Rich districts, poor districts: the property tax equity impact of Arkansas school finance equalization.

Author:Jordan, Meagan M.
Position:Report
 
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  1. INTRODUCTION

    From 1992 to 2003, the State of Arkansas was immersed in the Lake View legal action. The lawsuit originated from the Lake View School District in Phillips County, which is an impoverished rural area in "The Delta" region of Arkansas. The complaint alleged that the state's funding system was inequitable and harmed the students and taxpayers of poor districts. Throughout this time period, the legislature reacted to the court case in anticipation and as a result of rulings. Ultimately, the Arkansas Supreme Court ruled and affirmed that the state's funding system was inadequate and inequitable according to the Arkansas Constitution. Changes in the funding formula to address adequacy and equity rulings of the Arkansas Supreme Court have significantly increased state funding to Arkansas school districts.

    One of the complexities of intergovernmental funding is determining how the higher level of government, the funder, will address disparities across the lower level of governments, the recipients. As Dafflon (2004) points out, it is "intolerable" to not address the differences in "area, geography, population, and economic potential" (p. 523). The difference in the capacity of some jurisdictions to raise revenue is the key issue. The funding level of government does not want to provide a disincentive to the higher capacity recipient for raising own-source revenue but also does not want to penalize the lower capacity recipient for the inability to raise adequate revenue. Therefore, evaluating the effectiveness of an equalization system involves determining how well it has addressed these inter-jurisdictional differences in capacity (Dafflon, 2004). For the vast majority of local school districts in the United States, revenue-raising capacity is determined by the taxation of the assessed value of real property.

    Given that local property taxes are the basis of state equalization funding of school districts, the purpose of this paper is to examine the equity impact of the reform on poor and disadvantaged school districts. Specifically, this study seeks to determine if the lower wealth and less advantaged school districts have a higher property tax burden than the higher wealth and more advantaged school districts, and whether the tax burden has been lowered since implementation of equalized funding reform. First, this paper provides a literature review of Arkansas' school funding reform, equalization, and tax burden. Then, there is a discussion of the methods and results along with implications for equalization and inter-district equity.

  2. ARKANSAS EDUCATION FUNDING REFORM

    The Lake View School District in Arkansas filed a lawsuit in August of 1992 claiming that the use of property taxes as a primary means of funding public education is inherently unfair to students and taxpayers in districts with lower property values. While the case worked its way through the judicial system, there were several reforms along the way.

    In 1994, the Arkansas public education funding system was initially ruled unconstitutional in the Lake View case. While the State appealed, Act 917 of 1995 was passed (Arkansas Department of Education [ADE], 2001). Act 917 of 1995 changed Arkansas' method for distributing aid to school districts. The Act required state equalization funding to be distributed to districts based on assessed value and the average number of students enrolled in school each day. The State determined the amount for equalization by adding all state and local funds "available" for all public schools and dividing by the number of children. "The purpose of this funding is to equalize the disparities of property wealth throughout Arkansas" (ADE, 1996, p. 29).

    In 2000, the case expanded beyond equitable distribution of funds to include the issue of adequacy. Two constitutional issues were addressed, which were the requirement that the State provide a "general, suitable, and efficient system of free public schools" found in the state's constitution and the equal protection provisions. The judge's ruling included the following:

  3. The system is the sole responsibility of the General Assembly.

  4. The tax effort should be evenly spread.

  5. The system must provide the necessary resources throughout the state.

  6. The system must provide an adequate education.

  7. The system must be properly managed (ADE, 2001, p. 8).

    In anticipation of the Arkansas Supreme Court ruling on the Lake View v. Huckabee case, the General Assembly addressed the constitutionality of public school funding during the 2001 regular legislative session. The case was pending decision by the Pulaski County Circuit Court. On May 25, 2001, the judge issued a ruling that the school funding system was still unconstitutional. In November of the following year, the Arkansas Supreme Court upheld the ruling of the Circuit judge and declared the system inequitable and inadequate. (1) The state was ordered to conduct a school finance adequacy study, which had been requested in court rulings as early as 1994.

    Prior to the landmark ruling and subsequent reform, poor school districts like the Lake View School District had property values too low to raise sufficient funds, even if with a higher property tax rate. The ruling stated, "Because wealthy school districts are able to provide more educational resources than poor districts all students in Arkansas do not have an equal opportunity to learn. Lake View provides an example of the limitations of a poor school district" (p. 15). The ruling also explained that previous efforts to adjust the funding formula were not sufficient to meet constitutional requirements because funding was limited to available state and local funds. Funding had not been based on what was necessary to provide adequate education, which was the constitutional responsibility of the state and not local governments (Lake View v. Huckabee, 2002).

    The General Assembly created the Joint Committee on Educational Adequacy who contracted the adequacy study. The results of the study were presented in September of 2003. As a result of the study's recommendations and the court rulings, the General Assembly annually met in a series of regular and special sessions from 2003-2006 (Arkansas has a biennial legislature). The reform addressed a range of issues, including teacher salaries, facilities, curriculum, as well as increase in district funding from the state (Arkansas Bureau of Legislative Research [ABLR], 2007).

    According to the Lake View opinion, there was "an inherent disparity between a property-wealthy school district that can easily raise substantial funds through the uniform rate of tax and a less property wealthy school district that can only raise the funds to offer the barest necessities" (p. 96). Therefore, the state supplements the minimum required funding level for each district with the equalization funding to reach the state per pupil spending amount that the legislature determines to be adequate. There are categorical areas of funding that focus on student needs such as national school lunch students (a measure of poverty), English language learners, and students in alternative learning environments. These funds are distributed to school districts under specific purpose funding formulas. The formulas are applied the same across districts so that the amounts do not vary across districts (ABLR, 2007).

    The reform not only increased the foundation amount; it dramatically increased categorical funding. The foundation amount is the minimum amount of money that the legislature determines must be spent to ensure adequacy. It is comprised of a local district contribution via property taxes and the state equalization amount. As a result of the court-ordered adequacy study, the initial foundation amount at the time of reform was $5,400 per student. The State's foundation funding aid is the amount that must be provided above the local contribution to reach the foundation amount. The local aid is largely based on the required ad valorem local property tax rate of 25 mills (a mill is $0.001). While each local district has the same required tax rate, they vary across the state in...

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