Fred Thompson: Thinking About School Districts and Property Taxes

Note: I have been bust moving my family back from Brazil to Portland and have had not time to blog.  It is back to Brazil in August so my time here in Oregon is tight and I will have difficulty blogging regularly.  Fortunately Fred Thompson rides to the rescue with a couple of blog entries - the first is what follows:

Local school districts, their boards, school superintendents, and district offices have come in for a lot of criticism of late. Dylan Scott, in a recent Governing magazine article (May 2013), reports that advocates, both left and right, increasingly call for the outright elimination of local school districts, which would mean turning educational policy/finance over to state control. This notion is surprisingly attractive to some conservatives, who would make state governments the only higher authority for individual schools, which would be state funded but independently controlled and operated, although a more likely outcome of full state-level funding and control would seem to be machine bureaucracies of even greater scale and scope than at present.

Is the antagonism toward local school districts justified? In Making the Grade: The Economic Evolution of American School Districts, William A. Fischel argues that it is not. Fischel adopts the prevailing economic view of the function of local governments in our unique system of fiscal federalism: local governments, both general-purpose governments and special tax districts are like businesses, property owners are equivalent to shareholders, and local officials create value by maximizing property values within their jurisdictions’ boundaries via the provision of services and amenities that can be more efficiently financed collectively than by individual property owners. This basic logic underlies local reliance on user fees and property taxes, which, where assessments reflect market prices, are the economic equivalents of user fees.

According to Fischel, school districts play a central role in this system, because of the importance of schools to a critical class of property owners: homeowners.

“A significant factor for many people deciding where to live is the quality of the local school district, with superior schools creating a price premium for housing. The result is a ‘race to the top.’ as all school districts attempt to improve their performance in order to attract homeowners.” Fischel also argues that locally funded schools, especially those funded by ad-valorem property taxes, provide homeowners with the motivation to monitor and control local jurisdictions, because amenities and taxes are capitalized in the value of their largest asset, their homes, and local governance gives them an opportunity to do so. Finally, he provides evidence that home prices are more responsive to district boundaries than to the boundaries of school attendance zones, which he attributes to the special role played by local school districts in the accumulation of community-specific social capital, “mainly through the networks parents establish,” which spills over to a wide array of collectively provided services and not just to schools.

 In defending school districts supported in part by local property taxes, Fischel also questions voucher programs, noting that their greatest virtue is also their greatest vice: greater competition among schools erodes location-specific social capital.

The tax-financed, local public school system makes “exit” (to private schools) more costly, which in turn promotes more “voice” within the community. Parents will inevitably seek to make their voices heard in their children’s schools, wherever they are located. Public schools induce those within the same jurisdiction to have a more common voice in self-governance in other community matters.

Critics of Fischel’s argument in favor of linking resources to location typically ground their claims on two priori beliefs. The first has to do with the demand for educational services, the second with democratic governance. The first of these is that education is primarily a public, not a private good, and should, therefore, be supplied equally to all. I am inclined to believe that this argument misconceives the nature of public goods. Public goods are characterized by two characteristics, non-excludability and non-exhaustibility, which means that only one quantity can be supplied to the citizenry within a given jurisdiction, that the citizenry’s enjoyment the good is entirely passive, and that the good must be equally provided to all, whether they like it or not.

Clearly neither of these characteristics nor their implications applies to educational services, at least not for the most part. Consequently, most economists believe that educational services are primarily private goods. For a friend of education, this should generally be seen as a good thing. The single most powerful implication of the theory of public goods is that they tend to be under supplied. The principal exception to this generalization occurs where they are combined with private goods and dominated by the latter.

However, to say that education is not primarily a public good does not mean that this argument is wrong. Repairing it in this case is fairly straightforward. Equity or, more correctly, enjoying the benefits of living in a reasonably fair and equitable community is itself a public good and the delivery of educational services and amenities may be an effective means of promoting its provision. However, the relationship between educational services and a more equitable society is an empirical question, one that that most of those calling for equal student funding neither ask nor answer. My own view of the evidence is that improving access to and the scope of pre-school services and meeting students’ basic needs and, thereby, raising attendance once they have started school will go further toward improving outcomes for students from low-income families than increasing school resources per se, and that those things are appropriately state responsibilities

Opposition to using local property taxes to finance schools also rests upon a peculiar view of democratic governance, which holds that citizens are entitled to certain services simply “by virtue of their membership within a polity,” that governments are obligated to provide these services equally to all, and that this obligation cannot be outweighed by other considerations. Consequently, if education is one of the services to which the citizens of a state are entitled, it must be provided equally to all. Here too, I am inclined to take issue with the argument. I would freely grant that all citizens have certain rights and have been afforded certain entitlements, but what those entitlements are and how far they go is entirely a matter for the members of the polity to decide through its participation in the processes of democratic governance, deliberation, and debate. Folks are well within their rights to argue that education should be a service to which all citizens are equally entitled; that education is a service to which all citizens are equally entitled violates both fact and logic.

Indeed, I would argue that, from the standpoint of democratic governance, the most important criterion by which any institutional arrangement should be judged is the degree to which it promotes citizen engagement and participation in the management of the polity and an understanding of the consequences of collective choices for themselves and their neighbors. And, while this factor does not outweigh all other considerations, it should weigh very heavily in our assessment of alternative institutional arrangements.

From this standpoint, our idiosyncratic system of fiscal federalism appears to work fairly well in general and specifically with respect or the governance of public education. There is evidence that the system promote citizen monitoring of school performance, that higher tax prices and home ownership are associated with higher levels of monitoring, and that greater reliance on property taxes and other measures of decentralized control are associated with greater efficiency on the part of school districts. Further, looking at interstate variations in average student achievement, operating stability, flexibility, and transparency, one consistently finds that they are inversely related to state level financing and control, both in cross-sectional analysis and panel studies. In the face of this evidence, one might conclude that it would be wiser to question the merits of state-level finance/governance than district-level governance.