Chapter 7 Fiscal Effort Fiscal Effort Fiscal effort

Chapter 7 Fiscal Effort

Fiscal Effort Fiscal effort measures how much a locality, state, or nation spends of its resources in relation to capacity – or their ability to pay

Capacity & Effort Measuring capacity is a good place to start examining how much a nation, state, or locality can afford to spend on education The relative effort of that spending – the degree of fiscal exertion a community commits to its education resources – tells a much more robust story about what people value

Relative Effort For example, poorer school districts can spend a greater share of their wealth on education while more affluent school districts can spend relatively little to support their schools in order to achieve the same level of services for the children.

Measuring Fiscal Effort in Relation to Wealth Is it right for the state to determine a minimum local effort required before a community is eligible to receive state funds? Can and should states “cap” local contributions to education – in effect saying to the locality that if they levy additional taxes, those monies must go back to the state to raise the floor of educational opportunity for other localities?

Measuring Fiscal Effort in Relation to Wealth Is it right for the Federal government to establish high academic standards that all students must meet regardless of a locality’s capacity or effort to provide?

Many Dispute How Much We Should Spend on Education Some believe that we spend too much on education for the results we obtain Others thinks that our spending does not reflect the priority we should place on education as an investment in human capital

US Capacity & Effort Does the United States spends more than any other country on education? No. This is only true if we include higher education spending figures.

Education Spending International Comparisons: 1988

US Education Spending in International Comparison Austria & Switzerland outspend the U. S. in secondary education while Austria, Denmark, & Switzerland outspend us at the primary level in relation to GDP on a per capita basis. To say that we spend more on K 12 education than any other country is not true & distorts public perceptions about the results of our fiscal efforts in education.

Education Spending as a % of GDP Another way to look at our national education expenditures is to examine what we spend as a percentage of our GDP When we examine spending as a percentage of the whole, we can see our national priorities

For example, If a family of four earning $60, 000 spent 50% of their gross income on their home mortgage, we could say that having a nice home was a priority for them. 50% of gross income = mortgage

For example, 30% of income=mortgage 20% of income = church If another family spent 30% of their income on their home and gave 20% to their local church, we could say that their home & church were important parts of their value system

For example, 10% of income=dining out If another family spent 10% of their income on dining out in comparison to the first two families who prepared & ate most meals at home, we could say that restaurant eating was important to the last family

We Spend $$$ on What We Value Likewise, examining education expenditures in this light shows the relative importance countries place on educating their children.

Relative Education Expenses in International Comparison

Seeing National Priorities in GDP The United States does not rank in the top five countries when examining spending in this light In fact, Sweden, Norway, New Zealand, France, Portugal, Canada, and Switzerland outspend the United States in GDP

How Do We Compute Effort? Effort is best described as a ratio of school revenue (expenditures) to the overall tax base, or, Revenue Effort = Tax Base

Computing Effort as a Ratio Without comparing revenue against the tax base, only the dollars contributed – rather than the capacity – would be examined Even if those dollars were based on a perpupil expenditure, wealthy districts spending just a few dollars more per pupil would always look like they were exerting more effort than any other school district

Computing Effort as a Ratio, cont. These dollars must be examined in light of their capacity to fund education We do that by making the figure a ratio taking the tax base into account

Computing Effort is Complex Effort must be computed on the basis of nations, states, or localities Computing effort by summing the local, state, and national tax revenues mixes apples, oranges, and nuts It misrepresents the overall picture

Computing Effort Appropriately One purpose of state funding is to equalize for local disparities in ability to pay for education A poor locality not putting much effort into education is made to look better if we include state funding The state has greater wealth than this poor locality. Adding the state funding will make the locality look better in terms of effort

Computing Effort Appropriately Therefore, to add state funding to the local funding in order to compute the effort ratio is a flawed concept Each level of funding must be computed on its own level

Computing Effort Appropriately, cont. On the other hand, richer states putting the same fiscal effort into education as poorer states will always “look” better in terms of effort unless we consider capacity The same is true for nations. That is why we looked at national spending relative to GDP

Comparison of Two Districts School District A School District B # Pupils 10, 000 Per Capita Residential Property Value $ 50, 000. Total Per Capita Property Value $ 75, 000. $100, 000. Per Capita Income $ 75, 000. $ 60, 000. Per Pupil Spending $ 6, 000. $ 7, 500.

Computing Effort Using Per Capital Property Tax School District A R TB $ 6, 000. $ 75, 000. E= . 08 School District B $ 7, 500. $100, 000. . 075 Using effort in relation to the per capita real estate tax base, School District A expends greater effort than does School District B. District A has 1/4 less property value yet spends only 20 percent less to educate each student.

Computing Effort In terms of effort in relation to the tax base of per capita real estate, School District A expends greater effort than does School District B –. 08 compared with. 075 School District A has 1/4 less property value than School District B yet spends only 20 percent less to educate each student

Computing Effort Using Per Capita Income School District A R TB E= School District B $ 6, 000. $ 75, 000. . 08 $ 7, 500. $ 60, 000. . 125 School District A (. 08) has a lower effort ratio than School District B (. 125). In terms of income available as a tax base, School District B displays greater fiscal effort than does A.

States Vary in How They Fund Education Many states do not use real estate value as a sole means to establish capacity to fund education. Virginia, for example, uses a composite index of real estate, income, and sales tax on a proportional basis to calculate the ability of a locality to fund education.

Wealth is a Measurement of Many Variables To look at capacity with only one measure – real estate value or income – would be a mistake. Legally & statistically, it would NOT provide an accurate measurement of a locality’s capacity

Wealth as a ratio: 50% Income & 50% Property School District A # Pupils School District B 10, 000 Per Capita Residential Property Value $ 50, 000. Total Per Capita Property Value $ 75, 000. $100, 000. Per Capita Income $ 75, 000. $ 60, 000. Per Pupil Spending $ 6, 000. $ 7, 500.

Computing Effort 50/50 Split: Income & Property School District A School District B R TB $ 6, 000. $ 7, 500. $ 75, 000+$75, 000 $100, 000+$ 60, 000. E= . 046875 School District A has an effort index of. 04 while School District B has an index of. 046875, the greater number indicating the greater effort.

Wealth as: 50% Property, 40% Income, 10% Sales Tax School District A School District B # Pupils 10, 000 Per Capita Residential Property Value $ 50, 000. 10, 000 $ 50, 000. Total Per Capita Property Value $ 75, 000. Per Capita Income $ 75, 000. $100, 000. $ 60, 000. Per Capita Sales Tax $ 2, 500. $ 1, 000. Per Pupil Spending $ 6, 000. $ 7, 500.

Computing Effort 50/40/10: Income, Property, & Sales Tax School District A R = $ 6, 000. TB $ 75, 000 (. 5)+$75, 000 (. 4)+$2, 500 (. 10) = or E= $ 6, 000. $67, 750. . 088560

Computing Effort 50/40/10: Income, Property, & Sales Tax School District B R = $ 7, 500. TB $100, 000 (. 5)+$ 60, 000 (. 4)+ $1000 (. 1)= or E= $ 7, 500. $ 74, 100. . 101215

Using Multiple Criteria for Determining “Wealth” Using multiple criteria for determining wealth is complicated, but They are a better statistical measure for determining wealth, allowing improved comparisons for determining effort

States Decide Multiple Measures of Wealth States can use whatever multiple measures of wealth they deem appropriate Many different and complex formulae exist to measure wealth, and they vary from state to state

In Sum, Effort Indices Vary School District A School District B EFFORT INDEX Property Only . 08 . 075 Income Only . 08 . 125 Property & Income (50/50) Property, Income & Sales Tax (. 5+. 4+. 1) . 04675 . 088560 . 101215

Measuring Relative Wealth A nation’s relative wealth is usually expressed in Gross Domestic Product It is more difficult to measure State Domestic Product; therefore, states & localities typically measure relative wealth by per capita income or per capita property value. Many include sales tax, especially in tourist areas.

Factors Influencing Effort to Fund Education 1 - The public’s interest & attitude about their public schools 2 - How people feel about taxes in general 3 - How citizens “feel” about their schools 4 - The % of the population having their children in public schools vs. private schools

Factors Influencing Effort to Fund Education, cont. 5 – The % of the population with children or grandchildren attending the public schools in that locality 6 -When trusted & supported leadership advocates for public education goals

Factors Influencing Effort to Fund Education According to Alexander & Salmon, “No one has been able to determine, up to this time, the effects of any one factor, or the combination of factors…, upon the fiscal effort made by any state to support its public schools. ”

“Tax Effort” A more appropriate way to compare the relative burden of state and local taxes Considers what each state would raise if it & its local governments would raise and applied national average tax rates to their own tax bases This “representative tax system, ” is tedious and expensive to apply”

State & Local Tax Effort, 1996 State Alaska California Connecticut Florida Illinois Nevada New York Wyoming Tax Effort % 116 101 115 90 97 73 141 74 Rank___ 4 15 5 32 25 50 1 48

Making Such Comparisons is Misleading The capacity of states to raise revenue varies broadly Some states derive large revenues from: Severance taxes from oil & gas Casino gambling Businesses incorporated Most other states obtain little revenue from such sources

Federal Funding for K-12 Education Has Increased K-12 Federal Funding 1965 1975 1985 1995 2002 $ $ $ 1, 942. 60 10, 617. 20 16, 901. 30 33, 623. 80 53, 334. 60

State Effort to Fund Education Highest Effort Lowest Effort 1 8 10 21 34 36 42 50 West Virginia New York Michigan Massachusetts Nebraska Texas California Colorado

Fiscal Effort Tells About a State’s Values By computing the effort index, the relative effort among states can be computed on an equalized basis and compared fairly We can then determine which states value the next generation’s education