There’s a debate brewing over whether to change the state’s school funding formula. Common wisdom (as reported in The Boston Globe) is that the aid formulas in the 1993 Education Reform Act expire in the current fiscal year and that the Legislature will have to decide what to do next.
The common wisdom is wrong. The formulas defining the spending goal for each pupil–“the foundation budget”–and how state and local governments should share the cost of funding that goal have no time limit. Barring new legislation, these formulas remain in place, and the logic of the 1993 Supreme Judicial Court decision on school funding gives the state little choice but to continue funding them. The state has officially adopted (and funded) a definition of what constitutes adequate school spending. Were it to renege on its support of this concept, the court would almost certainly intervene, and would do so on an accelerated schedule.
What does end with the current year is the transition period built into the reform law, which envisioned that the transition to full funding of the foundation budget would be made over seven years. To that end, the law specified the spending increases to be made in each of the seven years–spending increases designed to “catch up” to the foundation. No spending targets were specified after that period, since the cost of maintaining foundation funding depends on ongoing inflation and enrollment increases and can easily be calculated each year.
What is Fairness?
Most complaints about the formula boil down to the simple desire to get more state money for one’s own town. However, any serious debate over the formula has to begin with an understanding of what the formula is trying to accomplish and what vision of fairness underlies it.
Although the details are complex, the underlying goal is not. The state wants to make sure that every district spends enough to provide its students with an adequate education. This foundation budget currently averages $6,500 per pupil–about $6,000 for average or wealthy districts, but as much as $7,500 for districts with a high proportion of children in poverty and $9,500 or so for the vocational high schools.
The law sets a ceiling on the local property tax rate required to support schools at the foundation level. If a city or town is taxing itself at the desired level but (because of low property values) falls short of the funding goal, the state makes up the difference.
The reason that Worcester, Chelsea, Brockton, and Lowell receive so much state aid is that, despite high local tax rates, their local revenues fall far short of the need.
In effect, the current formula is based on a vision of fairness that says every child should have an education funded at least at the foundation level and that the local property taxes necessary to support this should be roughly equal.
The law does not fully equalize property tax burdens around the state. The average “school tax rate” as measured by the reform law is $8.07 per thousand dollars of adjusted valuation.* Oddly, the loudest complaints are not coming from communities with the highest tax rates. For example, Barnstable, with a school tax of $6.36 (about 20 percent below the state average) has been vociferous about what it regards as unfairness. Perhaps this is because it looks at very wealthy nearby towns like Orleans with even lower rates ($2.75).
Paradoxically, the highest tax rates are paid by residents of some of the low-income cities. Despite its high state aid, Lowell is still taxing itself at $15.48; Lynn at $13.84; Worcester at $14.33. If fairness is defined as equal tax effort, first priority for additional aid should go to these high-tax cities.
How to Make it Fairer and Simpler
The formula could be much fairer and simpler. We should replace the portion of the local property tax that supports the foundation budget with a statewide property tax. Each school district would simply receive state funds equal to its foundation budget. This would eliminate all the complexity and argument associated with regional school districts and vocational schools. Wherever he or she lived in the state, each property owner would pay the same school tax rate. What could be fairer?
Instead of cutting the state income tax, we should divert excess state income tax funds to school aid, thus decreasing the statewide property tax. For example, cutting the income tax to 5.5 percent (about half the cut the Governor has recommended) would cost about $600 million. Using this money to fund schools would cut the statewide property tax by almost 20 percent, assuring that most taxpayers would see a reduction as a result of the change. By adjusting Proposition 2? levy limits downward, we could assure that these property tax reductions really occurred and that new state money was not simply used to raise local taxes for other purposes. Why cut the income tax, which is the fairest state tax and which does not generate much protest, when instead we could cut the property tax, which imposes genuine hardship on low-income and elderly families that have lived for a long time in homes that have greatly appreciated in value?
To further ease the burden on low-income and elderly homeowners, I’d propose a homestead exemption of $50,000 for all taxpayers and $100,000 for the elderly. Thus, a low-income family with a home valued at $150,000 would pay property taxes on only $100,000 worth of their home’s value; if the head of the family were over 65, tax would be paid on only $50,000.The accompanying chart shows how this would work in a town that is now at the statewide average school tax rate of just over $8. The new statewide tax rate would be $9.51, but because of the homestead exemption this would actually mean lower taxes for most homeowners. As matters now stand, a taxpayer with an average home ($150,000) would pay $1,212; this would fall to $951. If the homeowner were elderly, the tax would be only $476. Homes valued at $100,000 would save even more under this proposal; an elderly family with a $100,000 home would pay no tax. On the other hand, a non-elderly homeowner with a $250,000 home would save very little ($1,903 under my proposal as opposed to the current $2,020). The property tax savings depend not only on home value but also on a town’s current property tax. Thus, in a town like Barnstable with lower than average tax rates, the elderly and those with relatively inexpensive homes would still enjoy savings, but non-elderly homeowners with homes worth $250,000 would have to pay slightly more than at present. On the other hand, property taxes would fall dramatically in over-taxed cities like Lowell.
These examples suggest why such a plan is unlikely to be adopted. While it is fairer, simpler, and easier to understand, some taxpayers who now enjoy good schools with very low tax rates would have to pay more. Even though most taxpayers would be better off, the Legislature has been reluctant to make anyone worse off. A more likely outcome is that we’ll see a contorted effort to find ways to give more money to towns that already enjoy low taxes. To do so, the Legislature will make the formula even more complex and will increase rather than lessen current tax inequality. Alas.
Ed Moscovitch is President of Cape Ann Economics, a Gloucester, Massachusetts consulting firm. As a consultant to the Massachusetts Business Alliance for Education, he helped draft the proposals that served as a basis for the Massachusetts Education Reform Act of 1993. This article is an expanded version of a column originally published in the Boston Herald.