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

ABSTRACT Beginning in the 1970s, many state courts declared the widespread inequality in education spending across schools a violation of 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 has voting over policies in both state and local elections. A counterpart computational model compares equilibrium outcomes under the alternative school finance systems and examines 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.