The Political Economy of School Finance Systems with Endogenous State and Local Tax Policies

Beginning in the 1970’s, many state courts declared the widespread inequality in education spending across schools to violate their state’s constitution. Funding systems then emerged providing differing approaches to state and local support of education. We develop a theoretical framework and characterize outcomes under alternative systems. Our framework is distinctive in having voting over policies in both state and local elections. We also develop a calibrated computational model to compare equilibrium outcomes under the alternative school finance systems and to examine across state differences in expenditures. The model predicts that voters prefer systems with mixed state and local finance with designs mirroring those observed in practice.