EDUCATION
If it stands, Superior Court judge David Ruoff’s decision that New Hampshire’s school finance system is unconstitutional threatens to make our housing crisis worse and to undermine the quality of local public schools.
Federal Reserve economist Byron Lutz studied the effects of the Claremont decisions in the prestigious American Economic Journal: Economic Policy. (These decisions from the 1990s required the state to expand its funding of local schools significantly and redistribute from “property-wealthy” to “property-poor” towns.)
Lutz found that, when the state started taxing donor towns and subsidizing recipient towns, people moved from donor towns to recipient towns, seeking to benefit from the lower property taxes they could now afford. That caused property values to fall in donor towns and rise in recipient towns. Recipient towns then adopted growth management ordinances, which choke off housing supply and raise prices further.
Centralizing school funding — making more of it come from the state rather than the town’s own property taxes — weakens the most important constraint on NIMBYism at the local level. Stopping growth comes with a cost: a smaller property tax base. Property tax burdens rise when zoning forces a lot of land to go underutilized.
Fortunately, the state formula changed in 2011, so school funding has gradually become more decentralized.
But the way our complicated school funding formula used to work, towns that had bigger property tax bases per student had to pay extra to the state, which was then redistributed to towns with smaller property tax bases. That’s a strong incentive for towns to have a small property tax base, which often means stopping development.
For this reason, many scholars agree that when local governments must fund their own services out of their own property tax revenues, rather than grants from above, they tend to be less NIMBY and allow more growth.
Now, NIMBYs often claim stopping growth cuts the property tax burden by keeping out schoolchildren. But that’s not true. Using state-of-the-art quasi-experimental methods, Northeastern Illinois University economist Ryan Gallagher has found that large-lot zoning and bans on multifamily housing reduce the property tax base per student, thereby raising property tax burdens. The reason is that large families want large single family houses, while apartments and small houses attract few children but raise taxable value.
I tested the hypothesis that centralized education finance causes NIMBYism by examining the only nationwide dataset of municipal land-use regulations, the Wharton Land Use Regulatory Index. Controlling for the most important factors that affect zoning, I found that both centralizing school funding and adopting an explicit redistribution program were strongly associated with stricter land-use regulations.
Nearly doubling the state’s per-pupil adequacy grant and “recapturing” education tax dollars from donor towns, as Ruoff’s decision would require, would take the market straitjacket off NIMBYism, making our housing crisis worse.
Centralization also hurts public school quality. Look at Vermont. In response to similar court rulings, their legislature adopted full state funding of education. Now that the state is footing the bill, they also want to control budgets. Between 2010 and 2018, Vermont passed three laws strongarming towns into school consolidations, reducing the number of school districts in 185 towns from 206 to 50. They also penalize towns for “excess spending.” Vermont’s average NAEP scores for fourth grade reading and math and eight grade reading have since deteriorated against New Hampshire’s.
Since the start of this century, New Hampshire has had the second biggest increase in per-pupil money for public school out of all 50 states. The No. 1 and No. 3 states, New York and Illinois, don’t redistribute at all based on “property wealth.” Meanwhile, the bottom three states — North Carolina, Indiana and Idaho — are among the most centralized.
Therefore, while progressives might like that a big increase in state education funding could require an income tax, they should realize that the outcomes won’t be progressive; we’ll get more exclusionary zoning and less local commitment to public schools.
Conservatives might like that a big increase in the adequacy grant will also mean bigger Education Freedom Account grants. But they should also care that zoning will get worse, and the quality of public schooling will decline.
Currently, housing is affordable in many property-poor towns. Lutz’s research shows it will become a lot less affordable if the state ups its redistributive grants to them. That would hurt poor families.
Centralizing school finance in New Hampshire would be unfair, would undermine the quality of public schools, and would incentivize exclusionary zoning. The state should appeal Ruoff’s decision, and the New Hampshire Supreme Court should overrule.
Jason Sorens is senior research fellow at the American Institute for Economic Research.
