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Chapter 7

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.

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Chapter 7

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  1. Chapter 7 Fiscal Effort

  2. 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

  3. Measuring capacity is a good place to start examining how much a nation, state, or locality canafford to spend on education The relative effortofthat spending – the degree of fiscal exertion a community commits to its education resources – tells a much more robust story about what people value Capacity & Effort

  4. 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.

  5. 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

  6. 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? Measuring Fiscal Effort in Relation to Wealth

  7. 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 Many Dispute How Much We Should Spend on Education

  8. 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.

  9. Education Spending International Comparisons: 1988

  10. 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 K-12 education than any other country is not true & distorts public perceptions about the results of our fiscal efforts in education. US Education Spending in International Comparison

  11. 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

  12. 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,

  13. 30% of income=mortgage 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, 20% of income = church

  14. 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 For example,

  15. We Spend $$$on What We Value Likewise, examining education expenditures in this light shows the relative importance countries place on educating their children.

  16. Relative Education Expenses in International Comparison

  17. 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 Seeing National Priorities in GDP

  18. How Do We Compute Effort? Effortis best described as a ratio of school revenue (expenditures) to the overall tax base, or, Revenue Effort= Tax Base

  19. 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 per-pupil 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

  20. 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 as a Ratio, cont.

  21. 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

  22. One purpose of state funding is to equalizefor 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

  23. 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

  24. 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 considercapacity The same is true for nations. That is why we looked at national spending relative to GDP Computing Effort Appropriately, cont.

  25. Comparison of Two Districts School District A School District B # Pupils 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.

  26. Computing Effort Using Per Capital Property Tax R $ 6,000. $ 7,500. TB $ 75,000. $100,000. E = .08 .075 School DistrictASchool District B 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.

  27. 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

  28. Computing Effort Using Per Capita Income R $ 6,000. $ 7,500. TB $ 75,000. $ 60,000. E = .08 .125 School DistrictASchool District B 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.

  29. 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. States Vary in How TheyFund Education

  30. 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

  31. Wealth as a ratio: 50% Income & 50% Property School District A School District B # Pupils 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.

  32. Computing Effort 50/50 Split:Income & Property R $ 6,000. $ 7,500. TB $ 75,000+$75,000 $100,000+$ 60,000. E = .04 .046875 School DistrictASchool District B 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.

  33. Wealth as: 50% Property, 40% Income, 10% Sales Tax School District A School District B # Pupils 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 Capita Sales Tax $ 2,500. $ 1,000. Per Pupil Spending $ 6,000. $ 7,500.

  34. Computing Effort 50/40/10:Income, Property, & Sales Tax R = $ 6,000. TB $ 75,000 (.5)+$75,000 (.4)+$2,500 (.10) = or$6,000. $67,750. E = .088560 School DistrictA

  35. Computing Effort 50/40/10: Income, Property, & Sales Tax R = $ 7,500. TB $100,000 (.5)+$ 60,000 (.4)+ $1000 (.1)= or$ 7,500. $ 74,100. E = .101215 School District B

  36. Using multiple criteria for determining wealth is complicated, but They are a better statistical measure for determining wealth, allowing improved comparisons for determining effort Using Multiple Criteria for Determining “Wealth”

  37. 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 States Decide Multiple Measures of Wealth

  38. In Sum, Effort Indices Vary School District A School District B EFFORT INDEX EFFORT INDEX Property Only .08 .075 Income Only .08 .125 Property & Income .04 .04675 (50/50) Property, Income & Sales Tax (.5+.4+.1) .088560 .101215

  39. 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.

  40. 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

  41. 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, cont.

  42. 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.” Factors Influencing Effort to Fund Education

  43. “Tax Effort” • A more appropriate way to compare the relative burden of state and local taxes • Considers what each state would raiseif 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”

  44. State & Local Tax Effort, 1996 State Tax Effort % Rank___ Alaska 116 4 California101 15 Connecticut 115 5 Florida 90 32 Illinois 97 25 Nevada 73 50 New York 141 1 Wyoming 74 48

  45. 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 Making Such Comparisons is Misleading

  46. Federal Funding for K-12 Education Has Increased K-12 Federal Funding 1965 $ 1,942.60 1975 $ 10,617.20 1985 $ 16,901.30 1995 $ 33,623.80 2002 $ 53,334.60

  47. State Effort to Fund Education Highest Effort 1 West Virginia 8 New York 10 Michigan 21 Massachusetts 34 Nebraska 36 Texas 42 California Lowest Effort 50 Colorado

  48. 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

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