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Designing state aid formulas: the case of a new formula for distributing municipal aid in Massachusetts

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  • Bo Zhao
  • Katharine Bradbury
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Abstract

This paper designs a new equalization-aid formula based on fiscal gaps of local communities. Using conceptual analysis and simulations with Massachusetts data, the authors illustrate the tradeoffs that policymakers face in deciding on the policy variables in the formula and lay out several general guidelines for setting up these variables. When states are in transition to a new local aid formula, the issue of whether and how to hold existing aid harmless poses a challenge. The authors show that previous studies and the formulas derived from them give differential weights to existing and new aid in filling the gap and hence effectively treat communities receiving greater amounts of existing aid more favorably than communities receiving less or no existing aid. As a fairer alternative, the authors propose a new approach that considers existing and new aid within a consistent framework by taking account of both in filling the gap. In addition, unlike previous research that focuses only on a single year’s new aid distribution, the authors simulate the dynamics of aid distributions over multiple years and examine their evolution over time. The authors further provide and compare several possible solutions to addressing the possible tradeoffs between short-term and long-term goals. Although the proposed aid formula is designed for municipal aid and tailored to Massachusetts, the authors note that foundation aid formulas for education implicitly treat existing aid in the same way and suggest that the framework, principles, and policy recommendations might also be applicable to other states designing new municipal aid formulas. ; Also issued as New England Public Policy Center Working Paper, 08-2

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 08-1.

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Date of creation: 2008
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Handle: RePEc:fip:fedbwp:08-1

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Keywords: Municipal finance - Massachusetts ; Municipal finance ; Local finance - Massachusetts ; Local finance;

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  1. Katharine Bradbury & Bo Zhao, 2007. "Measuring disparities in non-school costs and revenue capacity among Massachusetts cities and towns," Working Papers 06-19, Federal Reserve Bank of Boston.
  2. Yinger, John, 1986. "On fiscal disparities across cities," Journal of Urban Economics, Elsevier, vol. 19(3), pages 316-337, May.
  3. Ladd, Helen F. & Yinger, John, 1994. "The Case for Equalizing Aid," National Tax Journal, National Tax Association, vol. 47(1), pages 211-24, March.
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