Tax limit repeal and school spending

Property taxes are a major source of revenue for local governments, including school districts. However, these taxes can be subject to state-imposed tax and expenditure limitations (TELs) as a way to reduce governmental spending.

Several studies suggest that limits on property tax reduce local governmental and school district spending. But how would repealing tax limits influence school district spending?

Phuong Nguyen-Hoang, assistant professor in the School of Urban and Regional Planning at the University of Iowa, researched the impact of repealing tax limits, with surprising results.

Published in the March 2013 edition of the National Tax Journal, Nguyen-Hoang presents evidence that the 1986 tax limit repeal on small city school districts (SCSDs) in New York State made no significant impact—either immediate or gradual—on the spending of the SCSDs.

“By repealing tax limits, my initial expectation would be that school districts would extravagantly overspend, but that is not the case,” says Nguyen-Hoang, faculty in the UI’s Public Policy Center and sole author on the study. “My results are counterintuitive, and that is what is interesting.”

While many New York State districts have never had tax limits, 65 SCSDs’ property tax levies were subjected to constitutional limits in 1951. Voters subsequently revoked these limits in a statewide election. Property tax levy limits constrain the total amount of revenue that can be generated from property taxes independent of tax rates.

This study uses panel data over 15 years (1980-1994). Nguyen-Hoang measured the impact of tax limit repeal by comparing the before-and-after mean differences in total operating education expenditures per pupil between 64 SCSDs and 495 matched comparison school districts in New York State that never had tax limits.

Estimates show that the 1986 tax limit repeal did not result in a temporary spending increase during 1987, or spending changes during each subsequent year. These results suggest that “at limit” SCSDs were not constrained by tax limits and were able to reach their desired levels of spending under the limits.

Nguyen suggests that these SCSDs utilized other nonproperty tax revenues, such as state aid, or changed their business practices to become more efficient.

“During the last six years before the limits were repealed, more and more districts were spending at limit,” Nguyen-Hoang says. “I think they were trying various ways to make sure they were spending at the level they wanted, so once the repeal was done there was no need for them to increase their spending.”

As of 2010, with the exception of Connecticut, New Hampshire, and Vermont, every state had enacted various TELs on their local governments. However, Idaho, Minnesota, Nevada, and Utah repealed TELs imposed on their local governments between 1986 and 1993. Nevertheless, state-imposed TELs still are prevalent across the United States.

“More states may consider repealing TELs in the future,” Nguyen-Hoang says. “Such a change is being considered in Wisconsin. This study provides state policymakers with empirical evidence of the effects in New York State of repealing a TEL on local government spending.”