“The reason that this [anti-property tax] movement, starting with Serrano, has been so bad for education is that it’s barked up the wrong tree, and incidentally destroyed the good things about the local property tax without really addressing the problems of inequalities in incomes and other family problems that exist between communities.”
When Alexis de Tocqueville visited the United States in 1831, one of the features of the new republic that attracted his attention was how “Americans of all ages, all stations of life, and all types of dispositions are forever forming associations.”
In the U.S. today, the French aristocrat would find that tendency undiminished, particularly in the formation of fundraising associations to improve public schools, which have ballooned in recent years to more than 4,000. The puzzle for a present-day de Tocqueville would be: If parents are so eager to donate money to their schools, why not just simply raise school taxes?
When Dartmouth College economics professor William A. Fischel visited California in 1980, he discovered another school finance puzzle in the form of Proposition 13. Approved overwhelmingly by voters two years earlier, the initiative slashed the property tax rate and held assessments down to very low levels, which severely limited the ability of local governments to fund their activities, particularly schools. Why, asked Fischel, would Californians vote overwhelmingly for a measure that caused such distress for their local schools?
Fischel’s explanation of what caused Proposition 13 represents a major contribution to our understanding of why local control of taxes and spending leads to better schools, and how the return on local taxes is reflected in home values. His work also provides a cautionary tale for advocates of equalized education funding to be careful what they wish for, because they may get it.
A magna cum laude graduate of Amherst College, Fischel received his Ph.D. from Princeton University in 1973 and subsequently joined the faculty at Dartmouth College. He has written extensively on local government taxation and finance, school finance reform, land-use controls, and zoning issues. From 1987 to 1997, he served as a member of the Zoning Board in Hanover, New Hampshire. He recently spoke with School Reform News managing editor George Clowes.
Clowes: What made voters in California overwhelmingly approve Proposition 13?
Fischel: I found the explanation in the Serrano decision, which was the first–and one of the most extreme–of the school finance decisions.
In 1971, the California Supreme Court enunciated the principle of wealth neutrality, and, in 1976, they implemented it in such a way that essentially required that school spending across California from publicly financed sources had to be essentially equal.
With what I knew about local government and property taxation, I realized that this would really change the way people looked at their property taxes. Generally, local property taxes and the benefits from spending those taxes locally are reflected in home values.
Nobody likes taxes, but if property taxes for local schools go up, people see that they might get better public services, and so the increase redounds to their benefit. It redounds to their benefit even if they don’t have children in school, because somebody who buys their house might be interested in the benefit of a better school. But this principle was essentially cut off at the knees by the second Serrano decision in 1976, which divorced the connection between local property taxes and local spending.
Clowes: So that if you were paying, say, $3,000 a year in property taxes for your local schools, that money didn’t go to the local schools any more?
Fischel: That’s right. After Serrano, your property taxes, particularly those for schools, were essentially a statewide tax. The state arranged it so that whatever you paid in property taxes had very little effect on the quality of your local schools. If your property tax base was too large–or property-rich, as it was called–the state would take some of your property tax revenues and send them to other districts. If you were property-poor, you’d pay less in local property taxes but you would get a supplement from the property-rich districts so that your spending would be the same.
Property tax variations became irrelevant to how much schools could spend. It didn’t matter how much you paid in local property taxes; you got the same in school spending pretty much regardless. So this divorced the connection between what you spent and what you got, and so the property tax became an excise tax.
Before 1978, Howard Jarvis had not even been able to get his propositions on the ballot, and other ballot initiatives to lower property taxes had been defeated in 1968 and 1972. But Serrano completely changed the landscape of public financing: What you paid locally was no longer spent locally. So when Proposition 13 came along, the voters said, “Yes, let’s adopt this.”
Clowes: A similar situation seems to be developing in Vermont, where parents are raising funds for their schools through voluntary donations rather than local property taxes because the state takes such a large portion of every property tax dollar they raise for schools.
Fischel: That’s right. The Vermont Supreme Court did essentially the same thing that the California Supreme Court had done without any inkling that this might have bad consequences for the schools. In fact, many of the so-called “donor towns” or “property-rich” places are populated with poor people, who just happen to have a power dam, or a ski lift, or something that generates a lot of property taxes. Some of these towns now are saying, “We’ll cut public financing for schools and try to make it up on the private side.” It just goes to show the power of local financing.
I also found evidence in other states that court decisions have similarly undermined local property taxation, and this has caused a great deal of the centralization of school finance that we’ve seen in the last 20 years. I think there is a connection between the centralization of school finance–i.e., less local taxes and more state control of taxation–and the declining quality of public schools.
Clowes: As a practical matter, when you make per-pupil funding roughly equal across a state, is there any evidence that this results in improved educational achievement, particularly in the schools that previously were said to be underfunded?
Fischel: Very little evidence. In fact, the evidence I’ve seen suggests exactly the opposite, that their education gets worse.
The results of Serrano and Proposition 13 have definitely hurt low-income children in California. This is partly because, contrary to the widespread beliefs of the Serrano equal-funding advocates, property-rich places are not filled with a bunch of plutocrats. In fact, more than half of the people that live in property-rich districts are below the average income for the state.
There are three or four good national studies that indicate that when the state assumes responsibility for school finance, average test scores go down. Centralizing funding does not raise the average score for the low-income places. If you look at the statewide figures, you find that the averages have gone down for the states that have centralized school finance–averages on SAT scores, on NAEP scores, and on Armed Forces Qualification tests. The evidence is quite negative all across the board.
Clowes: So if you want to improve educational achievement, equalizing funding does not appear to be the way to do it?
Fischel: It’s a bad way to improve educational achievement. But it’s important to understand why. I’m not a person who thinks that spending doesn’t matter. I think it does matter, but what matters a great deal more is who controls that spending.
The strongest control, of course, would be the individual parent. The next best thing to the parents would be the local school district, which controls the funding and the spending for education. They do a much better job than the state or the national government would do. This is because voters at the local level see a connection between what they spend and what they get, and they are willing to make sacrifices to get better education.
When funding is moved to the state level, people may in principle be in favor of more spending on education but they don’t see much reason–other than good feelings–to support high-quality schools. At the state and national levels, the non-consumer interest groups like the teacher unions, administrators, and board associations are much more powerful. They tend to diminish the interests of the consumer side, which is the parents and children in school. That’s also quite consistent with the theory that centralization results in lower quality even if it might increase spending.
Clowes: Would the same principles apply to support for vouchers if they were funded at the state level as compared to being funded by the local school district?
Fischel: Vouchers are a very efficient way to empower people who haven’t got the money to choose their school. I’m a believer in vouchers on the demand side. People who have the money will want it spent well on their children, and they will monitor schools more closely to see that that’s being done. So that’s a good thing. I think vouchers are a wonderful thing on the demand side.
My concern with vouchers is that if the funding comes from the state, how are you going to get those voters with no children–who constitute at least two-thirds and maybe three-quarters of the electorate–to be interested in funding the vouchers? If the money is spent on their local schools, there’s a feedback effect that is very beneficial to these retired or no-children voters because it will add to the value of their house. But when funding is at the state level, they don’t have this connection.
Now, if vouchers were funded at the local level, you’d probably get some of the same benefit you get out of property tax financing. That is, if you use local property taxes to finance vouchers for the community to use, that might make the community more attractive. Why would the majority without children vote for this? They’re going to vote for it if it brings people to their district who bid up the prices of houses and thus build up their wealth. If it benefits somebody in another district, it won’t pass as readily. On the other hand, if the school administrator can set the level of tuition for the sending districts, then this problem probably can be overcome.
Those are my concern about vouchers. It’s not that I’m opposed to them in principle, but I do worry about who’s going to vote for them.
Clowes: The basic argument that’s raised by the equalization proponents is that it’s unfair for a property-rich community to be able to generate taxes for public schools easily with a much lower property tax rate than a property-poor community, which must set a higher tax rate to generate sufficient funds. Doesn’t that impose unequal burdens on the residents in the two communities?
Fischel: Absolutely not. The reason is that the property market offsets the benefits. There’s empirical evidence on this. This is not theoretical speculation on my part.
I’m going to make a careful distinction here that the advocates of this position very often do not. I’m going to take two families who have equal incomes. So we’re not talking about differences in incomes; we’re talking about differences in the community tax base.
One of these families chooses to live in a community that has a very large tax base because they have a power plant or a dam or something that generates a lot of their taxes, so their taxes are usually low. The other family can live right next door in another community, and so their taxes are going to be high. And they live in essentially identical houses.
Actually, I have an example of this from New Hampshire. A developer put up virtually identical houses a few hundred feet from each other in the towns of Bow and Concord. Both towns send their children to the same high school, but Bow’s tax rate is about half that of Concord’s because Bow has a large power plant that pays a large portion of the town’s property taxes. In the low-tax community, the one with the power plant, people have to pay roughly $16,000 more for their houses than in the high-tax town.
If you take their low property tax payment and add their high mortgage payment, it comes out to be the same as somebody in the high-tax community, where they’d have a high tax payment but a low mortgage. Their total housing costs are identical. The total housing cost–that is, tax plus housing, mortgage, and other related costs–are identical in both places. There is no unfairness whatsoever.
Now, the advocates of equality will say, “Wait–these property-poor places are filled with poor people.” But then it’s a completely different argument. If you’ve got a place that has high concentrations of poor people, we know that you get problems. The answer to that is to distribute state aid on the basis of income, or single-parent families, or poor educational background–not on property tax bases.
The reason that this movement, starting with Serrano, has been so bad for education is that it’s barked up the wrong tree, and incidentally destroyed the good things about the local property tax without really addressing the problems of inequalities in incomes and other family problems that exist between communities.
My recommendation on the voucher front is to give vouchers to places where there are poor people. Central cities like Cleveland or Milwaukee aren’t tax-starved; they’ve got large tax bases. Their problem is that they just have high concentrations of poor people. Empowering those poor people with vouchers is the right thing to do.
But you don’t have to undermine the local property tax to do that. You can take state money and distribute the aid on the basis of income; the amount of the voucher can be based on the income of the families. That’s not ruinous to the local property tax system. You want to give money to poor people, not poor places.
For more information…
William A. Fischel, “School Finance Litigation and Property Tax Revolts,” http://www.lincolninst.edu/workpap/wpap4
William A. Fischel, “How Judges Are Making Public Schools Worse,” http://www.act60.org/fischel2.htm
George Clowes is former Heartland senior fellow addressing education policy. He served as founding managing editor of School Reform News between November 1996 and January 2005.
