Robin Hood and His Not-so-Merry Plan: Capitalization and the Self-Destruction of Texas' School Finance Equalization Plan

Abstract

School finance schemes control the allocation of $370 billion a year in the United States, but their economics are poorly understood. We examine an illuminating example: Texas' Robin Hood' scheme, which was enacted in 1994, allocates about $30 billion a year, and is currently collapsing and likely to be abandoned. We show that the collapse was predictable. Robin Hood's design causes substantial negative capitalization, shrinking its own tax base. It relies only slightly on relatively efficient (pseudo lump sum) redistibution and heavily on high marginal tax rates. Although Robin Hood reduced the spending gap between Texas' property-poor and property-rich districts by $500 per pupil, it destroyed about $27,000 per pupil in property wealth. The magnitude of this loss is important: if the state had efficiently confiscated the same wealth and invested it, it would generate sufficient annual income to make all Texas schools spend at a high leval. The Robin Hood scheme is stringent but not bizarre: other states' systdms share its features to some degree. We provide estimates of the effects of school finance system parameters, which policy makers could use to design systems that are more efficient and stable.