School Finance Reform in Michigan: An Analytical Framework

We examine whether the Michigan school funding reform of 1994 had general equilibrium effects in the Detroit metropolitan area. The reform had two components: centralization of school funding at the state level, with increases for low-revenue districts and revenue caps for highrevenue districts, and property tax reduction. We present a stylized equilibrium model whose main insight is that since the revenue component of the policy did not alter the preexisting ordering of districts by revenue, the main effect of the reform will be the capitalization of lower property taxes and revenue changes with a possible increase in school quality in some districts yet no household relocation. In addition, we study the effects of the change in the metropolitan area’s income distribution between 1990 and 2000, which favored low-income households proportionally the most. The combination of the model’s predictions for the tax-revenue reform and the changes in the income distribution implies that the observed housing appreciation can be decomposed into the capitalization of lower taxes and revenue changes, a general appreciation term, and an appreciation pattern related to changes in the income variance. We find that these theoretical predictions are supported by the data. Other implications of the model are also supported by the empirical evidence. 1 Ferreyra thanks the Berkman Faculty Development Fund at Carnegie Mellon University for financial support. We thank Julie Berry Cullen and Susanna Loeb for providing us with data on pass rates for Michigan. We are also grateful to Mary Ann Cleary, Jeff Guilfoyle, Andrew Lockwood, and Glenda Rader from the government of the state of Michigan for helpful conversations on Proposal A. We benefited from comments from seminar participants at Syracuse University. Bill Buckingham from the Applied Population Lab at University of Wisconsin-Madison provided Arc GIS support, and Surendra Bagde provided research assistance.