NEW REPORT: Where Money for Schools Comes from Matters Too

WASHINGTON—Where school funding comes from—not just how much there is—may be an important factor in the performance and improvement of K-12 school finance systems, according to a new report released by the Albert Shanker Institute today.

Using data from virtually all states over two decades, the authors assess each state in terms of how much of its funding comes from state sources (mostly income and sales tax) versus local sources (mostly property tax), and whether variation in these state and local “shares” affects funding outcomes.

They find that states that rely more heavily on state (rather than local) revenue tend to have more adequate and equitable school funding but also experience more funding volatility—i.e., more severe jumps and dips over time. Such volatility can cause chronic problems in budgeting and hiring processes even during relatively normal economic conditions, not to mention large revenue shortfalls during recessions.

“State revenue is crucial to any state’s school finance system, since it is typically targeted at high-poverty districts that can’t raise enough local property tax to meet their students’ needs,” explains University of Miami professor Bruce Baker, one of the report’s co-authors. “But state revenue, which is mostly from income and sales taxes, also tends to decline quite severely during economic downturns, and this hurts middle- and especially higher-poverty districts most.”

Relying too much on state revenue, according to Baker, “is like building your funding house on a foundation of sand.”

The authors recommend, first, that states exercise extreme caution when considering proposals to completely replace property tax revenue with state income or sales tax revenue. This could, the authors argue, address one problem (inequity) while exacerbating another (volatility) that is also harmful to the poorest districts.

The better approach, according to the report, is to maximize the strengths of state and local revenue while avoiding its weaknesses. In particular, the authors suggest that states, rather than local districts, should collect taxes on commercial and industrial property.

“The state taxing nonresidential property is potentially the best of both worlds,” says Haverford College professor Zachary Oberfield, another of the report’s co-authors. “It brings some of that relatively stable property tax revenue into the state revenue pool where it can be distributed to districts that need it most.”

“If we want to adequately and equitably fund our public schools, we have to go to the source,” says Randi Weingarten, president of the Albert Shanker Institute and the American Federation of Teachers. “State funding is crucial, but it’s also often at the mercy of the economy’s twists and turns. This report shows us that not only is stability important but that we can enact concrete reforms to fix the funding mix between states and localities. When we do, it’s far easier to create public schools where parents want to send their kids, educators want to work and kids thrive.”

The report, titled “The Source Code: Revenue Composition and the Adequacy, Equity, and Stability of K-12 School Spending,” was written by Bruce Baker (University of Miami), Matthew Di Carlo (Albert Shanker Institute) and Zachary Oberfield (Haverford College).