Intergovernmental Grants and the Demand for Local Educational Expenditures

Abstract

Intergovernmental grant programs can create offsetting economic incentives for recipients. This article examines the response of local school district voters to Michigan's Guaranteed Tax Base (GTB) school-aid formula and its Homestead Property Tax Credit program ("circuit breaker"). While some response was found to the price effects of both grant programs, econometric evidence suggests that efforts to reduce interdistrict spending disparities by means of GTB formula price effects will prove futile for two reasons. First, these effects are offset by the counter effects of the circuit breaker. Second, because their demand for school spending is inelastic, voters in "in-formula" districts will convert increased GTB matching aid into property tax relief by reducing tax effort. Further, the finding of statistically different price and income elasticities of demand for local expenditures in high- and low-spending districts, which are also high- and low-property wealth and income districts, suggests that the constant elasticity formulation often used in studies of local education demand is problematic.