Capitalization, Equalization, and Intergovernmental Aid

Abstract

This article makes a simple but heretofore unappreciated point: In urban areas, voter movement will cause equalizing intergovernmental aid (such as state education aid) to be capitalized into the value of housing. Because poor voters are likely to be renters, they will have to pay for better schools created by state aid through higher housing costs. To establish this point, the article describes a very simple model of an urban area with two communities and three income groups. In the case of an urban area in which the central city is not large relative to the metropolitan region, the welfare effect of intergovernmental aid on poor voters is completely offset by higher housing costs. Rather than increasing the total resources available to poor people, intergovernmental aid amounts to a Hicksian price adjustment that leaves the poor no better off than before. The article then discusses real-world complications to the model, including alternative decision-making mechanisms and preferences, and concludes that capitalization is an important overlooked feature in education grant systems.

Why do households without children support local public schools? Linking house price capitalization to school spending

“…7 While Black (1999) looks only at houses very close to attendance district boundaries where land supply might indeed be equally and completely inelastic, Dee (2000) and Haurin and Brasington (1996) present estimates based on much less disaggregated data, which might be biased without controlling for land supply. 8 Several authors have argued that location-based aid (as opposed to grants to poor individuals) can have adverse consequences, since poor residents are typically renters who will be forced to pay higher rents if the transfers are capitalized into higher house prices (e.g., Hamilton, 1976, andWyckoff, 1995). 9 Variation in the extent of capitalization may lead to differences in homeowner benefits from the mortgage interest deduction and other federal taxes and subsidies.…”

School Improvement and Urban Renewal: The Impact of a Turnaround School's Performance on Real Property Values in Its Surrounding Community

“…Though many of the effects of Fraser Academy have demonstrated to be positive, research and thoughtful consideration should also be given to what result the increased home prices have had on accessibility to the neighborhood. Is the result similar to the pushing out of families who have historically lived in the neighborhood, as evidenced by increased rental rates in the study done by Wycoff (1995)? All of these effects could then be weighed against the positive effects the school's transformation has had on students and then considered for future modeling.…”

“…The anecdotal information gathered initially had examples of families purchasing homes motivated less by concern for getting the best discount on a property and more for its proximity and access to the school beginning to excel as compared to others in the district. This investment into real property in the vicinity has enabled these families to build home equity more rapidly than what market conditions would permit, a circumstance also witnessed by Wycoff (1995) in a study correlating increased rental values to improved school success. This real property equity may be something these families can draw upon in the future, perhaps in terms of furthering their children's higher education.…”

Central-Local Fiscal Relations in Turkey: A Technical Analysis of Fiscal Equalization

“…In other words, the discounted present value of a future stream of costs and benefits will affect housing prices. Following Oates' pioneering study, 38 many others, such as Shah 39 and Wyckoff, 40 have tested whether the capitalization effect occurs.…”