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Addonizio, MichaelSchool Choice: Economic and Fiscal Perspectives.Policy Report PR-B12.Indiana Univ., Bloomington. Education Policy

Center.Apr 9433p.Indiana Education Policy Center, School of EducationOffice, Smith Center for Research in Education, Room170, Indiana University, Bloomington, IN 47408-1698($7.50).

Reports Evaluative/Feasibility (142)

MF01/PCO2 Plus Postage.*Costs; Economic Impact; *Educational Benefits;*Educational Finance; Elementary Secondary Education;*Evaluation Criteria; Private School Aid; *ProgramEvaluation; *School Choice

This paper applies economic concepts to severalschool choice issues, identifying various market and public school

choice proposals as alternative mechanisms for generating anddistributing the economic benefits of education. Private benefits

redound directly to those educated or their parents; external, or

public, benefits redound to other members of society. The criterion

for evaluating choice proposals is their potential to maximizecombined private and external benefits. Successful school choiceschemes must consider numerous factors that may increase the overall

cost of publicly supported education, including costs necessary to:

(1) increase parents' ability to take advantage of choice programs;(2) increase schools' diversification or improvement; (3) support the

education of privately educated students and expand these students'

education program to include public educational benefits; and (4)

decrease school size. Finally, a successful school choice program mayrequire significant modifications of the school finance system.General school funds should be distributed according to real schoolchoice cost effects, including those on personnel and overhead.Taxation systems should be modified to ensure that sufficient publicbenefits of education are provided and that parents and taxpayershave appropriate control over the amount and kind of private benefits

delivered. Categorical funding programs' purposes should be clarified

to distinguish between programs primarily benefiting the child and

those primarily benefiting the school. An executive summary is

included. (Contains 27 references.) (MLH)

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U.S. DEPARTMENT OF EDUCATOONOfffce of Educational Research and Improvement

EDUCA NAL RESOURCES INFORMATIONCENTER (ERIC)

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Points of view or opinions staled in this docu-ment do not necessarily represent officialOERI position or policy

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Policy ReportSchool of Education Office

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BEST COPY AVAILABLE : .

About the Center

The Indiana Education Policy Centerprovides nonpartisan research, information, and communication

on education issues to Indiana policymakers and educatorsto improve education in the state.

The Center has offices on two Indiana University campuses.One office is located in the School of Education

on the Indiana University Bloomington campus.

The other is located in the School of Public and Environmental Affairs

at Indiana University-Purdue University Indianapolis.

This report was produced by the School of Education Office.

The views expressed in this publication are those ofthe author and do not necessarily represent

the positions of the Indiana Education Policy Center

or its funders, the Lilly Endowment Inc. and Indiana University.

School Choice:Economic

andFiscal Perspectives

by Michael Addonizio

4

/

© 1994 Indiana Education Policy CenterPolicy Report PR-B12

April 1994

Michael Addoniziois Assistant Superintendent for Research,

Planning, and Policy Developmentat the Michigan Department of Education.

He received his Ph.D. in economics from MichiganState University and has published widely

in the area of education finance. His research interestsinclude fiscal federalism, the economics of

education, and public school finance.

6

The author gratefully acknowledges the helpful commentsof James Phelps, Gary Wolfram, and Mark Buechler

and the research assistance of Jim Spillane.Barry Bull offered especially helpful suggestions

on the next to last draft.This report does not necessarily reflect

the views of these individuals.

7

CONTENTS

Executive Summary iii

Economic Perspectives on School Choice 1

Alternative Supply Mechanisms: The Case for School Choice 3

Market Choice 4

Public Choice 5

Choosing a Supply Mechanism 7

II. Costs of School Choice 7

System Operating Costs 8

Demand-Side Supports 8

Supply-Side Incentives for Educational Entrepreneurship 10

Costs of Instruction 12

Choice and Aggregate Public Educational Expenditures 12

Costs of Smaller Schools 13

III. School Finance Issues under School Choice 13

General Funding Distribution Issues 14

Taxation Issues 16

Categorical Funding Issues 18

A Final Word 19

References 21

8

EXECUTIVE SUMMARY

This paper applies economic concepts to avariety of issues of school choice. It identifiesvarious market and public school choice pro-posals as alternative mechanisms for generat-ing and distributing the economic benefits ofeducation, benefits that redound directly to thosewho are educated or their parents (private ben-efits) and benefits that redound to other mem-bers of society (external, or public, benefits).From this perspective, the criterion that ought tobe used to evaluate any specific choice proposalis whether it has the potential to maximizecombined private and external benefits.

A successful scheme of school choice musttake into account a number of additional costfactors, which in total may increase the overallcost of publicly supported education:

costs necessary to increase parents' abilityto take advantage of the choice program,such as information and transportation sys-tems;

costs necessary to increase the diversifica-tion and improvement of schools, such asincentives for the development of charterschools or for school restructuring;

costs associated with the public support ofthe education of students now educated byprivate schools and with the expansion ofthe education program for such students toinclude the public benefits of education;and

costs associated with decreasing the size ofschools.

Finally, a successful school choice programis likely to require significant modifications ofthe school finance system, modifications thatgo well beyond simply having public fundsfollow students to their schools of choice:

General school funds should be distributedon the basis of the real cost effect of schoolchoice, including effects on personnel andoverhead costs.

Taxation systems should be modified toensure that sufficient public benefits of ed-ucation are provided and that parents andtaxpayers have appropriate control over theamount and kind of private benefits deliv-ered.

The purposes of categorical funding pro-grams should be clarified to distinguishbetween those programs in which the childis the prime beneficiary (for which fundingshould follow the child to the school ofchoice) and those programs in which theschool is the prime beneficiary (for whichfunding should not follow the child).

SCHOOL CHOICE:ECONOMIC AND FISCAL PERSPECTIVES

One of the more important developments inelementary and secondary education policy inrecent years has been the emergence of choiceas an idea in good standing. In view of thepopular rejection of vouchers and tuition taxcredits during the late 1970s and early 1980s,the current emphasis on choice is somewhatsurprising. We are, however, a society thatattaches great importance to individual choice,so it is perhaps more surprising that we haveendured so long a system of public educationthat substantially limits choice, not only ofschool building, but of curriculum and schoolschedule. The new interest in choice is alsodriven by growing concern over the quality ofour public schools, particularly in our urbancenters.

One can argue that the present organizationof education with its 16,000 local districts,84,000 public schools, and 28,000 privateschools already provides considerable choice tothose able to live in the neighborhood of theirchoosing or send their children to a privateschool. However, many families cannot affordto exercise such choice and must rely on newforms of choice to improve their educationalopportunities. These new forms of choice canbecome available to the public only by govern-ment action.

To date, much of the discussion of thesenew forms of school choice has focused onpolitics and public opinion. The purpose of thispaper is to show how the concepts and researchof economists can help provide criteria formaking decisions about school choice propos-als and can help analyze the resources necessaryto make those proposals work as intended. Tothis end, this paper includes three parts. Thefirst part presents basic economic perspectiveson school choice, the second considers thepotential financial costs of school choice, andthe third considers several issues related toschool finance under choice.

I.ECONOMIC PERSPECTIVES

ON SCHOOL CHOICE

Modern economics provides a special per-spective on public policy, one that focuses onhow well alternative policies on the wholesatisfy citizens' desires for a good life. Fromthis perspective, decisions about school choiceproposals are concerned with how governmentcan most effectively exert its influence over thesupply and consumption of education to satisfyits citizens' desires. This section explains how

119

economists view the debate over school choiceand what criteria they might use to resolve thatdebate.

According to one generally accepted defini-tion, economics is the study of the ways inwhich scarce resources are allocated amongalternative uses to satisfy human wants. Whileresources are conveniently classified into labor,capital, and land, the variety of economic goodsand services produced with these resources isvirtually limitless. Among these economic goodsis education, which satisfies human wants intwo general ways. First, education providesconsumers with skills and knowledge that di-rectly benefit those consumers either by satisfy-ing their immediate desires for intellectual fa-cility and cultural appreciation or by increasingtheir human capital and, thus, their power toearn goods that satisfy other desires. Second,education also provides consume' s with valuesand knowledge that enhance their ability toparticipate effectively in democratic society, aresult that does not necessarily satisfy desires ofthose consumers themselves but that is of ben-efit to other members of the society.

Because of this second factor, education issaid in the lexicon of microeconomics to createa "positive externality," a benefit that would beoverlooked in the market by direct consumerswhen making their decisions about how mucheducation to consume. That is, to the extent that

my comumption of education will likely in-crease my income and enhance my quality oflife, it is a private good that can be efficientlysupplied (i.e., supplied in the correct quantity atthe lowest cost) and allocated in the privatemarket. I would purchase education up to thepoint at which the cost of the last unit of educa-tion exactly equalled the private benefit I derivefrom consuming it. My personal calculus, how-ever, would not take into account the benefits ofmy education that would accrue to others.

The dual nature of education, providingboth private and external benefits, has impor-tant implications for its supply, that is, its pro-duction and distribution. Supplying education

/ entirely in a private market would be problem-atic because the positive externality would leadto the production of too little education. Sinceconsumers do not capture all the benefits of theconsumption of education, they will in a whollyprivate market demand less than the sociallyoptimal amount. At any given market price, toolittle education would be demanded and there-fore produced. This conclusion suggests a rolefor government in the allocation of education.For government can potentially take into ac-count all educational benefits, private and ex-ternal, and either by coercion or by influencingthe price of education ensure that the optimalamount of education from society's viewpointis consumed.' In the U.S. today, government

I Another line of reasoning explaining the public supply of education is provided by Brown (1992). Brown beginswith the observation that most schools, whether public or private, look substantially alike because they are respondingto consumers' concerns over the uncertainty about students' ability and future employment prospects. In the face of thisuncertainty, virtually all schools provide a full range of so-called primary school services, those services that affect theproductivity of students. Such services consist of instruction in traditional academic subjects as well as vocationaltraining, music, art, and athletics. Brown characterizes the result as "comprehensive uniformity" that caters to a varietyof interests and tastes. The schools act as insurance companies by protecting students from the risk of choosing a narrowcurriculum. Brown then argues that nonprofit schools (either public or private) enjoy an advantage over for-profitschools in the supply of primary school services because they have less incentive to scrimp on service levels. Finally,Brown cites research suggesting that public provision of comprehensive education is preferable to private nonprofitprovision for reasons of accountability and cost.

21 1

exercises this influence over elementary andsecondary education by requiring children toattend school, by providing public educationfree of charge, and by permitting those whowant and can afford to send their children toprivate schools to do so at their own expense.From an economic perspective, the argumentover school choice, then, can be seen as adebateover whether the current mechanism for allo-cating education is efficient, that is, whether itproduces the greatest amount of private andexternal benefits for the lowest cost.

Alternative Supply Mechanisms:The Case

for School Choice

Advocates of increased choice in educationoften emphasize the private, rather than exter-nal, benefits of education. Such advocates gen-erally hold the view that families should be ableto choose the school that best fits the specificeducational needs of their children. Further,they often make the economic argument thatchoice among schools will lead to greater com-petition for students and improvements in schoolefficiency with respect to student achievement.This argument is predicated on the view thatpublic schools essentially enjoy a monopolyover students living in their attendance areasand that monopolies, protected as they are fromcompetition, do not use resources efficiently.2

In response to the growing interest in schoolchoice, a number of choice models have beendevised. These models differ basically in the

degree of freedom families may exercise inchoosing the type and amount of education theirchildren will receive. The debate over the de-gree to which educational choice should berestricted arises from the dual purpose of educa-tion: private and external benefit. Familieschoose educational programs for their childrenon the basis of their own tastes and judgment.However, in addition to meeting the privatepreferences and needs of individuals and theirfamilies, schools also provide students with acommon set of values and knowledge to devel-op citizens who can participate effectively indemocratic society. The thesis that schoolsshould contribute to equality of social, econom-ic, and political opportunities among people ofdiffering racial and socioeconomic origins sug-gests that all students be exposed to a commoneducational experience that ought not be left tothe vagaries of individual or family preferences(Levin, 1991).

Systems of educational choice, therefore,must seek a balance between parents' right tochoose the influences and values to which theirchildren will be exposed and the right of ademocratic society to use the educational sys-tem to foster its most essential political, eco-nomic, and social institutions. Generally, twoalternative approaches have emerged from at-tempts to preserve a common educational ex-perience while allowing some range of choice:a market system of private choices such asthose provided by education vouchers or tui-tion tax credits and a system of public choiceamong schools that are sponsored or endorsedby government (Levin, 1991).

2 According to microeconomic theory, monopolies produce too little output and sell it at toohigh a price. That is, a

competitive market would produce more than would a monopoly and would sell at a lower price. With regard toeducation, advocates of unfettered choice argue that market competition would produce a broader array of educational

programs at a lower cost.

Market Choice. The most general form ofmarket choice is the voucher system, whichcreates an educational market for all families,including those with little or no tax liability.3The state's role in a voucher system would bethreefold:

FinanceTo provide funds in the form ofeducational vouchers for all school-agechildren;

RegulationTo establish criteria for eligi-bility of schools to receive and redcemvouchers;

AccessTo improve access to the educa-tional market by providing information andother services to parents, resolving disputesbetween schools and parents, and ensuringthat all children are enrolled in an approvedschool.

Specific voucher programs differ alongthese three dimensions of finance, regulation,and access (Levin, 1980). The financing ofvoucher systems may vary in the size of thevoucher, the opportunity for a school to chargemore than the voucher amount or to obtainadditional revenue through gifts, and the sourceof funds. Particular resolutions of these issues

will have different effects on families' abilitiesto choose among alternative educational pro-grams. For example, the ability of schools tocharge tuition in excess of the voucher amountcould increase segregation by economic class,and probably also by race. Alternatively, largervouchers could be provided to children in poorfamilies to compensate for the lack of educa-tional resources in the home.4 Voucher levelscould also be differentiated by grade level, byprogrammatic need (e.g., bilingualism or dis-ability), regional cost variations, or other socialpriorities.

One interesting variation on financingvouchers was a California state constitutionalinitiative proposed by Coons and Sugarman(1978). In this modified voucher plan, severalexpenditure levels would be available within acommunity' s schools. Each family could choosethe exp3nditure level (a proxy for school qual-ity) it most preferred and would be taxed at acorresponding rate. Put another way, this ap-proach would allow individual households achoice of educational tax rate and guarantee anexpenditure level commensurate with that rate.

Voucher plans also differ in the provisionsthat they make for regulating participatingschools and services to enhance access to themarket. For instance, the system could provideelaborate transportation and information ser-

3

4

The "vouchtt plan" was first proposed by Milton Friedman (1955). Friedman described his plan thus:

Governments could require a minimum level of education which they could finance by giving parents vouchersredeemable for a specified maximum sum per child if spent on "approved" educational service. Parents would thenbe free to spend this sum and any additional sum on purchasing educational services from an "approved" institutionof their own choice. The educational services could be rendered by private enterprises operated for profit, or bynonprofit institutions of various kinds. The role of the government would be limited to assuring that the schools metcertain minimum standards such as the inclusion of a minimum common content in their program, as it now inspectsrestaurants to assure that they maintain minimum sanitary standards. (pp. 127-128)

Such a plan was promoted for several years during the 1960s and early 1970s by the Office of Economic Opportunityand the U.S. Office of Education in an experiment in the Alum Rock School District, near San Jose, California, involvingonly public schools.

4

13

vices and regulate the admissions process toensure the participation of children from low-income families. Or the system could adopt amore laissez-faire approach, with a meager in-formation system, no transportation, and anentirely unregulated admissions process. Clear-ly, the financial and administrative implicationsof voucher systems may vary dramatically withthe form of system adopted. As we will see inthe second part of this report, these variationshave considerable implications for the costs ofmarket choice plans.

While market choice in education appearsto enjoy growing political support (for example,market choice proposals have been consideredby legislatures in at least 13 states), no statewidevoucher plans have yet been adopted.5 In 1990,Oregon voters rejected a voucher initiative by awide margin. In 1992, Colorado voters turneddown a citizen initiative that would have pro-vided parents with vouchers worth up to $2,500to send their children to either private or paro-chial school or educate their children at home.And in 1993, California voters defeated by amargin of greater than two to one a voucherinitiative that would have granted all Californiastudents requesting it a voucher equal to at least50% of state and local per-pupil expenditures,redeemable at any nonpublic school or partici-pating public school.

Passed by state lawmakers in 1990, theMilwaukee Parental Choice Program is the na-tion's only school choice plan that allows ele-mentary and secondary school children to at-tend private school at taxpayer expense. The

program provides each participating school withapproximately $2,600 per student. The scope ofthe Milwaukee plan is severely limited in sev-eral ways. First, participation is restricted to just1% of the enrollment in the Milwaukee PublicSchools. Second, participating pupils must befrom families whose income does not exceed175% of the poverty level. Third, voucher stu-dents must not exceed 49% of the students inany participating school. Fourth, voucherschools must accept all voucher-carrying stu-dents as long as space is available. If the numberof voucher students exceeds available space,participants are selected by lot with siblingsreceiving some preference. Fifth, participatingschools do not receive additional funds forlearning-disabled or emotionally disturbed pu-pils. In view of these limitations, it is difficult tocharacterize the Milwaukee voucher programas a true market program.

Because experience with voucher systemshas been so limited, it is difficult to assess theclaims of proponents and opponents of theseplans using hard evidence. Much of the debateabout the economic merits of these plans re-mains in the realm of economic theory.

Public Choice. An alternative to marketchoice is public choice, which also can take avariety of forms. However, unlike market choice,a public choice system consists exclusively ofgovemment-sponsored schools. That is, eachschool would be either a government-operatedpublic school or a private provider or charterschool regulated by government through con-

5 In a 1991 Gallup poll of the American people, about half of the respondents expressed support for vouchers, while

39% were opposed and 11% uncertain. Support for vouchers was especially high among minorities (57%), nonpublicschool parents (66%), and inner-city residents (57%). See Elam, Rose, & Gallup (1991). In a similar 1992 Gallup poll,

70% of the respondents said they would support a government voucher plan that includes public, private,and parochial

schools. See Lawton (1992). However, in a 1993 Gallup poll, 74% of the respondents said they did not favor allowingstudents to attend a private school at public expense. See Elam, Rose, & Gallup (1993).

514

tract. In either case, all students would be pro-vided a common core of educational experienc-es based upon the social aims of public educa-tion. The object of public choice is to establisha common core educational experience for allwhile allowing schools freedom in the way thecore is delivered and supplemented.

Under public choice, the content of the coreeducational program is determined by the elec-torate. This core may entail curriculum require-ments, school organization and student group-ing, instructional strategies, and the profession-al qualifications of teachers and other schoolpersonnel (Levin, 1991). The common corewould emphasize education as an economicgood, providing social benefits beyond the pri-vate benefits accruing to students and theirfamilies. One argument for public, as opposedto market, choice rests in part upon a concernthat private schools may fail to offer the com-mon core of democratic schooling, even if re-demption of a voucher were conditioned uponsuch a requirement.

A number of models have been advanced toexpand parental choice among government-sponsored schools, including choice of publicschool within one' s district of residence, choiceof public school in any district, more restrictedchoice models such as second chance programsfor students who have difficulty in their as-signed public school, and postsecondary op-tions allowing high school students to enroll incollege courses as part of their high schoolprogram. Magnet school systems, one of theearliest forms of public school choice oftenestablished in conjunction with desegregation

orders in an attempt to keep middle class whitesfrom fleeing urban school systems, are nowused as much to provide educational choices asthey are to promote integration. Alternatively, apublic school may contract with a private firmto provide educational services.6

A more recent innovation to create moreoptions within a system of public choice is thecharter school. In very general terms, a charterschool enjoys the operational autonomy of aprivate school while being held accountable toa public authority (Williams & Buechler, 1993).A charter school is a public school organized byeducators, parents, or others (e.g., a universityor community college, or any nonprofit organi-zation) and sponsored by a publicly electedbody, such as a local school board, a state boardof education, the elected governing board of apublic postsecondary institution, or a city coun-cil (for specific models, see Chubb & Moe,1990; Kolderie, 1992). The school is formed asa legally separate nonprofit or cooperative orga-nization. The public status of the school wouldstem from its nonsectarian character and openadmission policy. A charter school is a "schoolof choice," with no prescribed local servicepopulation and no local property tax base. Allattenders would be "active choosers" in that allwould select the charter school and no onewould be compelled to attend. As such, a charterschool would tend to blur the distinction be-tween market and public choice. At the time ofthis writing, eight states have adopted charterschool laws, including California, Colorado,Georgia, Massachusetts, Michigan, Minnesota,New Mexico, and Wisconsin.

6 Performance contracting was largely discredited in the 1960s amid press accusations of widespread contractorcheating, whereby instructors would leak exam questions to students prior to formal examination. Further, anexperiment in the early 1970s sponsored by the Office of Economic Opportunity (0E0) showed disappointing results(Gramlich & Koshel, 1975).

615

Choosing a SupplyMechanism

From an economic perspective, the variousmarket and public choice models vary alongtwo dimensions. One dimension is the scope ofallowable choice, with the extremes being thetheoretically unfettered market choice affordedby a pure voucher program and the limitedchoice provided by a government monopoly onpublic education. However, economic theorydoes not teach that there is anything inherentlypreferable about a more or less market-orientedsystem. The second, and more relevant, dimen-sion of difference is the degree to which theeducational system maximizes private and pub-lic (external) benefits. In evaluating choice pro-posals, the critical issue from an economic pointof view is whether the alternatives under con-sideration do abetter job than the current systemin generating the highest possible levels of thesetwo sorts of economic benefits. From this stand-point, two general issues arise. First, an educa-tional delivery system may generate the wrongmix of private and public benefits. For example,proponents of increased choice criticize thecurrent system for failing to allow parents toadequately customize their children' s educa-tion. At the same time, critics of choice believethat some parents, in seeking such customizationfor economic or religious reasons, may rejectthe public' s legitimate interest in fostering acommon core of citizenship values. Second, aneducational delivery system may generate thewrong mix of the various public interests ineducation. For example, one may argue that thepublic interest in high quality education hasbeen sacrificed for a rigid uniformity amongtoday' s public schools. Conversely, one mayargue that a system of choice may emphasizeeducational diversity at the expense of the pub-lic's legitimate interest that educational oppor-

tunities be distributed equally regardless ofrace, ethnic group, or gender.

Whether a choice proposal meets these eco-nomic criteria cannot be fully evaluated in theabstract. Rather, each individual proposal mustbe considered in concrete detail for its potentialto enhance the sum and balance of private andpublic benefits. Because our society's experi-ence with school choice is limited and becausehard evidence about the various proposals isdifficult to obtain, the economic evaluation ofchoice plans is inevitably uncertain and specu-lative. To provide only one recent example,economists estimated that the proposed Cali-fornia voucher system could "increase the re-sources available for each public school pupilby 7% . . . or cut those resources by 18%"(Olson, 1993). Although economics can pro-vide a conceptual framework for evaluatingschool choice, the limited evidence for applyingthat framework means that much of the eco-nomic debate about choice will remain theoret-ical for the immediate future.

COSTSOF

SCHOOL CHOICE

The introduction of greater choice in ele-mentary and secondary education will involvecosts associated with the creation of a "mixed"educational system driven in part by marketforces and in part by government regulation. Inorder for this mixed system to maximize theprivate and public benefits of education,policymakers need to consider two potentialareas of costthe costs of operating the choicesystem effectively and the additional costs ofinstruction that a successful choice system maygenerate.

71 6

SystemOperating Costs

As policymakers consider enacting schoolchoice plans, they will need to understand whatsort of expenditures may be necessary to makesuch a plan work as intended. The arguments infavor of choice assume that a reasonable num-ber of parents are willing to take advantage ofthe program, enough to encourage schools tocompete for students on the basis of quality anddiversity of instructional programs. In otherwords, for choice to work, there must be suffi-cient demand from parents. Similarly, the argu-ments for choice assume that schools will havethe capacity to improve and diversify their ed-ucational programs so that parents will have anincentive to choose a school for their children.Here, there must be a sufficient supply of schoolsworth choosing. However, these assumptionswill not necessarily come true by themselves.Evidence from statewide choice programs inMinnesota and Massachusetts, for example,suggest that relatively few parents (as few as5%) actually take advantage of their right tochoose. This may be too small a percentage tostimulate the response from schools that choiceadvocates anticipate. In short, the prospectiveloss of the children of a few disgruntled parentsmay not be sufficient incentive for most schoolsto engage in the work needed to dramaticallyimprove and diversify their instructional pro-grams. Furthermore, current school personnelmay not have the time, energy, or ideas neces-sary to make such dramatic changes. The choiceprograms in East Harlem, New York, and Cam-bridge, Massachusetts, widely regarded asamong the most successful choice efforts, pro-vided time and assistance to teachers to enablethem to redesign their programs. Thus,policymakers need to consider the potentialcosts associated with stimulating demand for

and supply of schools of choice in order toensure that a choice program will have theresults intended. This section discusses the typesof costs that may be incurred to enhance de-mand and supply.

Demand-Side Supports. Regardless of themodel chosen, choice programs require supportsystems in order to succeed. The first is aschool-based information system. A well-knownaxiom of economics is that the efficiency ofmarket systems depends crucially upon con-sumers' knowledge of alternatives. In theory,the perfectly competitive market assumes theexistence of perfect knowledge of all pertinentinformation for potential consumers and pro-ducers. In fact, all markets, including marketsfor educational services, have to contend withthe problem of advertising and promotionaldistortions. But in addition to regulating pro-motional activity by the schools, states couldincur substantial costs in establishing and main-taining an up-to-date information system that isunderstandable and accessible to potential pro-ducers and consumers. Information needs ofdisadvantaged populations are particularly acute.Such people may be poorly educated, non-English-speaking, or relatively transient be-cause of lack of housing and stable employ-ment. An effective information program wouldlikely include bilingual counseling services andwould have a decentralized structure.

Parents will need school-level informationon curriculum, instructional philosophy, andstudent outcomes in order to make informedchoices. Since most statewide education infor-mation systems are organized at the district,rather than building, level, states or schooldistricts will need to invest additional resourcesin developing and maintaining a school-basedinformation system. Further, school districtswill need to augment the information system

817

with counseling services to respond to parent

inquiries.Similarly, either market or public choice

programs will need to consider the cost ofadditional transportation that might be neededto encourage parent participation. Of course,

many school districts already transport a largeshare of their students. But choice plans arelikely to involve far more complex patterns ofstudent movement than are required by thetypical school district's geographic attendancezones. Without such services, many parents arelikely to be unwilling or unable to take advan-tage of the right to choose their children's

school.Ironically, a system of market choice, gen-

erally viewed as a more laissez-faire approachthan public choice, would arguably requiregreater administrative support (Levin, 1991).

For example, a market choice based on vouch-ers would require a regulatory structure to en-

sure eligibility of participating schools to re-deem vouchers and a structure and process forresolving disputes between schools and fami-lies. A public agency might be responsible fordetermining compliance of participating schoolswith requirements regarding admissions (e.g., alottery system for over-subscribed schools),curriculum, and pedagogy. Further, if voucheramounts are to vary with some measure ofeducational need, a mechanism would be need-ed to verify these differentials.

Although market choice in education issometimes touted as a cost-reduction option,the regulation of a market choice system couldbe comparatively costly (Levin, 1991). In thepublic school system, economies of scale arisebecause local districts operate and monitor pub-lic schools under state law. The regulation of avoucher system, on the other hand, would re-quire state oversight at the individual schoollevel. Indeed, some aspects of a voucher pro-

gram would necessitate oversight at the level ofindividual students. For example, given com-pulsory attendance laws, a voucher systemwould require the state to determine whethereach student is enrolled in an approved school.Further, in an individualized voucher scheme,the state would assess the educational needs ofedch child and determine the correspondingvoucher aMount. Some proposals would awarddifferent vouchers according to grade level,curriculum, bilingualism, special needs, varia-tions in local costs, the need to encourage racialdesegregation, and other factors. Other poten-tial costs of a market, as opposed to a public,choice program are a more customized trans-portation system and greater centralization offinancial and program administration as thestate works directly with families and schools asopposed to local school districts.

The trade-off between efficiency costs, aris-ing from the differences between consumerpreferences and actual consumption of educa-tion, and administrative costs is depicted graph-ically in the figure below.

Trade-Off between Administrativeand Efficiency Costs

Total Cost

AdministrativeCost

EfficiencyCost

Degree of Customization ofEducational Programs

9 18

As Levin (1991) notes, the market approachprovides greater efficiency (i.e., a closer fitbetween consumer preferences and consump-tion) by providing families with a greater rangeof educational choices. However, these effi-ciency gains are associated with higher admin-istrative costs, as the state deals with individualfamilies and schools directly, foregoing theeconomies of scale that can be exploited whendealing with school districts. The importantpoint is that these administrative costs do notrepresent bureaucratic frills; if governmentdoes not make these expenditures, too fewparents will participate in the choice programto generate the greater efficiencies that comewith matching parent desires for their childrenwith appropriate school programs. Detailedcost comparisons of actual versions of marketand public school choice with the existing sys-tem are required to determine the lower-costalternative.

Supply-Side Incentives for EducationalEntrepreneurship. Most discussions of edu-cational choice focus on the practice and conse-quences of allowing consumers to choose theirchildren' s schools; that is, attention is focusedon the demand side of a newly created andregulated market in educational services. Someobservers argue persuasively, however, that sim-ply increasing demand-side choice without pro-viding educators the resources and latitude to

offer new educational alternativesthat is, with-out addressing the supply side of the education-al marketwill inevitably fail to lessen con-sumer dissatisfaction with the public schools(see, for example, Elmore, 1990). A policy thatencourages parents and students to chooseamong educational programs that vary little incontent and pedagogy and over which educatorsat the school level exercise little control isunlikely to yield the educational innovation andimprovement envisioned by choice advocates.Rather, states that adopt educational choice inany form have a responsibility to allow educa-tors to prepare and organize themselves in newways and to offer new and innovative educa-tional programs in response to consumers' in-creased ability to choose. Choice strategies willsucceed in improving educational outcomesonly if they address both sides of the "educationmarket."

Supply-side strategies undertaken by vari-ous states have included the creation of second-chance programs that permit students who havefailed in secondary school, or dropped out, toenroll in alternative public education programs.Other states have encouraged the creation ofmini-schools, or schools within schools, to in-crease educational options for families.' Justas several business firms may share one build-ing, so too can several schools. Mini-schoolsare an especially attractive option in urban areaswhere public elementary and secondary schools

7 Perhaps the most well-known of these alternative school choice programs is the one instituted in Community District4 in East Harlem, on the upper east side of New York City. Since 1973, the district has formed more than 20 alternativeprograms which offer parents a wide choice of educational options. At the elementary level, most students attend theirneighborhood school, although many choose to attend an alternative school. At the junior high level, all students andtheir parents participate in a formal school selection process. While high schools are formally administered by thecitywide Board of Education, District 4 runs two high school alternativeprograms under an agreement with the board.

In creating theie alternative programs, District 4 leaders have broken the correspondence between buildings andschools. Several programs, usually embodying different educational approaches and different age groups, are housedin the same building. Uses of staff time and grouping practices within alternative programs are often quite flexible.

1019

are often large. Evidence also suggests thatlarge schools negatively affect student partici-pation and achievement, especially among stu-dents from low socioeconomic families (Cham-bers, 1981; Holland & Andre, 1987).

In addition to these efforts, other strategies,collectively known as school restructuring, mayprovide an important source of inspiration andguidance for school change. These strategiesfor school-based rather than state-mandatedchange draw on existing research into the pro-duction of educational outcomes that has beenlargely unsuccessful at identifying the re-sources, programs, and strategies (i.e., theschooling "inputs") that dependably contributeto improved learning at all times and places.8School restructuring encourages the use of ideasthat have not been generally observed as effec-tive in all circumstances but that display aninternal logic and some localized evidence ofsuccess.

The more organized versions of these ef-forts offer new choices to educators, parents,and students. Examples of such ongoing effortsinclude the Success for All program based atthe Center for Research on Effective Schoolingfor Disadvantaged Students at Johns HopkinsUniversity, the Accelerated Schools conceptdeveloped by Henry Levin and colleagues, theCoalition of Essential Schools initiative orga-nized by Ted Sizer, and James Corner's ideasfor improving the psychosocial developmentof students. Other efforts include The Paideia

Program, John Goodlad' s National Networkfor Educational Renewal, and the ProfessionalDevelopment Schools of the Michigan Partner-ship for New Education, based at MichiganState University.

While these efforts differ in substance, theyall involve the implementation of ideas comingfrom effective schools research, organizationaltheory, or elsewhere about what needs to bedone to improve schools. As such, they provideeducators with not only new choices but guid-ance as to implementation. States seeking tointroduce choice into their educational systemscould include fiscal incentives in the form ofplanning and implementation grants for schoolsto participate in such programs as a way ofdeveloping new approaches to instruction.

These additional cosfs of supporting inno-vation help school choice programs attract suf-ficient participants and deliver more effectiveinstruction. While supply-side incentives maybe especially important at the beginning of achoice program, there may be a continuing needto stimulate school modification as the clienteleof a school changes or opportunities for en-hanced instruction develop. Thus, up to a point,these incentives are necessary investments inthe success of school choice. And like demand-side supports, these supply-side incentives mustbe evaluated for their contribution to the eco-nomic goal of choice, the maximization ofpublic and private benefits of education.

Alternative programs are typically led by "directors" rather than principals, because the scale of the program is smaller

and the director can serve as both teacher and administrator. These and other departures from the traditional schoolstructure permit more adult/student interaction, more attention to individual student learning, and more agreementamong staff, parents, and students about academic content and expectations of the program. For further discussion, see

Elmore (1990).

8 Pessimistic assessments of the contributions of the "education production function" literature abound. Hanushek' s

1986 review is representative. For a more recent survey, and somewhat more optimistic view, see Monk (1992).

Costs ofInstruction

Many of the arguments for school choiceemphasize the potential of such programs toreduce the costs of instruction or to deliverbetter services at current cost levels. After all,schools that must compete for their studentshave built-in incentives to satisfy parents. Buttwo other phenomena may actually cause thecosts of instruction borne by the public to in-crease. The first arises from the possibility thatsuccessful choice programs may lead to thepublic financial support of the education ofmore students or expanded educational servic-es. The second arises from the possibility thatchoice programs may encourage the prolifera-tion of small,- hools.

Choice and Aggregate Public Education-al Expenditures. In 1990-91, approximately5.2 million K-12 students attended nonpublicschools. Given an average public school per-pupil expenditure of $5,748 for that year, tax-payers enjoyed a private subsidy of approxi-mately $29.9 billion for K-12 education (U.S.Department of Education, 1992). School choicecould increase the number of these private schoolstudents educated at public expense.

Under a voucher program, total publicspending could rise as public funds flow toprivate schools. At the same time, however,such an increase in public spending could bepartially or wholly offset by students leavingpublic schools for less costly private alterna-tives. This lower average per-pupil expenditurein private schools is likely attributable to sever-al factors, including lower teacher salaries and,

oddly enough, the economic inefficiency ofprivate schools.9 Lower costs in a market sys-tem may arise from two sources, either greaterefficiency in the utilization of resources or afailure of the market to deliver a sufficientsupply of a good. Voucher proponents havetended to emphasize the former explanation oflower private school costs; however, under-investment in education is likely to be an impor-tant factor as well. As we have noted, in amarket-based system, consumers overlook theexternal benefits of education when they makedecisions about the amount and type of educa-tion to purchase. As a result, the lower costs ofprivate schools may arise in part from theirfailure to supply educational services that ben-efit the public but not individual parents orchildren. Under an unregulated voucher sys-tem, students who leave the public schools forless costly private schools may, then, actuallyincrease the inefficiency of the educational sys-tem from the public perspective. As Monk(1990) observes, it is possible to address thistendency to underinvest in education within thevoucher framework. By lowering the price ofeducation faced by individuals, it is possible toinduce families to acquire more education (oreducation of a different type) than would other-wise be the case. The price of education faced byfamilies can be lowered by making the voucherslarger.. Or the voucher can be made larger forparticular fields of study. But either of thesesolutions has the effect of raising the public costof the voucher system.

In the case of expanded public choice, pub-lic K-12 spending would rise if students leaveprivate schools for public schools. This wouldoccur if parents find public schools to be more

9 In 1987-88, average base teacher salaries were $16,562 in private elementary and secondary schools and $26,230in public schools (U.S. Department of Education, 1992).

12 21

attractive as public school educators respond tosupply-side incentives to restructure existingpublic schools or organize new ones.

In sum, choice programs can increase pub-lic costs of instruction in one or both of twowaysby increasing the number of childreneducated at public expense and by increasingthe cost of private schooling to cover education-al services that benefit the public but are notnow demanded by private school parents. From

an economic standpoint, these increased costs

are not necessarily a bad thing since they tend to

maximize the total public and private benefitsof education. But, as we have also seen in ourdiscussion of the operating costs of choice sys-tems, policy makers need to realize that the full

exploitation of the potential benefits of choicemay actually increase the public budget foreducation.

Costs of Smaller Schools. School choiceprograms may encourage the proliferation ofrelatively small schools that may forego someeconomies of scale enjoyed by relatively largepublic schools. That is, average per-pupil costsmay rise as school size falls. At the school level,

economies of scale will occur through betterutilization of teachers, other instructional andnon-instructional personnel, and physical re-sources. A large body of empirical research haS

concluded that schools of a larger size canoperate at lower per-pupil costs, other things

being equal. The "optimal" school size variesfrom study to study, depending on the nature ofthe sample and the size measure used (e.g.,enrollments, size of staff). Most published U.S.studies concern high schools. Examples of op-timum school size are 1,500 pupils in averagedaily attendance for Iowa high schools (Cohn,1968); 1,675 for Wisconsin high schools (Riew,1966); 2,244 for Missouri high schools (Osbum,1970); and 2,432 for unit districts, 874 for high

school districts, and 336 for elementary districtsin Illinois (Hickrod, 1975).

These findings, however, should be inter-preted with caution. First, the studies fail tocontrol statistically for variation in educationaloutcomes. Second, the studies are dated. Muchprogress has been made in recent years in themeasurement of educational outcomes (i.e.,"education production") and, as Cohn andGeske (1990) argue, much work remains to bedone to develop production and cost modelsthat are consistent with accepted economic andeducational theories. These models then need tobe tested with reliable cross-section and time-series data. Replication of empirical results isimportant in light of the conflicting results ofpast studies.

Here, too, increased costs that arise fromsmaller schools may not necessarily be a con-cern from the economic point of view. Asalready noted, some research suggests thathigher levels of student achievement are associ-ated with reductions in school size. Neverthe-less, such size reductions may be yet anotherway in which the public budget for K-12 edu-cation may actually increase under choice.

SCHOOL FINANCE ISSUESUNDER

SCHOOL CHOICE

Programs of school choice may be state-wide or local in scope. The greatest challenge infinancing school choice is posed by those pro-grams that entail the movement ofpupils acrosslocal district boundaries, but each model raisesits own fiscal issues. Generally, school choiceraises three kinds of financing issuesissuesabout the distribution of general school fund-ing, taxation, and categorical funding.

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General FundingDistribution Issues

In most states, public fiscal support forschools is calculated by multiplying the numberof students served by a school district by afunding factor. This practice of paying forschooling by the student ignores a number ofimportant realities about the costs of operatingschools. For example, almost all instructiontakes place in classroom groups; therefore, theactual personnel costs of adding a single studentto a school are close to nothing. However, thecosts of adding fifteen or twenty students arevery real since they may require the hiring of anadditional teacher. Similarly, overhead costsfor such things as buildings, administration, andtransportation are not significantly changed bythe addition or subtraction of a few students.

Because the state pays for the education oflarge numbers of students in a school district,ignoring these realities usually does not work ahardship on schools since districts can shiftfunds from school to school or change schoolattendance districts to compensate for such prob-lems . If parents have chosen a particular school,however, districts do not have the flexibility tosolve these problems that they had in the past.Furthermore, if public funds are used to supportprivate education, the district or the state will beexpected to contribute tuition expenses for eachstudent educated. Thus, an important issue ishow the current system of distributing funds toschools should be modified to accommodatethe realities of school costs and at the same timeto provide schools with an incentive to partici-pate actively in the choice system.

To the extent that funding distribution isconsidered by choice advocates, it is generallyassumed that funding should follow the student.But this solution is not obviously correct. Asnoted, actual school costs are incurred largely

on a per classroom basis rather than a perstudent basis. The marginal cost of educating anadditional student may be negligible in mostcases (and would certainly be so if choices arerestricted by seat availability), while the mar-ginal cost reduction of losing a student is like-wise near zero.

Thus, one could argue that a choice programin which revenue (however calculated) followsthe child provides a windfall for the receivingschool and an unfair loss to the sending schoolthat will exacerbate the quality differences be-tween the schools and encourage further trans-fers. Eventually, however, a sufficient accumu-lation of transfer students would necessitateadditional resources in the receiving district ifprogram quality is to be maintained. (Again,such an accumulation of transfers would pre-sumably be possible only if choice is not limitedby seat availability.) However, a failure to re-ward or punish schools financially based uponthe choices that parents make may give schoolslittle interest in attracting new students or littleincentive to improve their programs to meet thedemands that parents of current students makeof them.

These microeconomic issues have elicitedmixed responses from states. At least 14 statesArkansas, California, Colorado, Idaho, Iowa,Massachusetts, Minnesota, Missouri, Nebras-ka, Ohio, Oregon, Utah, Washington, and Wy-ominghave some type of interdistrict openenrollment programs. California limits choiceto the school in the district in which the parenteither lives or works, while Ohio limits choiceto schools in contiguous or bordering schooldistricts. No such limitations are imposed by theother states; students may select any publicschool in the state.

The general tendency among these states isto allow basic total state plus local per-pupilfunds (excluding categorical funds) to follow

1423

the child. The sole exception is Arkansas, whereonly state aid follows the child?) States differ,however, in the definition of "full-base" fund-ing. For example, Ohio provides that an amountequal to the state foundation per-pupil revenueadjusted by the sending district' s cost-of-doing-business index follow the student, while in Iowathe lower of either the sending or the receivingdistrict's base per-pupil revenue follows thechild. Again, such arrangements can easily pro-vide a fiscal hardship for the sending district anda windfall for the receiving district if transfers

are limited to space available.A particularly controversial version of full-

base funding provides that an amount equal tothe per-pupil revenue of the receiving districtfollow the child. Such a plan can be problematicbecause students who select schools outsidetheir home district may often be attracted toschools in districts which outspend the home

district on a per-pupil basis. When Massachu-setts passed a law permitting open enrollmentamong districts electing to participate, localdistricts with large concentrations of low-in-come families found themselves compelled bylaw not only to forgo their local base per-pupilfunding for exiting students but to pay addition-al subsidies to higher spending and much wealth-ier neighboring school districts." In its first yearof operation, 1991-92, the Massachusetts planmade the sending district responsible for the fullper-pupil cost of educating the student in thereceiving district, regardless of the size of theper-pupil spending differences.'2

States with power-equalizing funding sys-temssystems that guarantee that districts withthe same property tax rates have the same per-pupil expendituresmay not face some of theseproblems. Because such systems concentratestate aid on districts that have low property

10 In Colorado, state law initially provided that only 85% of the sending district's base per-pupil revenue follow the

pupil. When, partly as a result, no districts elected to participate, the program was modified to allow all base per-pupil

revenue to follow the child. Colorado's interdistrict choice plan will be phased in at the rate of three school districts

per year. Districts must apply to participate in the program. At the end of five years, the Colorado legislature will decide

whether or not to institute a statewide mandatory program.

I I For example, Gloucester, a relatively poor district north ofBoston, spent approximately $4,500 per pupil in 1991-

92, while its wealthier neighbor, Manchester-by-the-Sea, spent about $7,700. Under the choice program, Gloucester

lost 77 of its 3,700 pupils to Manchester in 1991-92. For each one, Gloucester lost and Manchester gained the full $7,700

in state aid, yielding a substantial loss for Gloucester and a windfall for Manchester. The Massachusetts law also phased

out an existing interdistrict tuition program. Forty-eight of the 77 students who "open-enrolled" from Gloucester to

Manchester in 1991-92 had already been attending Manchester schools, with the parents paying Manchester $3,500 in

tuition. Under the open enrollment program, the tuition cost shifted from the parents to the Gloucester school district

and rose from $3,500 to $6,500.In response to these hardships imposed by the choice program, the Massachusetts legislature has since appropriated

$2.7 million in one-time, emergency aid for adversely affected districts and has capped the amount of revenue gained

by a receiving district at $5,000 per pupil. Further, districts losing pupils are reimbursed 75% of their losses by the state.

A transportation subsidy, however, was not approved. According to a study conducted for the legislature, reimburse-

ment of transportation costs incurred by participants in the open enrollment program in 1991-92 at the state employee

rate of 22 cents per mile would have totalled approximately $1.7 million (Fossey, 1992).

12 Participation in the Massachusetts plan is voluntary in the sense that a district can choose not to accept nonresident

students. However, no district can deny students the freedom to leave. In 1991-92, only 32 of the state's 361 districts

opted to participate.

wealth, students who transfer from low-wealthto high-wealth districts will not receive much ifany additional state assistance. But such powerequalizing systems still reduce state aid to low-wealth districts that lose students through choice.

A more general solution to the problemdiscussed in this section is the "classroom unit"or "teacher unit" finance model. With this mod-el, which of course can be implemented with orwithout a choice program, a school or districtwith a growing enrollment would not receiveadditional funding until it adds enough studentsto require the addition of a teacher. Similarly, aschool or district with a decreasing enrollmentwould not lose funding until it loses enoughstudents to reduce the size of its teaching staff.These threshold levels of enrollment changewould be set by formula and could be adjustedby pupil weightings to compensate for costdifferentials across rural, suburban, and urbancommunities, grade levels, and pupil categories(e.g., special education pupils, compensatoryeducation pupils). Such a solution avoids thepayment of a state aid windfall to the receivingdistricts or unfair state aid reductions for send-ing districts. Ideally, the formula might alsotake into account funding for overhead costs,costs for building maintenance and administra-tion that are not dependent on changes in enroll-ment. Potentially, a state-aid formula that re-sponds to the real cost effects of choice is verycomplex.

TaxationIssues

While finance schemes might be designedto pass muster in distribution, they also raiseissues of aggregate expenditures and taxpayerequity. That is, if states permit localities to settheir own level of taxation and expenditure for

schools, choice will give parents an incentive tolive in a low-tax district (or to vote for low taxesin their district of residence) and send theirchildren to a high-expenditure district. First,this incentive could have the effect of reducingoverall public expenditures on education, par-ticularly from local sources. This incentive ap-plies to all parents, whether they currently livein high- or low-expenditure districts. Parentswho send their children to schools in otherdistricts or to private schools do not have anincentive to support local schools. Parents whosend their children to local schools might resistadditional locally supported costs imposed bychildren who come from other districts. In ei-ther case, choice could give parents and othercommunity members a reason to reduce localexpenditures for education.

Second, choice could exacerbate taxpayerinequities. At present, property tax rates gener-ally differ considerably from district to districtwithin a state. But at least those levels of taxa-tion are subject to control by local residents whoare most immediately affected by the quality ofschools. Parents who send their children to aschool in another district have no say in theexpenditure levels of that district because theyhave no vote in school board elections or spend-ing referenda for that district. Under choice,then, levels of taxation could be deterinined toa greater extent than at present by those who donot necessarily have the greatest stake in theeducational system.

The difficulties just described can be seen asa fundamental incongruity between a school-based choice program and a district-based fi-nance system. Odden (1991) has proposed atwo-tier, school-based finance structure de-signed to maintain pupil and taxpayer equity inan interdistrict or market choice system.

The first tier would provide equal base per-pupil funding for all pupils in the state; it is, in

1625

effect, a foundation formula. The level of thisbase funding would be sufficient to ensure thatall students attain the state' s performance goals.Presumably, this tier would be funded largely orexclusively from state tax sources.

A second tier would provide individualschools with the opportunity to exceed the foun-dation spending level. The funding of this tierwould be based on the individual income tax,not the district property tax.° That is, the in-

come tax would be used to give parents in local

schools the choice to spend above the founda-tion level. Parents of children enrolled in apublic or participating private school wouldhave the option of exceeding the foundationlevel of spending by a majority or super-major-ity vote. 14 Specifically, all parents of children inany particular school could vote on whether toimpose an income tax surcharge on all parentsat the school.'5 The state would then equalizethe yield on the surcharge across schools in thesame way many states now equalize the yield on

local property taxes across districts by means of

a power-equalizing or guaranteed-tax-base for-mula. That is, the legislature would establish aschedule of per-pupil revenue yields for theallowable range of income tax surcharges.

Odden (1991) points out several attractivefeatures of this proposal. First, low-incomehouseholds would be protected from paying thetax surcharge to the extent that such householdsare exempted from the state income tax. Sec-ond, state equalization of the surcharge levied ateach school would provide a fiscal incentive forparents to increase their school tax effort. Aswith any district power-equalizing or guaran-teed-tax-base formula, voter response to thefiscal incentive (or "price effect") of matchingstate aid depends upon the voters' price elastic-ity of demand.'6 Third, in the lexicon of schoolfinance, this plan would include the completerecapture of "excess" local revenue. That is, inthe case of a school for which aggregate incomeper pupil exceeds the state guarantee level, theschool's revenue per pupil would be limited bythe state to that guarantee level, and the "ex-

13 As Odden (1991) notes, the financing of differential spending levels across schools by means of the property tax

is impractical and likely prohibited by law. Most states requireuniformity of tax rates within property tax jurisdictions,

thus precluding the possibility of differential property tax rates acrossparcels within a school district. Generally, such

differentials result from tax abatement programs that remove parcels, in whole or in part, from the ad valorem property

tax rolls. Such an approach would be impractical in this context. Individual income tax differentials are more common.

For example, many states use circuit breaker programs to provide property tax relief in the form of income tax credits

to individual households. Further, a number of states have enacted various forms of individual income tax surcharges.

14 In California, for example, Proposition 13 requires a two-thirds majority vote to raise taxes.

15 The administrative mechanics of such a school-based tax need not be overly burdensome, particularly for any state

in which income tax returns are already coded by school district (for example, in connection with a circuit breaker

property tax relief program). Once the surcharge is approved by the school parents, the school would certify the result

to the state and list all parents and their social security numbers.The state would then notify all parents of their income

tax surcharge. The surcharge on any single household could be capped at, say, 10% and could apply to all households

regardless of the number of chi ldren they have in public school. For familieswith children in more than one public school

and paying the maximum surcharge, the school tax could be divided proportionately among the children's schools.

16 A matching aid formula offers to match each dollar of the recipient's expenditure with a certain amount (m) grant

dollars, so m is the matching rate. Thus, the share of total expenditure financed by the grant (denoted by M) isM=m(l+m), and the local tax price (denoted by P) of an adtlitional dollar of services is P=1-M=1-[m/(1+m)]=1/(1+m).

cess" revenue would be distributed to lesswealthy schools through the equalizing formu-la." Fourth, these funds, along with the statefoundation funds, would be entirely discretion-ary at the school level. Such an arrangementwould support site-based decision making as toprogram planning and budgeting. Finally, thissecond tier of school spending would completethe choice framework by giving families theopportunity to select not only the school theirchild will attend, but also the quality of educa-tional programming in that school. As Odden(1991) notes, this school-based income tax sur-charge approach is entirely compatible with anymodel of public school choice, including intra-district open enrollment, magnet schools, ormini-schools. It could also be made consistentwith a voucher plan.

The two-tier funding approach, in which alltaxpayers support a common core educationalprogram for all students and parents pay forsupplements to the core in the schools theirchildren attend, fits nicely with the dual publicand private ends of education described above.Ideally, the first tier of financial support wouldbe sufficient to provide children of differingracial and socioeconomic origins the educationneeded to function effectively in a competitivemarket economy and a participatory democra-cy. This would suggest a relatively high founda-tion funding level. The level of second-tierfunding, of course, would vary across schools,reflecting the preferences of each school' s par-ents. A political question arises as to whetherthe state would impose a maximum per-pupilexpenditure level on schools. Given the likeli-hood that the highest-spending schools in a

system such as this would have high incomeparents and in view of the ability of states toextract recaptured funds from such parents andredistribute those funds to all schools throughthe two-tier formula, legislators may be in-clined to dispense with any spending limit or setit at a very high level.

CategoricalFunding Issues

At present, state aid earmarked for particu-lar programs or studunt populations (e.g., com-pensatory education, programs for gifted andtalented students) rarely follows the child ininterdistrict choice programs. Whether it shouldor not would seem to depend upon the statutorybasis for each individual program. In someinstances, however, statutory intent is unclear.In the absence of interdistrict choice, state orfederal funding sources have sometimes failedto clearly distinguish between categorical fund-ing for educationally disadvantaged studentsand funding for schools or districts serving highconcentrations or proportions of such students.Under choice, however, it is important to clarifythe intent of such programs since the fundingintended for disadvantaged students should fol-low the student to a school of choice and fund-ing for disadvantaged schools should not.

Odden (1991) notes, for example, that fed-eral Chapter I funds for compensatory educa-tion flow to local districts according to thenumber of low-income children residing in thedistrict. Within districts, however, funds areallocated on the basis of students' educational,

17 In microeconomic terms, the marginal tax price of school expenditures for high-income parents would be greaterthan one. That is, in order to increase per-pupil expenditures in their school by one dollar, affluentparents would haveto increase their school tax payments by more than one dollar per pupil.

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27

not economic, needs. If a Chapter I child living

in a low-income urban district elects to leavethat district to attend a school in a more affluent

suburban district that does not qualify for Chap-

ter I funding, should that child retain eligibility

for the categorical funding? Clearly, the educa-

tional needs of the child are not lessened by the

transfer. At the same time, however, the child

would not qualify for Chapter I funding if he or

she lived in the suburban district. If the funding

were to follow the child to the suburban district,

would not the principle of horizontal equity

require that all children in the suburban district

with the requisite educational need be funded,

regardless of the income level of the district?

In contrast, federal special education stat-

utes clearly identify the individual student as

the object of funding. All children identified as

needing special education services must re-ceive them regardless of their district or school

of attendance.To resolve this dilemma, Odden (1991)

suggests that the student simply be counted in

the district of attendance for purposes of cate-gorical funding.'8In this way, district andschool

attendance determines eligibility for categori-cal funding. Such a scheme would generally

mean that a student who leaves a low-incomedistrict for a school in a more affluent commu-nity would forfeit eligibility for those categori-

cal funds distributed by formula to schools or

districts rather than students. However, the en-

vironment and programs of the more affluent

school might more than compensate for the loss

of program eligibility. Further, such transfers

could result in greater per-pupil categoricalfunding for those remaining in the neighbor-

hood school. For student-based categorical pro-grams such as federal (and, in some cases, state)

special education, aid would follow the child tothe school of attendance. In view of the possibil-

ity that significant numbers of academicallyneedy students may transfer to schools in com-munities with relatively low numbers of suchstudents, state and federal authonties may have

to clarify, in some cases, whether categoricalprograms are intended to assist disadvantagedstudents or disadvantaged schools.

A FINAL WORD

The recent public interest in school choicecan be viewed as part of a broader movementtoward entrepreneurship in elementaiy and sec-ondary education. As one part of a multi-faceted

strategy to create incentives to improve schoolperformance, choice and its attendant financeissues are seen as an interesting and integratedapproach to allocating educational resources soas to create new and restructured schools and

more options for students.When choice is limited to existing schools,

financing schemes are generally reduced to one

of three unsatisfactory compromises: (1)interdistrict choice plans in which it is difficultto make funding accurately reflect the real be-tween-district costs of choice; (2) intradistrictpublic choice plans in which choice is limitedbut between-district cost problems are avoided;

and (3) severely restricted market choice plans

in a few jurisdictions in which the number ofparticipating students is so limited that costproblems are negligible. Further, in the absence

of supply-side strategies to encourage educa-tional entrepreneurship, the economics ofschoolchoice is reduced to a rationing of slots indesirable schools, resulting in a disequilibrium

18 This is the policy in Arkansas, California, Colorado, Idaho, and Washington.

of shortages and surpluses that does little toimprove either economic welfare or education-al outcomes.

If a state accepts the premise that supply-side strategies, including charter schools, re-structured schools, and various public choicemodels, are essential if choice is to succeed asan educational strategy, then the state shouldincorporate in its school finance system a fiscalincentive for such supply-side efforts, includ-ing planning and implementation grants forschool restructuring and start-up funds for char-ter schools to supplement operating revenuesthat would follow the students. Viewed in thisbroader context of fostering educational entre-

preneurship, the financing of public schoolchoice can extend beyond the unsatisfactorypolitical compromises reached by states thathave grafted school choice programs onto dis-trict-based finance systems to include moreflexible incentives for educators to create neweducational choices in every community. Suchfiscal incentives would generally be supple-mented by state policies promoting devolutionof decision-making authority and freedom fromregulatory control so as to enhance the opportu-nity of educators to design and initiate programsto compete for the fiscal rewards and avoid thefiscal sanctions of educational choice.

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REFERENCES

Brown, B. W. (1992). Why governments runschools. Economics of Education Review, 11(4),

287-300.

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