which various aid programs affect property values and therefore alter the aid amounts different communities receive.  The distribution of aid (and even of performance) after these property-value effects are considered could be quite different from initial distribution, which is where all previous analysis stops.