School Finance Capitalization

Any major reform of school finance will almost certainly bring about change in property values. This Note explains why this effect should occur, reports the econometric evidence that it will occur and discusses the implications of the phenomenon for the analysis of reform proposals. School finance reform is seen to have two objectives: taxpayer equity and expenditure equity. The analysis presented in this Note suggests that the issue of taxpayer inequity is not as clear-cut as some analysts and courts appear to have believed. The effect should be to raise the importance of issues in expenditures equity and the effect of school finance systems on children as opposed to taxpayers. Furthermore, we have identified the source of taxpayer inequity to be barriers to residential mobility and perfect price adjustment. Future school finance should direct some attention to these issues.