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# Use of State’s Categorical Voucher System

## Use of State’s Categorical Voucher System

Part A:

Consider a situation where a state has developed and implemented Caroline Hoxby’s ideas about how to best design categorical vouchers as a public school finance mechanism. The Dominguez family had a third grade son who attends an inner city school in the Hilltop Unified School District, an inner city school district in one of the large cities in the state in question. Their son is categorized as an English Language Learner (ELL) student. The family is less than pleased about the quality of the education that their son is getting in his neighborhood school in the Hilltop USD, and they are considering using the state’s categorical voucher system so that their son can attend what they perceive to be a better elementary school in a neighboring school district, the Ridgemont Unified School District. The decision of whether or not to use the state voucher for the Ridgemont USD school depends on whether any extra costs would accrue to the family by using the voucher and whether or not those, if there were any, would fit in their family budget. Here are the facts they face in making their decision:

Average per pupil expenditure (PPE) in Hilltop USD: \$8,000
Average per pupil expenditure (PPE) in Ridgemont USD: \$9,000

Tax rate in Hilltop USD: 0.0200 per dollar of assessed value
Tax rate in Rigdemont USD: 0.0225 per dollar of assessed value

Current taxable assessed value of the Dominguez home: \$80,000

Per student state categorical aid for special education students: \$1,000
Per student state categorical aid for students from low-income households, defined as TANF-eligible households: \$500
Per student state categorical aid for English Language Learner students: \$375

Under the state’s categorical voucher plan any categorical aid follows the student to be used by the district in which the student is enrolled. It is assumed that the amount of any per student categorical aid is equal to the marginal cost of educating a student who falls in that category or categories.

Using these set of facts and Hoxby’s description of the ideal categorical public school voucher plan, answer these questions:

1.   If the Dominguez family can afford and is willing to pay an extra \$700 per year for (what they believe to be) a better education for their son, will they chose to use the categorical voucher to send their son to the school in the Ridgemont USD? Answer “yes” or “no” and then defend your answer.
2.  What will be the increase in revenue that the Ridgemont USD will see if the Dominguez family sends their son to their school?
3.    3. What will be the total cost to the Hilltop USD if the Dominguez family sends their son to their school?
4.    Is either district incentivized to either want or not want to educate the Dominguez child based on the categorical aid that follows the child in this plan? Explain your answer.
5.  Assume for a moment that the only cost to the Hilltop USD of “losing” the Dominguez family’s third grader to Ridgemont is the loss in average per pupil expenditure. From a purely economic (budgetary) standpoint and given that they are having to educate one less student, should Hilltop USD be indifferent to the loss of the student, incentivized to keep the student, or incentivized to “push” the student toward leaving for Ridgemont? Explain and defend your answer.

Part B:

In the state of LKB (Locals Know Best), public education is currently funded out of local property taxes. The assessed value of the property in Richville is \$800,000 per student. As a result the current one percent tax on the value of property raises \$8,000 per student, enough to finance a high quality education program. (Throughout this set of questions, assume that education is the only local public service and that, in every town in the state, all property tax revenues are used to pay for public education). The assessed value of the property in Poorville is \$100,000 per pupil. Consequently, the current two percent annual tax on the value of property generates only \$2,000 per pupil, not enough revenue to finance a good education program.

The citizens of Poorville file a legal suit contending that the system of financing public education out of local property tax revenues violates the equal protection clause of the State constitution. The State Supreme Court finds in favor of the plaintiffs and orders the State Legislature to devise a new school finance plan.

One proposal is that the State adopt a Foundation Plan with a foundation level of expenditure equal to \$3,000 and a minimum local property tax rate of one percent. Under the proposed plan, there would be no “recapture.” That is, no community would receive a negative level of aid. (The lowest level of state aid per student would be zero dollars.)

A second proposal that the legislature is considering is a Guaranteed Tax Base (GTB) plan with a guaranteed tax base of \$150,000. Like the Foundation Plan, the GTB plan would have no recapture.

1. Under the Foundation Plan, what would be the level of per student state aid that Poorville would receive, assuming that it satisfies the minimum tax rate requirement? Explain.
2. Assume for the two parts of this question that Poorville maintains its property rate at two percent.

2a) What will be the level of per student state aid?

2b) What will be the per pupil expenditure level in Poorville?

1. Consider the case where, in response to the introduction of the Foundation Plan, Poorville lowers its local property tax rate to 1.5 percent.

3a) What would be the level of per student state aid that Poorville would receive?

3b) What would be the per pupil expenditure level in Poorville?

1. How would the GTB plan affect the price of a “quality unit of education” in Poorville. (In answering this question you could assume that a unit of educational quality costs \$1.00 per student to produce. When it was dependent on its own tax revenues to fund public education, Poorville bought 2,000 quality units per student at a cost of \$1.00 per unit. Seen from this perspective, the question is how the GTB affects the price that Poorville has to pay out of its own revenues to purchase a unit of educational quality for each student.)

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