Robin Hood Lives in Texas

Thursday, October 30, 1997

Last spring Governor George Bush of Texas proposed a sweeping state tax reform that would have raised the sales tax rate from 6.25 to 6.75 percent. The move was a courageous one on the governor's part since it contradicted the governor's pledge not to raise the sales tax. Although the plan envisioned a reduction in taxes overall, the legacy of his father's failed attempt at reelection in 1992 (arguably because of reneging on his "read-my-lips, no-new-taxes" pledge) must have lurked in the background as a warning. Governor Bush's plan was not enacted, but this son of "read my-lips" proposal may still cost the younger Bush in future runs for elective office.

Governor Bush deserves some sympathy because Texas's method of local school finance has been a mess since 1989, when the state's supreme court declared the old property tax setup unconstitutional because it failed to meet the standard of "efficiency" required by the state's constitution. As in many states, the courts were swayed by widespread funding disparities between rich and poor districts. After the court ruling, the Texas legislature was put in the seemingly impossible position of reducing the inequality in the state's school system without violating any other parts of the state's constitution (such as the ban on statewide property taxes and on income taxes).

Schemes Straight out of Sherwood Forest

The last near decade has been marked by attempts to pass various types of "Robin Hood" laws, which would redistribute money from richer districts to poorer ones. These laws often led to legal conundrums (at one point both disparity and equality had been declared unconstitutional) or simply were not passed by the voters. A revised 1993 law was eventually deemed acceptable, apparently because it provided richer districts with five choices on how to give money to poorer districts. Since all five choices amounted to the creation of a statewide property tax, this decision can only be understood by masters of legal loopholes (the rest of us are left scratching our heads). At least one can now say that Texas has a unique version of "school choice."

Texas's old system was inequitable, but it had some desirable efficiency properties. There are virtues from connecting the raising of revenue (the local property tax) and the locus of spending (educational outlays by school districts). One benefit is that educational spending levels can reflect the varying preferences of families. The setup also promotes good schools because educators have to please their customers--local taxpayers--to raise revenue. In addition, the arrangement encourages healthy competition across public school districts because taxpayers can move elsewhere to secure a better education.

The current system is a mess because most revenue is still raised by local property taxes but the richer places get to keep only a fraction of their taxes. The other portion goes, in Robin Hood fashion, to the poorer districts. This setup discourages taxes and outlays in richer districts and therefore promotes a dumbing down of school systems overall. This effect is even stronger in states such as California that have greater disincentives for local districts to raise taxes. (For a general analysis of this phenomenon, see Caroline Hoxby, All School Finance Equalizations Are Not Created Equal, Harvard University, November 1996.)

Educational Equilibrium: Equity and Efficiency

Governor Bush wanted to rely on higher state sales taxes, redistributed on a per pupil basis to school districts, to eliminate the Robin Hood element of the current property tax. His plan would have removed the disincentive for rich districts to raise local taxes to finance local education. The danger, however, comes from detaching district revenue from the decisions of local voters, who are the district's customers. This change dilutes the incentives of educators to provide satisfactory services; in the extreme, if all districts were given fixed per-pupil allotments from the state, then the only remaining local control would come from taxpayers' ability to move elsewhere. (School administrators would care about this mobility because fewer students would mean fewer dollars from the state.)

Given the desire and legal requirement to establish more educational equity, states will have to shift in some way from localized to statewide financing. Unfortunately, this shift removes the important incentives created by property tax–based methods of school finance. Therefore, as states consider financing changes, they must also be concerned with how to reestablish the lost incentives. The key is to target state outlays at the customers (through school vouchers with an equal value per pupil) rather than the producers (through state funding for districts). In the voucher setup, schools would get the students and the money only if they performed up to the competition, which could come from private providers or public school districts. Thus, vouchers ("school choice") enable states to achieve educational "equity" for students while maximizing the incentives for good school performance.

Texas, as other states, should enact true school choice to attain schooling that is equitable and efficient. With this reform, the arguments about Robin Hood, leveling down, and weak incentives for good school performance would be things of the past.