School finance reform: Assessing general equilibrium effects

Abstract

In 1994 the state of Michigan implemented one of the most comprehensive school finance reforms undertaken to date in any of the states. Understanding the effects of the reform is thus of value in informing other potential reform initiatives. In addition, the reform and associated changes in the economic environment provide an opportunity to assess whether a simple general equilibrium model can be of value in framing the study of such reform initiatives. In this paper, we present and use such a model to derive predictions about the effects of the reform on housing prices and neighborhood demographic compositions. Broadly, our analysis implies that the effects of the reform and changes in the economic environment are likely to have been reflected primarily in housing prices and only modestly on neighborhood demographics. We find that evidence for the Detroit metropolitan area from the decade encompassing the reform is largely consistent with the predictions of the model.

The Effect of School Finance Reforms on the Distribution of Spending, Academic Achievement, and Adult Outcomes

“…(2) Do SFRs lead to enduring spending changes? Researchers have found that SFRs may affect marginal income tax rates (McGuire and Anderson, 2011), residential sorting (Tiebout, 1956), and shifting of income sources for school spending (Brunner and Sonstelie, 2003); be capitalized into housing prices (Epple and Ferreyra, 2008); and lead to loopholes or subsequent reforms to undo the effects of SFRs (Imazeki and Reschovsky, 2004). Accordingly, the effects of SFRs on school spending in the short run might be quite different from those in the long run.…”

Essays on public education finance

“…In addition to the evidence presented in this paper, these empirical findings are consistent with the predictions of the current model in the sense that a Foundation system may socially be beneficial over a Power-Equalizing system after accounting for the effects coming from the housing market and property tax revenues. While these results are consistent with this paper, Epple and Ferreyra (2008) do not model the political economy behind the Michigan reform but rather describe its effects. This paper analyzes welfare gains and provides conditions under which a system would be more likely to be chosen by majority voting.…”

“…As described above, the latter is crucial to rationalize recent switches from Power-Equalizing to Foundation systems. In a similar spirit, Epple and Ferreyra (2008) examine general equilibrium effects of school funding reform of 1994 in Michigan. This reform has two components: property tax reduction and centralization of school funding at the state level, with increases for low-revenue districts and revenue caps for high-revenue districts.…”

“…They also present empirical evidence to support these predictions for the Detroit metropolitan area. Also, Ferreyra (2009) applies the model in Epple and Ferreyra (2008) to study the effects of school finance reform on the Detroit metropolitan area. She estimates a general equilibrium model of multiple jurisdictions with 1990 data from Detroit.…”

“…Under a Power-Equalizing system, we have a two-dimensional policy space. Therefore, we must meet two conditions to guarantee that the single crossing property holds, as is in Fernandez and Rogerson (2003) and Epple and Ferreyra (2008 Given this, the Median Voter Theorem applies and the district with the median income is the decisive district. That is, hence, the preferred guaranteed tax base is monotonically increasing in income, we have y V P E = y M .…”