If you made it through my entire post last week, you’ll have read about my beef with the Governor’s proposal to increase per pupil flat grants in the newest state budget. I also mentioned that the Governor’s increase to the School Levy Tax Credit (property tax relief) was diminishing the equalizing effect of the state’s main form of school funding, and that the DPI had proposed fixing the formula rather than increasing flat grants and tax relief. These are super wonky topics that have taken me a long time to wrap my head around – and I’m still regularly bugging my savvier tax policy friends with questions. So with that in mind, I did some number crunching to use the data to explain these various options for changing Wisconsin state school finance. Here’s what’s what:
Status Quo – This is the true result of the existing equalization aid formula. Schools receive support from the state proportional to their tax base. If the district has lots of property wealth, the formula should kick in less for them than for a district with low property wealth. The district decides how much it will spend per kid (this is called the shared cost), and the formula decides how much the state will contribute.
Status Quo + SLTC – What gets reported as the state’s contribution to each district’s shared cost is actually lower than reality once you factor in the School Levy Tax Credit (SLTC). Each district gets property tax relief equal to whatever percentage of the total tax revenue they contributed. So, say that altogether all the districts in the state levy $10M in taxes. If your district levied $100,000 of that, you get 1% of the SLTC budget. (The total state property tax levy was actually about $4.85 billion and the SLTC budget was $853 million in 2015-16.)
Walker Proposal – Here we’re looking at the effect of keeping everything else constant and adding on that per pupil flat grant and increased SLTC that Walker has proposed. For the sake of keeping this simple, I’ll just use the current equalization aid funding + the proposed new aid and SLTC boost.
DPI Proposal – DPI proposes scrapping the SLTC, no new per pupil flat grant, and three crucial changes to the equalization aid formula.
Minimum per pupil equalization aid of $3000. Right now, 19 districts receive no equalization aid. These districts have very high property wealth, making them ineligible for the funding. However, about a third of these districts serve 50%+ low-income students. Another 80 districts or so receive less than $3000 in equalization aid. So this change is a substantial increase in funding for these districts.
Increase the secondary cost ceiling. That probably means nothing to you unless you’ve been reading up on your state school finance policy. Here’s what that means: the equalization aid formula is set up in three tiers. At each tier, the state and the district will split a certain amount of cash, and the amount that the district pays is proportional to its tax capacity. DPI is proposing that the second-tier amount be raised, meaning that the state will split a little more with each district. In 2016-17, that ceiling was $9539. DPI would like to raise it to $10,464.
Add a 20% weight for low-income students in calculating property value per member. We know now that districts receive state support relative to their ability to generate revenue through local property taxes. What DPI wants to do here is essentially lower the property value per member for districts with lots of low-income students. Basically, if you had $1M in property value and 10 students, right now your property value per pupil is $100,000. Under DPI’s proposal, if 2 of those students were low-income, they’ll count as 1.2 students. So now you divide $1M by 10.4 students, giving you property value per pupil of $96,000. This means that districts will pay a smaller portion of each tier’s shared spending, relative to the size of their low-income student population.
Even though equalization aid is intended to allow property-poor districts to equalize spending and tax burdens across districts, it seems to be meeting neither of these goals. In the two graphs below, you can see that districts with higher tax rates actually spend less per student than districts with lower tax rates, and districts with the lowest property wealth tend to have the highest tax burdens. So not only are property-poor school districts not keeping up in per student spending, they are also faced with a higher property tax rate.
What’s more, the districts with higher property tax rates are the same districts that serve higher proportions of low-income students.
So it would seem that the equalization aid formula is failing to meet its goals. But remember, this isn’t the whole picture. Now we factor in the School Levy Tax Credit.
Status Quo + SLTC
The School Levy Tax Credit is distributed to school districts based on their share of the total property taxes levied for education in the state. Big districts in cities like Milwaukee, Madison, Racine, and Green Bay receive the largest dollar amounts in SLTC funds. However, these districts have more students and more taxpayers. The tax relief is spread out among many more taxpayers, thus meaning a smaller benefit is received by tax-paying residents in these districts. And in the context with which we’re concerned, property tax relief serves to increase the portion of that shared cost that the state foots the bill for. So we’re interested in the SLTC per student rather than the total amount. The graph below factors in the per student property tax relief received from the STLC. For example, say that a district’s shared cost is $10,000 per pupil and the state pays $2500 (25%) and the district pays $7500 (75%). If that district receives $1000 per pupil in property tax relief, the state now pays $3500 (35%) and the district pays $6500 (65%), increasing the share of state support by 10%. The graph shows the size of those increases by the amount of property wealth.
As you can see, the percentage increase in state support goes up as property wealth goes up, meaning that wealthier districts receive a bigger boost from property tax relief than poorer districts.
All districts’ share of state support increases after the SLTC, but the slop of the red lines (after SLTC) is not as strong as the blue line. In a perfect world, we’d want the lines to be perfectly diagonal. Your support from the state is high at low levels of property wealth, and low at high levels of property wealth. As the line shifts from diagonal to horizontal, the difference in amount of state support received by poor and wealthy districts gets smaller. In real dollars, this shift translates to an average of $600 per pupil for the lowest property wealth districts and an average of $3100 for the highest property wealth districts – the same districts that were ineligible for any equalization aid because of such high tax base capacity. How does this impact the equalizing power of the equalization formula? See below.
In general, Walker’s proposal simply adds $450 per pupil to each of the green bars in the previous graph. Every district’s per pupil state aid will rise by that much, plus a small increase from the expanded SLTC budget. Below, we see these increases by property wealth per pupil. While each group’s per pupil aid increases, remember that property tax burdens are highest for schools with the lowest property values, and Walker’s proposal does not alleviate that inequality.
In terms of the percentage state share of this spending, the graph below shows that Walker’s proposal (SLTC increase in bright blue, SLTC increase + flat grant shown in yellow) increases the state share across all districts. The increase is slightly larger for districts with higher property values.
What is notable here, however, is that the impact of property tax relief and flat grant aid is to significantly increase the state’s contributions to wealthy districts. The equalization aid formula on its own (Status Quo, in navy) provides only a very small share to districts with high tax capacity. While property tax relief (current SLTC budget in green, proposed SLTC budget in bright blue) raises contributions from the state for everyone, the increase is greatest for wealthy districts. The DPI proposal aims to redistribute these resources to support property-poor districts with high-need students.
Now that we’ve established that a) the equalization aid formula doesn’t do that much equalizing, b) the SLTC disproportionately benefits property-wealthy districts, and c) Governor Walker’s proposal does not improve disequalized property tax burdens or per pupil spending, does the DPI proposal offer something better? Using the three changes outlined above, I calculated the revised mill rates and equalization aid.
In the graph above, we see that the DPI proposal reduces the tax burden to spend the same amount for all districts, and the biggest benefits land on the lower end of the property wealth range. High-wealth districts still receive some benefit, though smaller in scale. In the graphs below, we see the real dollar impact.
On the left, we compare the status quo equalization aid formula (blue) with the revised DPI formula (red). All districts would receive more equalization aid as the state takes on a greater share of the cost. The biggest gains, however, are for higher wealth districts. This is largely due to the inclusion of the $3000 minimum in the DPI proposal. On the right, we compare the DPI formula (red) with the status quo + SLTC (green). These two look very similar, suggesting that the real effect of the DPI proposal would be to a) lower property taxes for property-poor districts or b) allow districts to tax at the same rate and spend more. This effect is seen below. In red, districts would maintain the same per pupil spending and reduce property tax rates, while in orange, districts would increase per pupil spending and maintain property tax rates.
The prior calculations assumed that districts did not increase their per pupil spending, but it is very possible that some districts would make another choice – to maintain property tax rates and increase per pupil spending with the additional equalization aid, or even to increase their own property tax rates to earn more from the formula. Districts currently spending the most per pupil might favor spending the same and decreasing property taxes, but districts with high need and low property wealth are incentivized to take advantage of the formula. Below is a demonstration of different decisions’ impact on the per pupil spending abilities of one example school district in the bottom quintile, one at the median, and one in the upper quintile of property wealth.
The Status Quo (navy) represents these districts’ per pupil spending for 2015-16. Status Quo + SLTC (green) does not change because the SLTC does not add additional funding but rather decreases the local share of spending. DPI Proposal Choice 1 (red) does not increase spending because these calculations assume that districts elect to decrease property tax rates and maintain funding. DPI Proposal Choice 2 (orange) assumes that these keep their property tax rates and the increase in spending represents the state’s additional support. In DPI Proposal Choice 3 (purple), districts increase their per pupil spending from 2015-16 by $1000. Here, we still see a significant disparity across levels of property wealth. However, below we see that per pupil equalization aid increases significantly under DPI Choice 3 for low property wealth districts, suggesting that the state would take on most of the additional spending for these districts, while high-wealth districts would be responsible for more of that extra $1000. We also notice that for these example districts, two benefit more from SLTC than the DPI proposal. This suggests that the DPI Proposal may not meet the spending equalizing goals as well as I thought it would.
However, we do see that DPI Choice 3 does provide a greater benefit than SLTC to lower property wealth districts in terms of share of state support. The DPI proposal, which eliminates the SLTC, would distribute more of the state support benefit to property-poor districts.
While two out of three of DPI’s proposals are effective in increasing state support for districts with low property wealth and high-need students, the $3000 minimum functions in very much the same way that Governor Walker’s proposed per pupil aid would. Particularly for the districts that receive no equalization aid or very little aid under the current formula, this part of the new proposal allows them to spend an extra $3000 (without increasing property taxes) on top of already far above average per pupil spending. I didn’t actually expect to see this. I figured the impact of the other two changes would be significant enough to close the gap a little more. Thus, I rescind my earlier enthusiasm for the DPI proposal, and advocate only for amendments 2 and 3: increasing the secondary cost ceiling and a 20% weight for low-income students in the equalized value calculation.
All of this is to say: what we’re doing right now isn’t working. If you live in a district with low property wealth, your educational resources are fewer than what’s available to a kid in a district with higher property values. We haven’t created a school finance system that helps the property-poor districts catch up, and that means we’re systematically giving high-income kids educational opportunities that low-income kids can’t access. Walker’s decision to add new cash to the budget is certainly better than no new funding at all, but the structure of that funding is crucial. We would do better to eliminate property tax relief that disproportionately benefits the wealthy and to target increased funding toward districts with high need students or low tax capacity.
If you’re calling your legislators, encourage them to amend the equalization aid formula to increase the cost ceiling and add a 20% weight to the equalized value calculation instead of spreading out the resources among districts who don’t need the extra help.