Legal Challenges to Public Education Finance: July 2011

CHAPTER 1 INTRODUCTION

A. Financing Public Education in America

Certain issues in American public policy ebb and flow in prominence; national security, taxes, trade, social welfare, and even gun control have all had their time to be the center point of discussion. Perhaps no issue, however, has been as contentious as public education covering kindergarten to twelfth grade, and for good reason. Public education—which it will be called throughout this piece to draw an indelible line between it and private education—is not a mono- lithic idea like taxes or trade. Put in the simplest of terms, education was made compulsory by federal law, public schools are the responsibility of the individual states, and the majority of funding comes from local districts. Failing schools get the majority of media and public attention, and methods to improve public edu- cation are almost always met with mixed results, and correlated data is about the best we in public policy can hope for. There are just too many moving parts to conclusively and unequivocally state with certainty that a particular public education program or policy is a successful or a failure. This fact is bolstered by the fact of the overwhelming amounts of educational data, almost all of which is corollary, can be taken for many different interpretations.
There is though one strong correlation related to public education that is the source of this paper’s main idea. When more money is spent per-pupil, education tends to improve; more importantly and conversely, the less spent per- pupil the poorer the performance (Greenwald, Hedges, & Laine, 1996). While Greenwald, Hedges, and Laine’s meta-analysis of spending changes found a posi- tive correlation between increases and greater outcomes, the relationship be- tween spending and outcomes are usually weak to disputed. Regardless money is an important factor that must be considered. Just like all the other variations in public education, there are failing schools that spend immensely per-pupil and successful schools that get by and excel with less than average spending. If a state/district/school cannot afford contemporary textbooks, modern facilities, and the basic tool to enrich the minds of our nation’s youth they will almost certainly fail. Money is by no means the singular answer that will guarantee progress, but without adequate resources success is not even within grasp.

In the research compiled here, how much money is spent is a much more relevant question than how the money is spent. Public education derives its funding from federal, state, and local sources (Table 1) with varying input from each (U.S. Department of Education, 2005). While spending per pupil can vary wildly, even within one state, so can the funding from the state and local governments especially. The differences are in totals for certain, but more importantly in how the money is collected: sales, property, and/or income taxes. Differing systematic reforms largely play a secondary role to various spending totals and sources. A successful public educational program or method for one school district might not and cannot be expected to work in another school district no mat- ter how similar, if the second school district does not have the same funding source—both in amount and structure. There cannot be a correlative post hoc comparison when schools or districts are not on the same financial footing. But the future of public education policy mandates that a more effective formula or system be derived that helps compare success and duplicate performance.

How public education performance is measured is another point of con- tention; what does “success” look like? If different schools, school districts, and states are defining achievement by using different metrics, we can see these bodies declaring victory while their schools performance may be way off state or national averages. There is some literature that suggests a diversified, standardized, and universal method to more accurately weigh programmatic success is needed. According to Rumberger and Palardy (2005) who sought to find greater indica- tors of education success, greater measurements would mean including standard test scores and at least drop-out/transfer rates:
“...test scores alone are insufficient for measuring school performance. Failure to use other complementary measures of
school performance in addition to test scores could lead to erroneous conclusions about which schools are effective and
what characteristics promote school effective ness.” (pp. 26)
By allowing school districts and states to individually define what success looks like, opens the door for rampant misidentification of progress. Howard (2004) and, Lewin and Medina (2003) cite two examples is in how some schools or districts push weaker students out of the regular curriculum and into non- diploma tracks so that they do not have to count them as drop-outs (cited in Rumberger & Palardy, 2005, p. 4).

In the 2004-2005 school year, there was a total of $536 Billion spent on all public education in the United States by the local, state, and federal governments (U.S. Department of Education, 2005). Since 1990-1991, that total has more than doubled. While over two decades the spending has doubled, how the states and districts have changed their funding methods can be said to have changed even more. These two lower levels work to provide funding or finance primarily from three sources: income, property, and sales taxes. An entirely separate paper could be written about what if any effects tax methods have on spending or even outcomes. Income taxes have been used as a way to tap into the wealth of the affluent residents so as not to overburden the lower and working classes. This tax will almost always be a bastion of the states, as implementation by municipalities can easily drive residents to surrounding areas that do not have the tax (Nechyba, 1997). Nechyba’s research evaluated why property tax had become the sole tool of local governments to raise revenues, while states had greater power with the implementation of sales and income taxes. States will have to find what tax structure works best for their situation, including promoting education, adhering to court mandates, and providing a robust business atmosphere for graduates of their education systems.

While the drawback of collection logistics hamper the use of income tax at the local level, it does—or can—have powerful ramifications when levied. This source of government revenue tends to be the archetypal definition of a progressive tax: the more one has, the more he or she is expected to pay. Such taxes, in theory, provide equal access to services without an undue burden on the least fortunate. The result, or the ideal result, is a leveling of opportunity without a guarantee of outcome leveling. Wealthy families or individuals would pay more for public goods like education, so that children of less wealthy families could have their opportunity to prosper. Such a system acts to persistently chip away at the status quo so that hereditary prosperity and generational wealth do not become fait accompli. Baker (2007) evaluated economic prosperity and wages since the early 1970s and found that since the early 1970s average wages for working class citizens have stayed flat, when adjusted for inflation (p. 7). This increased de- mand placed upon wage earners—moving up tax brackets with no real personal economic improvement—coupled with the movement to eliminate unnecessary taxes, is poised to undermine the income tax’s impact on state budgets. The general trend in the states that do have an income tax is to mimic the federal government with progressive brackets that increase as the base wage increases. That is where the similarities end as the progression of the different bracket rates, the total number of brackets, and the income threshold points vary wildly, one would assume to meet each individual state’s needs.

Despite the mixed feelings surrounding the income tax and the push to cut all taxes whenever possible, most states rely on this revenue stream; forty-three plus the District of Columbia levy some form of income tax. Seven states— Alaska, Florida, Nevada, South Dakota, Texas, Washington1, and Wyoming—have no income tax whatsoever and the states of Tennessee and New Hampshire have an income tax for capital gains only (“State Individual Income Tax Rates,” 2010). While state income taxes have great value on funding public education, they typically do not come under the purview of local control; thus, discussion of income tax impact will be limited to state-level comparisons and not local ones.

As much as income taxes are under the control of state governments, property taxes are controlled by local governments and municipalities. Their implementation is of the same magnitude but in the different direction. According to Fisher’s work (1996), historically property taxes tend to be implemented by the states to some extent, but are mostly under the realm of local governments (p. 200). His book—The Worst Tax?: A History of Property Tax in America— certainly makes no equivocal statements about property taxes, but he does shine a light onto a fringe view of an important tax. There is great discussion about business and individual benefits, but little mentioned specifically about public education. He does make dubious claims that are unlikely to occur due to fiscal, political, and rational reasons. The argument is made that since states already control much of their districts’ education policies, that a shift to one universal state school board—like what is found in Hawaii—would translate into some benefits as well as save money. He loses all credibility, however, when he cites that in 1991 41% of collected property taxes went for education, and that, “Abandoning the property tax for school purposes would provide major property tax relief” (pp. 212). It is true that localities, states, and the federal government could cut taxes and save people plenty of money, but at what cost?

The nature basic notion of property taxes is to assess some rate of liability based on a house and/or land’s value. Therein lies part of the property tax criticism; basic property tax cannot be executed equally based on property value. Fisher (1996) continues:
“Real estate is poorly assessed, mostly because of competition among assessment districts results in pressure on assessors
to undervalue property. State boards of equalization have not been successful in topping competitive undervaluation.”
(pp. 124)
The same fault of local income taxes—local competition—is at work with property tax as well. There is this competitive race to the bottom where neighboring municipalities will undercut each other hoping to draw in more residents or main- tain the current population and work on tax volumes rather than individual yields. These local governments essentially engage in non-competition with each other until one—whose local tax revenues for public education has been eviscerated—caves and increases taxes. This decision then allows the other to do the same and lose less. This competition has gotten so bad that some states, Kansas specifically, had to step in and take over some local tax policies; the result of the shift was greater state control that came with their tax system.

These municipalities may or may not have wealthy landowners from whom they can derive education funding, thus causing wide variation in revenues. There has been an ebb and flow of this responsibility of property tax collection that echoes federal involvement in education. As states have capped or taken over property tax responsibility, they have thusly assumed the privilege of dictat- ing what school boards can and cannot do in the way of education (Sokolow, 1998). He argument is opposed to that of Fisher’s in that he embraces the property tax as a tool for greater local control. In districts in states with a low tax burden, it should be their right to impose greater taxes within to improve their own public education system. The same author highlights just how great the shift from local to state control could be:
“...state actions that eliminate or severely reduce local control over the property tax undercut the political as well as the
fiscal autonomy of communities.... When local elected boards control the tax rate, the property tax enhances the local
processes of representation and public priority- setting. No other revenue source, tax or non-tax, provides elected officials
with a comparable degree of discretion and flexibility.” (pp. 166)
If municipalities cannot dictate how or how well they fund their public education, they cannot shape a system that best suits their schools. Fisher (1996) continues the assault on those undermining the importance of the property tax by claiming:
“...such attacks may have long-term consequences that will make govern- ment more remote and even less responsive....
[and] may change the structure of government in ways that could be detrimental to both uniformity and equality.” (pp. 214)
As residents of a community demand that their property taxes be lowered, they unknowingly transfer local public education control to the state by default. But that discussion gets into an entirely different debate over the execution and existence of Dylan's Rule versus home rule in local governance policies, a separate paper unto itself.

The third funding source—sales taxes—does not have a particular monopoly on their usage as they are implemented equally by states and the municipali- ties within. MacManus’s (1990) holistic review of changes in methods of governmental funding highlighted just how popular sales taxes were becoming; in 1985 only two states were allowing the collection of any general sales taxes, but by 1990 thirty states were allowing some form of sales tax collection (p. 26). This shift can also be seen in relation to states getting away from the property tax (Fisher, 1996). The ideological notion was that consumption or demand should be the basis for taxation rather than supply (e.g. personal income). One of the drawbacks of the sales tax is the same of the other two; surrounding municipali- ties cutting such taxes to draw in shoppers or retain their own retail base. The additional problem of sales taxes is one of fairness. The property and income tax systems are progressive, that is to say the bigger or more expensive your house is or the more one makes in income, the liability percentage to be paid will be greater. But the sales tax has been demonstrated to be regressive; poorer and lower-income individuals and families pay a higher percentage of their wages to sales tax than the wealthier do. Davis and his colleagues published a large review of tax burdens in all fifty states for the think-tank Institute on Taxation and Eco- nomic Policy. Their research found that in Alabama alone, the bottom bracket of wage earners—those making less than $16,ooo per year—paid an average of 7.8% of their salary in sales taxes; the top one-percent of earners only paid 1.1% of their salary in sales taxes (Davis et al., 2009, p. 16). A family of four in these brackets will purchase many different items varying wildly in costs, but the necessities they buy—groceries, toiletries, sundries—cannot be expected to be that different. Many states have tried to address this fact, but most solutions serve to only make a straightforward tax much more complicated.

Of course, the judicious and thoughtful execution of these taxes— especially at the local level—requires true leadership rather than political expediency, and an excellent administrator rather than deceitful sycophant, especially so in times of economic recession. Reschovsky’s (2004) research looked at how and why education is one of the first programs targeted when a recession plagues state governments. He concluded that a monopolistic stake in any one tax, minimizing the other two, would leave any level of government in the financial hole, thus posed to cut public education (p. 93). It does not take an economist to understand if the local factory closes, income tax collections will dry-up; if home values decline, property tax revenues will decrease; if the shopping center closes, sales taxes will drop. It would be unwise to think none of the economic down- turns mentioned ever happened in the sampled units; the economy is a fluid entity subject to local, state, regional, national, and global trends. This funding volatility—especially of in-class spending—explains much of the motivation for the federal government getting more involved both in funding and in programmatic changes.

Yet, despite the federal government, states, and municipalities making a greater investment in their students, many of the outcomes have either remained unchanged or not changed proportional to the increased investment. Thus the source of the problem addressed here. States and school districts are facing a growing problem of greater performance demands coupled with a more and more complicated tax structure that makes securing reliable funding increasingly difficult. The modus operandi of federal public education support is derived from narrow, outdated, and incongruous achievement measures. In the wake of the No Child Left Behind law, if states and schools fail to meet these guidelines they can see their federal funding cut. In order to maintain this federal support, states increased their public education spending, as seen in Table 1. The percent of lo- cal contributions decreased as state and federal increases were the source of much of the doubling of spending. There is plenty of variance among the states, but this table gives a good idea as to the general trend in education expenditures and their sources. Not only did this extra spending not buy much in the way of improvement, but also served to bloat education budgets. When these taxes were cut or when—more importantly—the base of these taxes dried up due to changes in economic conditions, states and school districts were forced into proration or drastic reductions in education spending. Only when states and districts stabilize their funding and establish a reliable tax base, and the federal government adopts a more diverse measurement for success, can public education policies be meas- ured accurately.

Table 1 - Percentages of Local/State/Federal Spending

YEAR
National Spending Average Per Student (not adjusted for inflation)
LOCAL %
STATE %
FED %

1993 $5,923.73 45.61% 47.23% 7.16%
1994 $6,161.49 44.95% 48.13% 6.92%
1995 $6,362.51 44.39% 48.86% 6.75%
1996 $6,622.43 44.25% 48.98% 6.77%
1997 $6,964.82 43.98% 48.89% 7.13%
1998 $7,393.45 42.30% 50.34% 7.36%
1999 $7,852.12 40.97% 51.35% 7.68%
2000 $8,414.69 41.01% 51.26% 7.73%
2001 $8,800.04 40.65% 50.96% 8.39%
2002 $9,110.04 40.54% 50.44% 9.02%
2003 $9,574.71 41.25% 49.16% 9.59%
2004 $10,137.90 41.11% 49.17% 9.72%
2005 $10,745.22 41.19% 49.22% 9.59%
2006 $11,468.49 40.99% 50.05% 8.96%
2007 $12,113.63 40.79% 50.53% 8.68%

Legal Challenges to Public Education Finance

19 July 2011

CHAPTER 1 INTRODUCTION A. Financing Public Education in America

11 July 2011

Abstract, Table of Contents, and List of Tables

Intro