Federal contributions to high-income school districts: the use of tax deductions for funding K-12 education

The federal role in education finance is commonly seen as compensatory. The federal government gives large sums of money to low-income schools and school districts through programs such as Title 1. Yet, this view of federal aid is based solely on direct educational expenditures. The federal government and state governments also support schools through tax deductions and tax credits for educational expenditures. These policies tend to benefit higher-income districts. Without incorporating tax policies into our assessment of federal contributions to schools we will vastly underestimate the federal role and vastly overestimate the progressive nature of federal aid to schools. As an example, the deductibility of state and local taxes from the federal income tax is a federal contribution to schools. An individual in the 28% federal income tax bracket, who pays US$1000 in deductible state and local taxes for schools may deduct the US$1000 from the taxable income and reduce his/her federal tax bill by US$280. Thus, of the US$1000 going to schools, the federal government pays US$280 and the individual pays US$720. This paper estimates the extent and distribution of this subsidy and asks how the price incentives created by the deductibility affect the distribution of education spending across school districts. We compare both the size and progressivity of this ‘indirect’ federal subsidy to direct federal aid to schools (Title 1, for example). We find that the deductability more than doubles the federal contribution to schools and is so regressive that, even in combination with direct federal programs, more federal funds go to high-income than to low-income school districts.  2003 Elsevier Ltd. All rights reserved. JEL classification: I2; I22; I28