Budget & Finance

Property Taxes Fuel K-12 Budgets. How Well Does That Work?

By Mark Lieberman — November 28, 2022 4 min read
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Local property tax revenue covers more than a third of all of America’s annual spending on K-12 public schools. But is that a best-case scenario, a necessary evil, or an outdated relic?

A new report from the Lincoln Institute for Land Policy, a nonprofit think tank based in Massachusetts, poses those questions by examining the landscape of school funding in five states. The authors conclude that it makes sense to continue using property taxes to pay for public education—but with some reforms to eliminate existing inequities.

Here’s why this report matters. Property taxes are rising as home values soared during the pandemic and inflation puts the squeeze on consumers’ wallets. Political fights over property taxes are a perennial fixture of election season. And the complexities of school funding may be opaque to educators, even as it undergirds their livelihood.

The report was written by Daphne A. Kenyon, an economics consultant and public finance expert; Bethany Paquin, a senior research analyst at the Lincoln Institute; and Andrew Reschovsky, an economics professor emeritus at the University of Wisconsin-Madison.

The authors recommend a nationwide school funding system that combines progressive property tax programs with robust and flexible state aid that accounts for financial disparities among districts, the evolving pressures of inflation, and variable needs among diverse students.

Here are some facts and takeaways from the report’s recommendations for improvements to school funding. Also, read the full report.

Property tax funding is consistent and reliable

People can avoid sales taxes by shopping in nearby places where they’re lower. Companies can skirt income taxes by relocating offices. But dodging higher property taxes is far more cumbersome. That means property tax collections tend to be more stable and reliable than other forms of local tax revenue.

At their best, property taxes also provide citizens with a transparent view into where their money is going. When school districts need money for a new building or a fresh set of laptops, they ask their voters to chip in more on their property tax bills. Voters don’t always agree, but when they do, it’s because they see a direct connection between a line item on their tax returns and an improvement in their community.

Property tax funding is tailor-made for perpetuating existing inequities

One of the most common knocks against funding schools through property taxes is the likelihood that neighborhoods with lower home values will have less well-funded schools and perpetuate a cycle of disinvestment.

The report gives an example that bears out those criticisms. One district with 100 students has $30 million in property wealth. Another district of the same size has $60 million in property wealth. The latter district would only have to tax its citizens half as much in order to generate the same per-pupil spending as the other. Or, if both districts taxed their residents the same ($16.67 for every $1,000 of assessed value), the wealthier district could spend twice as much per pupil.

Circuit breakers aren’t just for turning off the electricity in your home

More than half of U.S. states have programs called “circuit breakers” that provide property tax relief to low-income homeowners. The report says these programs can be hugely beneficial for school funding, providing relief to needy families without lowering overall rates and jeopardizing school revenues in the process.

Not all circuit breakers are created equal, though. In Massachusetts, only elderly residents can take advantage of them, and the maximum credit they can receive is $1,130 per annual tax bill. In Wisconsin, there’s no age limit, but only households with an income below roughly $25,000 qualify, leaving out many homeowners struggling to pay bills. Stronger circuit breakers that relieve low-income households without diminishing revenue from medium- and high-income households would help stabilize school budgets, the report argues.

State aid works well in theory, but it varies a ton in reality

When property taxes fall short, states make up the difference—or at least, that’s what many people expect and believe.

It’s not quite that simple, though. Some states contribute a far larger share of K-12 education spending than others, due in part to substantial variations in formulas that guide education allocations. School finance experts charge that many state aid formulas are woefully out of date; the report cites South Carolina as an example of one that hasn’t been updated since before a major statewide change in tax policy in the mid-2000s.

State aid is also more volatile than local revenue. The broader fortunes of the economy can play a major role in the waxing and waning of state budgets. Schools feared being on the downside of that variation at the start of the COVID-19 pandemic, when a free-falling economy portended an enormous dropoff in education funding that never quite materialized.

Property taxes aren’t the only taxes that fund schools.

Most people assume local school funding is synonymous with property taxes. But in roughly 10 states, local sales or income taxes make up more than 5 percent of all local revenue for K-12 schools. In Louisiana, school districts can impose sales taxes, which make up more than one-fifth of total revenue for K-12 education in the state.

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