District power equalization

Educational Finance (Coursework

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Required Text:

Brimley, V., Verstegen, D.A., and Garfield, R. (2012). Financing Education in a Climate of Change, 11th Ed. N.Y.: Pearson, Inc. ISBN: 9780137071364

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Lesson 2 –

Introduction

Equity in school finance refers to fairness in the expenditures per pupil and fairness in the treatment of taxpayers. In this context, equity and equality, although often used synonymously, do not mean the same. Fairness is more important in financing education than evenness or sameness, because students have wide differences in their abilities, needs, and educational desires. The school finance reforms emphasize equity of educational input; it is impossible to measure accurately equity of output. Even though real property taxes are usually paid at the same tax rate in a given district, they are not always equitable, because of different rates of assessment as com-pared to market values, different degrees of ownership of the property being taxed, and differences in the income or the wealth of taxpayers even though their property taxes may be relatively similar.

Income and wealth have some advantages over property assessments in formulas for determining the fiscal capacity of school districts. It is much easier to treat equals equally the horizontal component of equity than to treat unequals unequally the vertical component of equity. No one has deter-mined exactly how unequally those with unequal needs or abilities should be treated.

Since the cost of education varies with the abilities and the needs of students, the use of weighting factors adds some measure of fairness to finance formulas. The use of assessed valuation of property per pupil is more equitable than assessed valuation of property per capita for the operation of school finance programs. Wealth and income are gaining some support as bases for determining fiscal capacity.

The equity issue at the local school level has become a topic for researchers in the field of education finance. Critics are anticipating that it in some way may relate to accountability. The complexities in comparing one state to another is difficult because data of this nature are not required of local districts. It is important for administrators to monitor the budget figures. However, unless mandated, there appears to be limited interest in collecting and providing local-level finance information.

Taxes are classified into three general types: proportional (the same percentage of income spent for taxes for all levels of income), progressive (higher percent of income for taxes for higher levels of income), and regressive (lower percent of income for taxes for higher incomes). It is generally agreed that reasonable progressive taxes are the most equitable and regressive taxes the least equitable.

In the early history of the United States, many of the individual states were slow in accepting responsibility for financing their public schools. Consequently, full local district funding was the first of all school finance systems. Because of the extreme differences in the size and wealth of local districts, local financing proved to be a very unfair and discriminatory method of financing education. Early efforts of the states to aid local districts in financing education came principally in the form of flat grants. These, too, proved to be nonequalizing. Gradually, however, the states moved to equalizing grants and to the equalization principle in supporting local districts. Some

states and school districts continue to use obsolete and unfair educational finance practices in spite of the relationship between equal protection and equalization in school finance. Such practices are being challenged in state courts.

In this century, various patterns of financing education are emerging. Full state funding of public education has been advocated by some writers for several years. Such a plan raises some important questions about increased state control and the problem of financing districts that desire to maintain special higher- cost programs.

District power equalization involves the principle of state-local partnership, where each local district mill levy would produce the same number of dollars of revenue per mill per weighted student (state and local) in every district. Its main disadvantage is the fear that such a principle might open the doors of the state treasury. Property reassessment upward does not necessarily increase the total revenues.

Reading

Study Chapters 3 and 4 of the text.

View the PowerPoint slides for this Lesson.

Assignments

Short Answer Questions

1. Discuss the problems and ramifications involved in improving school finance formulas in order to provide greater equity for taxpayers.

2. According to the literature, what are the apparent trends in the measurement of school district wealth? What are the problems involved in applying these measures to school finance formulas?

3. Using the following information about two school districts, solve the indicated problems.

District Assessed Valuation Weighted Pupil Unit

A $ 100,000,000 2,000
B $ 45,000,000 900

Foundation Program Board Leeway Voted Leeway

State Guarantee $ 1,800/ WPU $ 1,000/ WPU $ 400/ WPU
Required Levy 20 Mills $ 1.40/$ 100 AV $ 10/$ 1,000 AV

Need (in $) Local Effort State Allocation Total
a b c b + c
District A
Foundation Program $________ $________ $________ $________
Board Leeway $________ $________ $________ $________
Voted Leeway $________ $________ $________ $________
Total All Three Programs $________ $________ $________ $________
District B
Foundation Program $________ $________ $________ $________
Board Leeway $________ $________ $________ $________
Voted Leeway $________ $________ $________ $________
Total All Three Programs $________ $________ $________ $________

From the previous problem, calculate the following:

4. Ratio of state revenue to local revenue (Foundation program)

District A District B

_______:_______ _______:_______

5. Under the power equalization principle, how much money would the state provide for each of these districts using all three programs?

District A$_______ state money District B$_______ state money

6. Total WPU value from all sources:

District A$_______

District B$_______

Lesson 3 –

Introduction

Taxation is a system of transferring money from the private sector to the public sector of the economy. The public institutions of the nation are almost completely dependent on this method of obtaining funds for their operation. Taxation is fairer and more dependable for financing education than the previously used rate bills, tuition charges, and student fees. A good tax system should include the following features: (1) There should be co-ordination among all levels of government with little or no duplication of taxes. (2) All citizens should pay some tax. (3) Taxpayers should be left in the same relative financial position with each other after taxes are paid. (4) The tax should bring a reasonable yield, not be merely a nuisance tax. (5) Tax erosion should be minimal, regardless of the benefits government owes to deserving citizens. (6) Tax collection should be simple and convenient for taxpayers and of little cost to the collectors. (7) The tax should be levied on the person or household who pays it the shifting of the tax should be minimized. (8) The payment of the tax should not cause a major change in the economic practice or vocation of the taxpayer.

The property tax is becoming less and less fair as people increasingly invest their surplus monies in other forms of wealth. The unfairness of a property tax is evident in many ways, such as unequal assessment practices, taxation without relationship to net ownership of the property being taxed, unequal tax bases per pupil to be educated in various kinds of school districts, and lack of a direct relationship between the taxes owed and the amount of wealth or income of the person or household being taxed. Taxpayer resistance to property taxes has increased greatly. Circuit breakers were adopted by most states to relieve elderly and low- income people of part of their property tax burden. Legal steps were taken in a number of states to restrict the use of the property tax, and some states passed legislation restricting government expenditures. Personal property taxes are difficult to collect, and their use has proven to be somewhat ineffective.

Income taxes are probably the most equitable of all taxes, but their use at the local level is limited for two major reasons: (1) They are already used to a high degree by the federal government and to a limited degree by most states. (2) It is relatively easy for resisting taxpayers to find loopholes to avoid such taxes. The income tax is probably the fairest of all taxes. In practice, it is less than ideal as a revenue- collecting measure. It is usually a progressive tax and should include personal and corporate income. There is a continual cry for overhaul of the income tax laws.

Sales taxes are effective at the state level but are not readily manageable at the local level, especially in small school districts. Sales taxes are regressive when food items and other necessities are taxed, since low-income families generally spend a higher percentage of their income on necessities than the more affluent do. E-commerce has spurred a sales tax debate.

Potential new taxes include site-value and value-added taxes, which have a history of successful use in some foreign countries. Congress has attempted unsuccessfully to introduce the use of some new kinds of taxes several times in the last few years. Although the concept is very old, lotteries have become popular in some states as a source of revenue for the schools. Since

lotteries generate only a small percentage of total state allocations, school administrators need to be concerned about relying on this source because of the uncertainty of receipts. The debate will continue on whether a lottery is truly a tax. In any case, it is regressive in nature, since many buyers of tickets are among the members of society who can least afford them. The pros and cons will continue to be debated as more states consider the possibilities of instituting lotteries to raise money for state budgets.

Private foundations may be a source of revenue for school districts. However, the collaborative effort of the private and public sectors working for education may have a greater impact than the actual funds raised through foundations. School-business partnerships have continued to increase in numbers, as business and industry leaders have become more concerned with developing a work force that can compete in a global marketplace. The collaborative efforts will require revenues from business and industry and accountability from educators.

Because of the continual increases in funds allocated to public education by most of the states, local control of education is slowly decreasing. This is a source of some concern to many people who view education as a frontier where people at the local level can exercise some degree of authority in decision making in matters that directly affect them. Rural areas of the country no longer have the strong influence on legislation they once enjoyed. On the other hand, urban areas have lost the financial advantage they once had over rural areas. City school districts suffer financially because of higher costs and the need to provide social and welfare services that are minimized in most rural areas.

Although much has been done to decrease the extremely large number of school districts that once existed in the United States, some states still operate far too many small districts. Just as many school districts are too small for efficient operation, many city districts are too large. Most states have been able to provide for the financial needs of small districts and are working toward a satisfactory solution for the municipal overburden of large cities.

Historically, there has been a fervor to maintain local control of education, but greater open debate and controversy regarding the effectiveness and usefulness of local boards have emerged and they are experiencing an eroding of authority. Business and political leaders are developing programs mandating more control over local school districts. Mayors of some large cities have gained control over schools in their jurisdiction and are usurping power from the school board.

Some states have passed legislation requiring districts to expend at least 65 percent of revenue on a defined operating budget and have taken over the supervision of school districts. Accountability requirements, failing schools, mandated legislation, and other factors have diminished the administrative authority of some local school districts and will affect others in the future.

A good tax system has a minimum of tax shifting. The results are often detrimental to local school districts that have limited control over such matters. Court decisions, legislative action, or legal rulings may change the tax structure that can cause a local school district to lose revenue for the instructional program as well as capital outlay and debt service obligations. The process is complex, and local boards of education may have little control over factors that erode their financial base.

Mobility of the population is significant, and people want good schools throughout the nation, but the public may not be willing to pay for them. Recent developments have some local boards looking to private, for- profit companies to operate schools. Critics indicate that this approach will erode local control. The states have always assumed general responsibility for education, but many of them have left the major financial obligation and control with local districts.

The real property tax has been the major source of local funds for education since the early history of the nation. States have recently begun to place limits on such taxes and, in a few instances, have placed limits on annual expenditure increases for public education. Local nonproperty taxes are not as effective or productive as they appear to be in theory, yet some states are branching to other sources.

Education finance will need to depend on diverse sources of income in the future. A relatively few school districts are still dependent on some other unit of government for approval of some aspect of their financing. The disadvantages of such a relationship far outweigh the advantages. Dependent school districts are much more likely to become involved in local government politics than are independent districts. Certain trends are discernible in local taxation practices. Better property tax administration, continued competition for the tax dollar among various agencies and institutions of government, a continuation of the problems created by municipal over-burden, more state support for education, and continued resistance to taxes are among the most evident.

Short Answer Questions

1. For taxation purposes, property is usually assessed at a fractional part of its sale (market) value. Revenues are determined by applying tax rates against these assessed values. Since states use different percentages of sale value in calculating assessed value, comparisons between states require the determination of sale values and true tax rates.

(assessed value) (tax rate) = (sale value) (true tax rate) (AV) (tr) = (SV) (ttr)

Thus, if property valued at $ 100,000 and assessed at $40,000 has a tax rate (sometimes called apparent tax rate) of 40 mills, it would have a true tax rate of 16 mills.

If the assessed value of a piece of property is 25 percent of its sale value, you know immediately that its true tax rate is what percent of its apparent tax rate?

2. If a piece of property is assessed at $12,675 under a fractional practice of 65 percent, what is the sale value of the property?

3. If a district requires revenue of $1,487,424 and the sale value of all taxable property is $106,000,000 (to be assessed at 60 percent), what will the tax rate be in dollars per $100 of assessed valuation?

4. Mr. Smith has a house assessed at $51,000 (60 percent of sale value). His tax is $3.50 per $100 of AV. Mrs. Jones has a house assessed at $35,550 (45 percent of sale value). Her tax rate is 36.2 mills. From the following information, answer the following:

Who pays the greater tax?

5. How much greater?

6. Using the tax rate and the assessment practices of Mr. Smiths district, how much tax would Mrs. Jones pay?

7. Ms. Brown has a house assessed at $ 55,800 (62 percent of sale value). Her tax rate is $ 3.25 per $ 100 of assessed valuation. Mr. Barnes has a house assessed at $ 42,720 (48 percent of sale value). His tax rate is $ 32.75 per $ 1,000 (AV).

Who pays the greater tax?

8. How much greater?

9. Using the tax rate and the assessment practices of Ms. Brown’s district, how much tax would Mr. Barnes pay?

10. Reducing the number of school districts in a state will generally reduce the difference in ability to support education between the wealthiest district and the poorest district in terms of assessed valuation per pupil to be educated. Construct a problem in a state (real or mythical) and show that this statement is true or false.

Lesson 4 –

Introduction

Early settlers apparently recognized the importance of education to the future of the United States, but they left the various states with the responsibility for its implementation and development. Education was not referred to specifically in the United States Constitution; interpretation of the Tenth Amendment delegated that responsibility to the individual states. Each state in the Union has interpreted its responsibility differently depending on language in their state constitutions and enabling legislation. Hence, there is no single public school system, but rather 50 distinct systems.

The states have developed their school finance systems largely by trial and error, with considerable difficulty and sacrifice. Public schools were originally financed largely by land grants, fees, tuition charges, and other nontax funds; as schools became more numerous, property taxes were introduced as a source of local revenue.

The Northwest Ordinances of 1785 and 1787 and later land grants did much to help the states develop public education. At first, local districts financed education with little or no state assistance, and there were vast differences in a districts ability to provide quality education programs. By the early part of the twentieth century, the states were making grants to local districts, for the most part based on the philosophy of Ellwood Cubberley. A quarter of a century later, the equalization principles of George D. Strayer and Robert M. Haig were being applied to school finance systems. Paul Mort and others did much to improve the equalization concept during the middle years of the twentieth century. In the latter part of the century and evolving into the past decade, various factors altered the focus on funding education. Continued emphasis on equity and adequacy are prevalent issues, and accountability involving student outcomes and teacher quality are receiving the attention of the courts, legislators, business leaders, and interested citizens.

Currently, there are a great variety of methods to allocate funds to local districts. Describing the finance systems of the 50 states is complex. Some commonalities include a basic or foundation program, a relationship between state and local contributions, and utilization of the categorical funding method. The trend has been toward greater state responsibility for financing public education, resulting in greater state control and an erosion of the power and authority of local school boards.

The role of the federal government in education has long been a controversial one that has had racial, religious, and political overtones. Historically, federal involvement with the public schools has been minor. However, at the turn of the twenty- first century, centered on a perceived need that certain populations were disadvantaged educationally, the No Child Left Behind Act of 2001 was legislated. The law changed the dynamics of the federal role in education.

The framers of the Constitution seemed to have feared the establishment of a nationally controlled school system. In effect, the adoption of the Tenth Amendment in 1791 relegated the federal government to an advisory role as far as education is concerned. Throughout the history of the United States, the comparative roles of the three levels of government have been in a

state of change. Federal education activities began in 1785 with the land grants in the Northwest Ordinances that were given for the purpose of establishing schools. Later, the Morrill Acts provided land for the establishment of land-grant colleges. These were followed by supplemental acts and by various vocational education grants. School lunch, relief and emergency programs, war on poverty, and payments in lieu of taxes are examples of federal involvement in financing education. Federal emphasis has been given to programs designed to help eliminate racial and sex discrimination, stress cultural awareness, provide funds for specialized categorical programs including, through NCLB, the educationally disadvantaged.

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