Capitalization, Equalization, and Intergovernmental Aid

This article makes a simple but heretofore unappreciated point: In urban areas, voter movement will cause equalizing intergovernmental aid (such as state education aid) to be capitalized into the value of housing. Because poor voters are likely to be renters, they will have to pay for better schools created by state aid through higher housing costs. To establish this point, the article describes a very simple model of an urban area with two communities and three income groups. In the case of an urban area in which the central city is not large relative to the metropolitan region, the welfare effect of intergovernmental aid on poor voters is completely offset by higher housing costs. Rather than increasing the total resources available to poor people, intergovernmental aid amounts to a Hicksian price adjustment that leaves the poor no better off than before. The article then discusses real-world complications to the model, including alternative decision-making mechanisms and preferences, and concludes that capitalization is an important overlooked feature in education grant systems.