Thursday, October 12, 2017

The Effect of School Finance Decisions on Overall State Spending and Taxes

Zachary Liscow has posted an incredibly informative and complex analysis of the interplay between school finance litigation victories and legislative action.  While analysis in this general area is not new, his approach is much deeper.  Liscow attempts to measure not just whether school finance decisions affect per pupil expenditures, but how they affect tax policy, the differential burdens of that tax policy, and the redistribution of governmental resources.  These inquiries are really aimed at identifying macro-level trends, whereby school finance litigation potentially produces a redistribution of resources or, more bluntly, an overall reduction in inequality.  Do legislatures increases taxes on the wealthy while at the same time driving more state resources to the needy through schools?

In his abstract, he writes:

I find that the court orders’ distributional impacts do stick. The education spending is financed by tax increases that do not target the largest beneficiaries of the increased education spending, the poor and those with children. Thus, since the main beneficiaries of the school spending do not pay a disproportionate share of the costs, advocates for school finance reform are effective at transferring resources to poor families. The results suggest that welfare analysis of these legal rules should take into account not only efficiency but also distribution, in a departure from traditional economic analysis of legal rules.

In his more nuanced discussion later, he indicates that states do not typically redistribute existing resources in other areas toward education, they just raise taxes.  Those tax increases are pretty evenly felt across all households.  He conclude with the following:

This paper’s results are difficult to square with this underlying political economy assumption that that legislatures, even in the long-run, optimize the distribution of taxes and spending. This paper presents evidence of “zombie legislatures”: courts dramatically change the distribution of spending, and the legislature does nothing to offset those acts. Instead, the legislatures drift. Determining how much legislatures optimally should respond is beyond the scope of this paper, but the fact that there is no evidence of any offset at all suggests at least the possibility that a different background assumption about whether legislatures achieve the socially optimal distribution of taxes and spending may be appropriate. Of course, the paper says little about whether taxes and spending redistribute too much or too little and thus little about what that appropriate assumption should be. An important subject of future work is determining the impact of legislative drift on deviations from the optimal distribution of taxes and spending. And, more generally, the implications for policy design without a background assumption of an optimal distribution of taxes and spending are an important subject for future work.

Get the full paper here.

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