The Impact of Property Tax Limitations on School Funding and Performance.

• Author: Knudsen, James J.
• Position: In Nebraska - Statistical Data Included

Because school districts derive a large proportion of their revenue from property taxes, tax limitations are an important education finance issue. The author explores the effect of tax limitation legislation on school districts in Nebraska.

Complaints about the equity of property taxes are a popular refrain across the United States. People in metropolitan areas where assessed valuations tend to increase robustly often perceive that growth as merely a means of fueling increased government spending. The landowners and farmers in rural areas, meanwhile, perceive their tax bills to be proportionately larger than the government services they receive. These perceptions have meant increasing pressure on lawmakers to slow the growth in government spending and/or property tax collections. Since Proposition 13 was passed in California in 1978, many states have passed or attempted to pass tax and expenditure limits on local government. In 1996, the Nebraska Legislature passed LB1114 to limit property tax rates. This measure provided a cap on the property tax rates of all local government units in total and included a specific limit on school district levies. This article seeks to ascertain the impact of this legislation on education funding and school perf ormance.

Property Tax Limitations and Education Finance

Property tax limitations attempt to constrain the growth of spending, property tax rates, assessed valuation, or some combination thereof. Because a large proportion of property tax collections go to local school districts and because a large proportion of school district revenue comes from local property taxes, a discussion of property tax limitation inevitably involves a discussion of education finance.

The impact of property tax limitation on education finance and school district revenues is dependent on the effectiveness of the limitation in reducing property taxes and on the response of the state legislatures to the reduction of local revenues. How effectively the law limits property tax collections depends on the nature of the law. Property tax collections are the product of the property tax rate and the assessed valuation. Limitation laws vary from state to state, but they typically restrict tax collections, spending levels, property tax rates, assessed valuation, or some combination of those methods. For instance, Proposition 13 in California limited both the tax rate and assessed valuation. Limits on revenues (expenditures) or on both tax rates and assessed valuation are more likely to be binding than limits on only tax rates or assessed valuation. If only property tax rates are limited, the limit will likely be capitalized into property values, making the limit less effective. Likewise, if assessed v aluation is limited, property tax rates can be increased to negate the effect of the limit.

The other component that influences the effect of property tax limitations on school districts is the state response to shrinking school district revenues. If the property tax limitation is binding and state aid is not increased, school districts are certain to face tighter budgets than before the law. However, if the state increases funding, it is possible that the effect of the property tax limitation will be muted.

Another aspect of the state aid effect is on equalization. Since court rulings in the 1970s, most states distribute their aid with an equalization formula. Equalizing aid provides relatively more state aid to districts that are poor (usually measured with respect to property wealth per student) and relatively less state aid to districts that are wealthy. Since the tax limitation laws reduce the importance of local property tax revenues for school districts relative to state aid, a property tax limitation may improve the equity of educational spending.

Because of the disparity in tax limitation legislation from state to state, researchers have not arrived at a clear consensus on the effect of limitation laws on school spending and performance. Shadbegian studied limitations in general and found that such laws reduce the importance of property taxes but that local governments raise revenue from other sources to mitigate the effect of the limitation. [1] This effect is most pronounced when the limitation law also limits the ability of local governments to shift revenue sources. With respect to school districts, Figlio examined data from 49 states and found that tax limitations increase student-teacher ratios and reduce student performance. [2] In Illinois, Dye and...