Chapter 7
Fiscal Effort
Fiscal Effort
• Fiscal effort measures how much a
locality, state, or nation spends of its
resources in relation to capacity – or
their ability to pay
Capacity & Effort
• Measuring
capacity is a
good place to
start examining
how much a
nation, state, or
locality can
afford to spend
on education
• The relative effort of
that spending – the
degree of fiscal exertion
a community commits
to its education
resources – tells a
much more robust story
about what people
value
Relative Effort
For example, poorer school
districts can spend a
greater share of their
wealth on education while
more affluent school
districts can spend
relatively little to support
their schools in order to
achieve the same level of
services for the children.
Measuring Fiscal Effort in
Relation to Wealth
• Is it right for the
state to
determine a
minimum local
effort required
before a
community is
eligible to receive
state funds?
• Can and should states
“cap” local contributions
to education – in effect
saying to the locality that if
they levy additional taxes,
those monies must go
back to the state to raise
the floor of educational
opportunity for other
localities?
Measuring Fiscal Effort in
Relation to Wealth
• Is it right for the
Federal government to
establish high
academic standards
that all students must
meet regardless of a
locality’s capacity or
effort to provide?
Many Dispute How Much We
Should Spend on Education
• Some believe that we
spend too much on education
for the results we obtain
• Others thinks that our spending
does not reflect
the priority we should place on
education as an investment in
human capital
US Capacity & Effort
Does the United States spends more
than any other country on education?
No. This is only true if we include
higher education spending figures.
Education Spending
International Comparisons: 1988
US Education Spending in
International Comparison
• Austria & Switzerland
outspend the U.S. in
secondary
education while
Austria, Denmark,
& Switzerland
outspend us at the
primary level in relation
to GDP on a per capita
basis.
To say that we
spend more on K12 education than
any other country
is not true &
distorts public
perceptions about
the results of our
fiscal efforts in
education.
Education Spending
as a % of GDP
• Another way to look at our national
education expenditures is to
examine what we spend as a
percentage of our GDP
• When we examine spending as a
percentage of the whole, we can
see our national priorities
For example,
• If a family of four
earning $60,000
spent 50% of their
gross income on
their home
mortgage, we could
say that having a
nice home was a
priority for them.
50% of gross income
= mortgage
For example,
30% of income=mortgage
20% of income = church
• If another family
spent 30% of their
income on their home
and gave 20% to
their local church, we
could say that their
home & church were
important parts of
their value system
For example,
10% of income=dining
out
• If another family spent
10% of their income on
dining out in
comparison to the first
two families who
prepared & ate most
meals at home, we
could say that
restaurant eating was
important to the last
family
We Spend $$$ on
What We Value
Likewise, examining education
expenditures in this light shows the
relative importance countries place
on educating their children.
Relative Education Expenses
in International Comparison
Seeing National Priorities
in GDP
• The United States does
not rank in the top five
countries when examining
spending in this light
• In fact, Sweden, Norway,
New Zealand, France,
Portugal, Canada, and
Switzerland outspend
the United States in GDP
How Do We Compute Effort?
Effort is best described as a ratio
of school revenue (expenditures) to
the overall tax base, or,
Revenue
Effort
=
Tax Base
Computing Effort as a Ratio
• Without
comparing
revenue against
the tax base,
only the dollars
contributed –
rather than the
capacity – would
be examined
• Even if those dollars
were based on a perpupil expenditure,
wealthy districts
spending just a few
dollars more per pupil
would always look like
they were exerting
more effort than any
other school district
Computing Effort as a Ratio,
cont.
• These dollars must
be examined in
light of their
capacity to fund
education
• We do that by
making the figure a
ratio taking the tax
base into account
Computing Effort is Complex
• Effort must be computed on the basis of
nations, states, or localities
• Computing effort by summing the local,
state, and national tax revenues mixes
apples, oranges, and nuts
• It misrepresents the overall picture
Computing Effort Appropriately
• One purpose of state
funding is to equalize
for local disparities in
ability to pay for
education
• A poor locality not
putting much effort into
education is made to
look better if we include
state funding
• The state has
greater wealth than
this poor locality.
Adding the state
funding will make
the locality look
better in terms of
effort
Computing Effort Appropriately
• Therefore, to add state funding to the local
funding in order to compute the effort ratio is a
flawed concept
• Each level of funding must be computed on its
own level
Computing Effort Appropriately,
cont.
• On the other hand, richer states putting the same
fiscal effort into education as poorer states will
always “look” better in terms of effort unless we
consider capacity
• The same is true for nations. That is why we
looked at national spending relative to GDP
Comparison of Two Districts
School District A
# Pupils
School District B
10,000
10,000
Per Capita Residential
Property Value $ 50,000.
$ 50,000.
Total Per Capita
Property Value
$ 75,000.
$100,000.
Per Capita Income $ 75,000.
$ 60,000.
Per Pupil Spending $ 6,000.
$
7,500.
Computing Effort Using Per
Capital Property Tax
School District A
R
TB
$ 6,000.
$ 75,000.
E=
.08
School District B
$ 7,500.
$100,000.
.075
Using effort in relation to the per capita real estate tax base,
School District A expends greater effort than does School
District B. District A has 1/4 less property value yet spends
only 20 percent less to educate each student.
Computing Effort
• In terms of effort in relation to the tax base of
per capita real estate, School District A
expends greater effort than does School
District B – .08 compared with .075
• School District A has 1/4 less property value
than School District B yet spends only 20
percent less to educate each student
Computing Effort Using Per
Capita Income
School District A
R
TB
E=
$ 6,000.
$ 75,000.
.08
School District B
$ 7,500.
$ 60,000.
.125
School District A (.08) has a lower effort ratio than School
District B (.125). In terms of income available as a tax base,
School District B displays greater fiscal effort than does A.
States Vary in How They
Fund Education
Many states do
not use real
estate value as
a sole means to
establish
capacity to fund
education.
Virginia, for
example, uses a
composite index of
real estate,
income, and sales
tax on a
proportional basis
to calculate the
ability of a locality to
fund education.
Wealth is a Measurement of
Many Variables
To look at capacity with only one
measure – real estate value or
income – would be a mistake.
Legally & statistically, it would
NOT provide an accurate
measurement of a locality’s
capacity
Wealth as a ratio:
50% Income & 50% Property
School District A
# Pupils
School District B
10,000
10,000
Per Capita Residential
Property Value $ 50,000.
$ 50,000.
Total Per Capita
Property Value
$ 75,000.
$100,000.
Per Capita Income $ 75,000.
$ 60,000.
Per Pupil Spending $ 6,000.
$
7,500.
Computing Effort 50/50 Split:
Income & Property
School District A
School District B
R
TB
$ 6,000.
$ 7,500.
$ 75,000+$75,000
$100,000+$ 60,000.
E=
.04
.046875
School District A has an effort index of .04 while School
District B has an index of .046875, the greater number
indicating the greater effort.
Wealth as: 50% Property,
40% Income, 10% Sales Tax
School District A
School District B
# Pupils
10,000
Per Capita Residential
Property Value
$ 50,000.
10,000
$ 50,000.
Total Per Capita
Property Value
$ 75,000.
Per Capita Income $ 75,000.
$100,000.
$ 60,000.
Per Capita Sales Tax $ 2,500. $ 1,000.
Per Pupil Spending $ 6,000.
$
7,500.
Computing Effort 50/40/10:
Income, Property, & Sales Tax
School District A
R = $ 6,000.
TB $ 75,000 (.5)+$75,000 (.4)+$2,500 (.10) =
or
E=
$ 6,000.
$67,750.
.088560
Computing Effort 50/40/10:
Income, Property, & Sales Tax
School District B
R =
$ 7,500.
TB $100,000 (.5)+$ 60,000 (.4)+ $1000 (.1)=
or
E=
$ 7,500.
$ 74,100.
.101215
Using Multiple Criteria for
Determining “Wealth”
• Using multiple criteria
for determining wealth
is complicated, but
• They are a better statistical
measure for determining
wealth, allowing improved
comparisons for
determining effort
States Decide Multiple
Measures of Wealth
• States can use
whatever multiple
measures of wealth
they deem appropriate
• Many different and
complex formulae exist
to measure wealth, and
they vary from state to
state
In Sum, Effort Indices Vary
School District A
EFFORT INDEX
School District B
EFFORT INDEX
Property Only
.08
.075
Income Only
.08
.125
Property & Income
(50/50)
Property, Income &
Sales Tax (.5+.4+.1)
.04
.04675
.088560
.101215
Measuring Relative Wealth
• A nation’s relative wealth is usually
expressed in Gross Domestic Product
• It is more difficult to measure State
Domestic Product; therefore, states &
localities typically measure relative
wealth by per capita income or per
capita property value. Many include
sales tax, especially in tourist areas.
Factors Influencing Effort to
Fund Education
• 1 - The public’s
interest & attitude
about their public
schools
• 2 - How people feel
about taxes in
general
• 3 - How citizens
“feel” about their
schools
• 4 - The % of the
population having
their children in
public schools vs.
private schools
Factors Influencing Effort to
Fund Education, cont.
• 5 – The % of the
population with
children or
grandchildren
attending the public
schools in that
locality
• 6 -When trusted &
supported
leadership
advocates for public
education goals
Factors Influencing Effort to
Fund Education
• According to Alexander & Salmon,
“No one has been able to determine, up
to this time, the effects of any one factor,
or the combination of factors…, upon the
fiscal effort made by any state to support
its public schools.”
“Tax Effort”
• A more appropriate way to compare the
relative burden of state and local taxes
• Considers what each state would raise
if it & its local governments would raise
and applied national average tax rates
to their own tax bases
• This “representative tax system,” is
tedious and expensive to apply”
State & Local Tax Effort, 1996
State
Alaska
California
Connecticut
Florida
Illinois
Nevada
New York
Wyoming
Tax Effort %
116
101
115
90
97
73
141
74
Rank___
4
15
5
32
25
50
1
48
Making Such Comparisons
is Misleading
• The capacity of states
to raise revenue
varies broadly
• Some states derive
large revenues from:
– Severance taxes
from oil & gas
– Casino gambling
– Businesses
incorporated
• Most other
states obtain
little revenue
from such
sources
Federal Funding for K-12
Education Has Increased
K-12 Federal Funding
1965
1975
1985
1995
2002
$
$
$
$
$
1,942.60
10,617.20
16,901.30
33,623.80
53,334.60
State Effort to Fund Education
Highest Effort
Lowest Effort
1
8
10
21
34
36
42
50
West Virginia
New York
Michigan
Massachusetts
Nebraska
Texas
California
Colorado
Fiscal Effort Tells About
a State’s Values
• By computing the effort index, the
relative effort among states can
be computed on an equalized
basis and compared fairly
• We can then determine which
states value the
next generation’s education