Fiscal Undercurrents Pulling Us Toward Universal School Choice?

Much as the Gulf Stream sets the course for trans-Atlantic cargo ships, there are many unseen socioeconomic trends that push and pull on the movement of society and public policy.

In the realm of K–12 education, there are two major fiscal trends that are silently pulling the United States toward a system that would allow universal school choice:

• a shift in the design of state-enacted school funding formulas toward funding students instead of funding schools, and
• a declining reliance on local property taxes to fund public schools.

In making those changes, state legislatures have, mostly unwittingly, set the stage for the continued evolution of public school finance toward universal school choice. In fact, universal school choice is fast becoming the only logical destination for public school finance in the United States.

Although it’s taken some time, in ever-increasing numbers state legislatures are figuring out that the old approach of funding schools has simply become too expensive due to its massive misallocation of funds.

Why State Funding Formulas are Shifting from Schools to Students

A century ago, the school-based funding approach worked reasonably well. New public schools were being built to provide access to education where people lived. Once the access problem was essentially solved by the 1950s, the seeds were sown for the demise of the school-based funding approach.

The strains on that old system became more apparent over the ensuing decades as American society became both more diverse and more mobile. The most obvious financial weakness was that the system did not efficiently shift money as students switched schools. Schools with declining enrollment lost little or no funding. Schools with growing enrollment were given little additional funding. As you might imagine, the first reaction was from the growing schools as they cried, “Foul!” So, state legislatures reacted by adding more funding for enrollment growth. However, they did not simultaneously reduce funding for declining enrollment schools—mostly because of pressure from local citizens and teachers’ unions.

It’s now easy to see why that was a recipe for fiscal distress. Once growth of the U.S. economy, and most state economies, slowed from the torrid pace of the 1950s and 1960s, the mounting pressure of increasing funds for growing schools while protecting funds for declining schools began to squeeze state and local government finances and drive up tax rates—particularly local property taxes. Yet still, the old school-based approach continued well into the 1990s in most states—now supported both by simple inertia and growing political pressure from teachers’ unions.

There is clearly more to the public debate around school choice than just the matter of how public schools are funded. But much like the hidden effects of the Gulf Stream on the flow of cargo shipments, the underlying structure of public school finance has tremendous influence on the flow of students.

With the bursting of the dot.com bubble in 2000, the terrorist attacks in 2001, and the ensuing recession, the financial strain of that old school funding system finally became too much to bear. In the face of economic strains and with student achievement stagnating, state legislatures found it increasingly difficult to justify continued increases in K–12 funding. Worse still, when they began to more closely examine the forces driving up school funding, they came to the unpleasant realization that much of it was caused by paying twice for many students. As student populations shifted between schools, the school-based funding formulas where paying both the former school and current school for the same student.

The rational reaction across the nation has been to modify the state-enacted school funding formulas to allocate funding to students, not schools. That is generally referred to as “money following the students.” With public school funding tied tightly to student enrollment levels, not school buildings and classrooms, the problem of double payment evaporates. As simple and seemingly obvious as this idea is, it has taken a long time to mature—and in many states it is still evolving. However, it is now quite clear that this is the direction that public school finance is moving in the United States.

As we approach the point where every public school is funded primarily by monies tied to students, it becomes much easier for policymakers and citizens to envision the next logical step—where every school (public and private) is funded by monies tied to students.

Why Reliance on Local Property Taxes to Fund Public Schools is Declining

Over this same time period, another important fiscal trend was taking hold. Ever-mounting property tax burdens were producing waves of taxpayer revolts at different times in many states. The opposition to property taxes was not based so much on what the money was used for, but on other factors. Some opposition was based on the view that property taxes are an infringement on property rights. Although the basis of that argument is unrelated to the amount of the tax, certainly as the tax burden rose their sense of being infringed upon grew. Many others linked their opposition to concerns that the tax is, in some ways, disconnected from ability to pay. For many older citizens, they watched their property value and tax burden rise while their income dropped and stagnated in retirement. To them, it seemed patently unfair that they were asked to pay more taxes every year, despite their dwindling income.

With public schools being the biggest, or among the biggest, users of property taxes in most states, legislatures began to look more closely at the dependence of public schools on property taxes. In many states, the logical response was to shift funding dependence from local property taxes to state-levied taxes such as income tax and sales tax. That has been done in many different ways in different states. Still today, the dependence on local property taxes to fund public schools varies widely across the country. Northeast states typically continue to have a heavy reliance on local property taxes for public schools. As you journey south and west, the funding mix shifts more heavily to state-levied taxes. But more importantly, in nearly every state, the recent trend is to reduce dependence on local property taxes.

Interesting, but you may be wondering how that trend affects school choice.

Taxpayers have a special relationship with the many different taxes they pay. They expect taxes levied locally to be used locally. Consequently, tax laws typically restrict the uses of tax revenue to the confines of the geographic area subject to the levy. Thus, when public schools are funded by a local property tax levy, both public expectations and the law demand that the revenue flow to the local public schools. That creates a significant barrier to allowing the “money to follow the students.” As previously explained, expanding school choice is more difficult when money is tied to specific schools.

So, as the trend of less dependence of public education on local property taxes continues, the vision of offering every student a choice of schools becomes more feasible and likely.

There is clearly more to the public debate around school choice than just the matter of how public schools are funded. But much like the hidden effects of the Gulf Stream on the flow of cargo shipments, the underlying structure of public school finance has tremendous influence on the flow of students. In both cases, it is much more difficult to try to move against the prevailing current.

With these two growing trends in public school finance, it is now the case that the current is shifting in favor of more student choice. Let’s hope the prevailing winds also shift to our back.