The Effect of Mandated State Education Spending on Total Local Resources

Working Paper: NBER ID: w10701

Authors: Katherine Baicker; Nora Gordon

Abstract: Many states are under court-order to reduce local disparities in education spending. While a substantial body of literature suggests that these orders and the resulting school finance equalizations have increased the level and progressivity of state education spending, there is little evidence on the broader effects of such measures on the change in total resources available not only for schools, but for other local government programs as well. When states spend more on education, both state and local budget constraints change. We find that while mandated school finance equalizations increase both the level and progressivity of state spending on education, states finance the required increase in education spending in part by reducing their aid to localities for other programs. Local governments, in turn, respond to the increases in state taxation and spending by reducing both their own revenue-raising and their own spending on education and on other programs. Thus, while state education aid does increase total spending on education, it does so at the expense of drawing resources away from spending on programs like public welfare, highways, and hospitals. These findings provide insight into the effectiveness of using earmarked funds to achieve redistribution.

Keywords: education finance; state education aid; local government spending; school finance equalization

JEL Codes: H0; H7; I2

Causal Claims

Cause	Effect
State education aid (I22)	Local spending decisions (H72)
State education aid (I22)	State aid for other programs (H59)
State education spending (H52)	Local revenue-raising efforts (H71)
State education spending (H52)	Local expenditures on public programs (H75)
State education aid (I22)	Total spending on education (H52)
Local governments' response to state education spending (H75)	Resources for other essential programs (I39)