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Reforming Reforms: Incentive Effects in Education Finance in Vermont

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  • Stephen J. Schmidt

    ()
    (Department of Economics, Union College, Schnectady, NY, USA.
    Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA.)

  • Karen Scott

    (Union College, Schnectady, NY, USA.)

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    Abstract

    In 1997, Vermont passed Act 60, which reformed its education finance system to achieve greater equality of spending within the state. Like other recent education finance reforms that included strong and transparent incentives to reduce spending, Act 60 was politically very unpopular. In February 2004, Vermont passed Act 68, an attempt to acheive court-mandated education equalization at a lesser political cost than that required by Act 60. In this paper we analyze the incentives for local spending created by Act 60 and Act 68, and estimate the effects the change will have on spending inequality in Vermont. We find that Act 68 greatly reduces spending disincentives created by Act 60, but reduces them disproportionately for wealthy towns. As a result it increases inequality of spending in Vermont relative to Act 60. Because spending is quite inelastic with respect to tax prices, however, the increase in inequality is not very large relative to existing inequality. Act 68 does result in lower tax prices in all towns in Vermont and hence produces a moderate increase in education spending statewide. It has also been more politically acceptable than its predecessor, though not unanimously supported. Our findings emphasize the importance of marginal effects of education finance, and suggest that understanding the way in which towns respond to the incentives those effects create is critical in designing successful education finance reforms. They also show that a rereform of education finance in response to political criticism of an initial reform can reduce political concerns without greatly decreasing the equalizing incentives.

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    Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0425.

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    Date of creation: Dec 2004
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    Handle: RePEc:rpi:rpiwpe:0425

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    1. Caroline M. Hoxby, 1998. "All School Finance Equalizations Are Not Created Equal," NBER Working Papers 6792, National Bureau of Economic Research, Inc.
    2. Rothstein, Paul, 1992. "The demand for education with 'power equalizing' aid : Estimation and simulation," Journal of Public Economics, Elsevier, vol. 49(2), pages 135-162, November.
    3. Silva, Fabio & Sonstelie, Jon, 1995. "Did Serrano Cause a Decline in School Spending," National Tax Journal, National Tax Association, vol. 48(2), pages 199-215, June.
    4. Robert L. Manwaring & Steven M. Sheffrin, . "Litigation, School Finance Reform, And Aggregate Educational Spending," Department of Economics 96-05, California Davis - Department of Economics.
    5. Murray, Sheila E & Evans, William N & Schwab, Robert M, 1998. "Education-Finance Reform and the Distribution of Education Resources," American Economic Review, American Economic Association, vol. 88(4), pages 789-812, September.
    6. Thomas Downes, 2003. "School Finance Reform and School Quality: Lessons from Vermont," Discussion Papers Series, Department of Economics, Tufts University 0309, Department of Economics, Tufts University.
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