NCPA - National Center for Policy Analysis

Bartlett Center: Research On Local Property Tax Financing

May 18, 1999

The way in which public schools are financed affects their quality, says Edward Glaeser of Harvard University. According to his research, local property tax financing provides stronger incentives for better teacher performance and educational programs, compared to school budgets determined by a formula for distributing state revenues.

Local property tax financing directly and indirectly affects the quality of public schools in a town:

  • The quality of public schools affects real estate prices and the volume of new construction -- where schools are good, housing prices will be relatively high and new construction relatively strong; conversely, poorer schools create less demand for housing, causing lower prices and less new construction.
  • Teachers and school officials have incentives to work hard because their salaries are tied to local revenues -- and good schools attract more people, which increases property ownership and in turn raises the total assessed value of property.
  • Finally, increases in property values make it easier to raise school budgets and teachers' salaries because increases in the property tax rate can be avoided.

Of course, the relationship between property values and school budgets doesn't exist where school spending is determined by the state and funded from state revenues.

Glaeser has also found similar affects from local financing of city services. State grants to local governments have significantly replaced local financing in some states. But cities that are largely financed by local property taxes can avoid economic stagnation and population decline by improving public employee performance via salary incentives like those for teachers and school officials.

Source: Colin E. Campbell (Dartmouth College), "An Argument for Local Property Tax Financing of Public Schools," Research Note, January 1999, Josiah Bartlett Center for Public Policy, 7 South State Street, P.O. Box 897, Concord, N.H. 03302, (603) 224-4450.


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