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Do State-Funded Property Tax Exemptions Increase

Local Government Efficiency? An Analysis of New

York’s STAR Program

Eom, Tae Ho Yonsei University

Ross Rubenstein Syracuse University

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Education Finance in NYS

School Districts Not Necessarily Coterminous with Municipal Boundaries Except for Some Municipalities,

With Full Taxing Authority on Property Tax

Revenue Sources

Own Revenue Sources (Property Tax): 45%

State Aid: 45%

Federal Aid: 10%

Management Responsibility

Given to School Boards Except for Big Five Cities (NYC, Syracuse, Rochester, Buffalo, Albany)

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Education Finance Reform in U.S.A.

A Nation at Risk (National Commission on Excellence in Education): American Schools are “Failing”

Equity Movement Conflicting Views (Scholars, Legislators, Lawyers, Voters) Equality in Per Pupil Spending, Wealth Neutrality Courts Became Central Players in School Finance

Focusing on Geographically Based Disparities

Serrano v. Priest: Violated the Equal Protection Clauses

Provoke Debates on the Relationship between Education Funding System v. Outcomes

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Education Finance Reform in U.S.A.

Adequacy

Since 1989 (Kentucky Supreme Court) Linking Education Finance to Education Quality Emphasize Outputs and Outcomes while Equity Focusing on

Inputs State Aid (Foundation Formula) and Adequacy What is a Core Education and What Does it Cost? Abbott Court Cases in New Jersey

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Net Property Tax Relief to

Taxpayers

Determinants of Property

Tax Payments

Property Tax Relief

Program

Determinants of Property Tax Rate

Determinants of Demand for Local

Public Service

Determinants of Local

Government Inefficiency

State Aid Program

Source: Duncombe and Yinger, 2001

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Theories of Inefficiency Leibenstein (1966,1978):

X-Efficiency Theory (Motivational Theory, Incentive Theory)

Firms Not Necessarily Operate on the Efficiency Production Frontier; Deviations Labeled as X-inefficiency

Individuals Do Not Always Behave in a Maximizing Manner Selectively Rational Compromising Personal Motives and the

Goals of the Firm Posits a Principal-Agent Problem in Organizations between

Owners (Voters) and Employees Three Factors: Individual Motivation, Sense of Responsibility,

and Completeness of Labor Contract

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Theories of Inefficiency

Niskanen (1971, 1975):

Budget Maximizing Bureaucrats

A Principal-Agent Model Explaining Inefficiency in the Public Sector

Relationship between Elected Officials (Principal) and Appointed Bureaucrats (Agent)

Bureaucrats have an Incentive to Maximize Budgets Technical Inefficiency (Overproduction of Public Service) Competition, and Size of Government Cause Inefficiency

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Empirical Studies on Public School Efficiency

Ruggiero, Duncombe, and Miner (1995); Duncombe, Miner, and Ruggiero (1997)

Competition, Government Size, External Factors, and Internal Characteristics

Fiscal Factors and Socioeconomic Characteristics Matter

Duncombe and Yinger (1997, 2000)

Hypothesize that Higher State Aid may Decrease Efficiency Argue that the Median Voter’s Tax Share has a Significant

Positive Impact on Efficiency

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STAR (School Tax Relief Program)

BASIC STAR Given to Owners of Owner-Occupied One-to-Three Family

Houses, Mobile Homes, Condominiums, and Cooperative Apartments

BASIC STAR EXEMPTIONS (Gradual Implementation) 1999-2000: $10,000 2000-2001: $20,000 2001-2002: $30,000 (the same thereafter)

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STAR (School Tax Relief Program)

ENHANCED STAR Given to Seniors at Age 65 or Higher with Income Less Than

$60,000 (Adjusted Every Year)

SALES PRICE DIFFERENTIAL FACTOR (SPDF) Adjust Exemption Amount Based on House Sales Price Counties where the Median Residential Property Value

Exceed the State-Wide Median Residential Property Values Higher Exemptions to Downstate Counties while No weight to

the Upstate Counties (Minimum SPDF 1.0)

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An Example of STAR

A House in Westchester County Assessed Property Value: $150,000 STAR Exemption Amount: $30,000 SPDF: 1.5 Tax Rate: 1.2 Percent

Without STAR Property Tax Amount=150,000*0.012=$1,800

With STAR Property Tax Amount=(150,000-30,000*1.5)**0.012=$1,260 Reimbursement Amount: $540 (30 Percent Reduction)

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Regional Distribution of STAR Benefits

STAR STARRegion Exemptiona Tax Savingsb

2000 2001 2002 2000 2001 2002Downstate small cities 9,379 18,264 27,542 167 329 481Downstate suburbs 15,317 26,214 34,358 279 462 614NYC 3,107 5,377 7,286 53 90 104Yonkers 16,879 24,411 29,289 262 375 414Upstate large cities 6,006 8,821 11,471 91 139 194Upstate rural 9,004 12,429 16,568 144 206 287Upstate small cities 9,831 11,603 15,246 185 228 312Upstate suburbs 10,776 14,319 20,507 199 269 401State Average 11,271 16,510 22,387 201 295 412aregional averiage of per household STAR exemption amountsbregional averiage of per household tax savings due to STAR exemption

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E= f (F, M, P, N, C)

E : Efficiency

F : Fiscal Capacity

M : Monitoring Pressure

P : Competition

N : Enrollment

C : Environmental and Costs

Research Model

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Public Sector Efficiency Measurement

Empirical Challenges

Multiple Outcomes and Often Competing Goals Few Incentives Directly Related to Productivity Production Functions for Transforming Inputs to Outputs Not

Well Understood

Stochastic Frontier Method

Data Envelopment Analysis

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Data Envelopment Analysis (DEA) Non-Parametric Liner Programming Measuring a Relative Efficiency Level Deal with Multiple Inputs and Outputs Determine a “Best-Practice” Production Frontier Producing a

Best Ratio of Outputs to Inputs Inefficiency Defined as the Distance between the DMU and

the Frontier

Still, Sensitive to Selection of Outputs “Efficiency” in terms of “A Selected Set of Outcomes” A “Black-Box” Approach Dealing with Environmental Factors

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Selection of Outcomes

Cost Function Approach

E=f (S, P, N, F, D, e)

E : Per Pupil Spending

S : An Array of Student Performance Measures

P : Input Prices

N : Number of Pupils

D : Student Characteristics

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Dependent Variable: log of per pupil operating expenditurea

Random Effects Fixed EffectsVariables Coefficient Coefficient

(t-statistics) (t-statistics)4th Grade English & Math Test Scoresb 0.012 0.006 (Average % above standard reference point) (10.02)** (5.83)**8th Grade English & Math Test Scoresb 0.012 0.007 (Average % above standard reference point) (12.02)** (10.37)**Percent non-droputb 0.028 0.018

(2.44)* (1.89)Log of teacher salaryb 0.029 0.008

(3.10)** (1.45)Log of enrollment -0.57 -1.851

(-8.28)** (-4.54)**Square of log enrollment 0.03 0.06

(6.73)** (2.11)*Percent of students with limited Eng. 0.018 0.232

(7.06)** (10.80)**Percent of children in povertyc 0.008

(5.83)**% of students receiving free lunch 0.001

(1.13)%of high cost students 0.011 0.003

(2.00)* (0.73)%female headed householdc 0.026

(10.33)**within class income diff 1.88E-07 -1.36E-08

(1.98)* (-0.15)within class property value diff 4.87E-08 2.04E-08

(3.39)** (1.49)within class opaid diff 9.86E-05 -8.97E-06

(10.28)** (-1.09)Constant 6.774 16.611

(5.70)** (9.61)**Observations 2508 2507Number of School Districts 653 653

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Average DEA Index Values by Region

Region1999 2000 2001 2002

Downstate small cities 46 47 48 47Downstate suburbs 57 57 58 54NYC 42 41 39 38Yonkers 38 35 37 35Upstate large cities 42 34 33 34Upstate rural 69 67 67 61Upstate small cities 62 59 61 54Upstate suburbs 75 73 72 68State Average 68 66 66 61

Cost Adjusted

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Impacts of Fiscal Capacity on Efficiency

Conflicting Views Positive Impacts: Allows Districts to Have More Educated and

Capable School Boards Negative Impacts: Lowers Monitoring Pressure on School

Performance (Ruggiero et. al., 1996)

Measurement Issues Could Appear Less Efficient if Large Portion of the Budget

Spent for Outcomes Not Measured by DEA

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Impacts of Competition on Efficiency

Market Approach of School Governance (Chubb and Moe, 1991)

Demand Side Pressure Makes School More Efficient Argue for Charter Schools, Vouchers for Private Schools

Hoxby (2000)

Competition As Control Variables Density, Percent of Private School Enrollment, Geographic Size

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Impacts of Government Size on Efficiency

Theoretical Orientations Negative View: Monopolistic Power Makes Governments Less

Efficient Positive View: Economies of Scale

Empirical Evidence Curvilinear Relationship: Sizable Potential Savings in

Instructional and Administrative Costs as a Small District Moves to a District with 2000-4000 Pupil

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Impacts of Monitoring Pressure on Efficiency

Hypothesis

Tightness of the Budget Constraint Affects the Level of Pressure Taxpayers Exert on District Officials to Improve Efficiency

Key Factors Tax Price: How Much Does the Median Voter Bear for An

Additional Dollar Spent for Education? Stat Aid Per Pupil: How Much Money for Education Does Come

from the State?

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Tax Price Specifications

)]/1)(/[(

])/1([(

]/)[(

VmXVVm

VVmXVm

VXVmTP

= (General Tax Share)α(STAR Tax Price) α

Vm : Median Housing Value V : Total Property per Pupil X : STAR Exemptions

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State Aid Specifications

TY=Y+A[ )/( VVi ]=Y[1+ A/Y )/( VVi ]

TY : Total Income Y : Median Income A : State Aid Per Pupil

iV : Median Voter’s House Value V : Per Pupil Total Property Value

)/( VVi : Median Voter’s Tax Share

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Control Variables

Cost Variables: Teacher Salary Economies of Scale: Enrollment and Squared Enrollment

Environmental Variables: Harsh Environment Results in a Higher Cost to Obtain Any

Given Performance Level (e.g., Harsh Weather and Heating Costs)

Proxies for Omitted Outcomes Software, Library, Textbook Expenditures Percentage of Students Taking Regent Exams

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Variables Mean Standard Min MaxDeviation

Log of DEA 4.09 0.23 2.35 4.61(Output)Per pupil operating expenditure 10,806 3,723 4,617 51,384(Input)4th grade test scores (average % in level 3 and 4) 72.6 12.5 21.7 1008th grade test scores (average % in level 3 and 4) 51.5 14.8 5.7 95.5Percent Non-dropouts 97.7 1.8 87 100(Fiscal Capacity)Log of median Income 10.72 0.33 9.67 12.01Per pupil property value 564,714 1,486,226 66,129 26,400,000(Monitoring Pressure)Log of tax share -1.14 0.53 -4.50 0.05Log of STAR tax price -0.44 0.21 -1.45 -0.05Ratio of operating aid to median incomea 0.01 0.01 0.00 0.07Percent of adults with college educationb 0.09 8.07 -28.95 33.54Percent of owner occupied houses 76 11 30 95(Competition Factors)Density 196 351 0 3238Log of square qumiles 3.59 1.33 -0.97 6.40Percent of private school enrollment 6.80 9.28 0.00 59.81(Cost Variables)Log of teacher salary 10.82 0.16 10.13 11.28Log of enrollment 7.41 1.02 3.69 13.86Square of log of enrollment 55.98 15.45 13.61 192.01Percent of limited Eng. profiency students 1.45 3.22 0.00 23.89Percent of free lunch students 15.71 9.74 0.90 48.49Percent of chileren with female household head 13.54 5.14 5.05 43.14(Omitted Outcome Measures)Per pupil software expenditure 13.40 13.91 0.00 204.73Per pupil library expenditure 10.32 8.21 0.00 77.14Per pupil textbook expenditure 68.82 27.39 0.20 353.33Ratio of students taking Regent Exam in:Chemistry 0.13 0.05 0.00 0.31English 0.25 0.04 0.13 0.62Physics 0.06 0.03 0.00 0.21Math sequence1 0.18 0.12 0.00 0.55Math sequence2 0.20 0.09 0.00 1.05Math sequence3 0.15 0.05 0.00 0.34(Other Factors)City districts (yes=1) 0.09 0.28 0.00 1.00Percent of urban housing 52 42 0.00 100

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Variables Coeff. (t-stat) Coeff. (t-stat) Coeff. (t-stat)(Fiscal Capacity)Log of median Income -0.500 (-7.18)** -0.427 (-7.42)** -0.416 (-6.82)**Per pupil property value -1.2E-07 (-3.37)** -7.9E-08 (-2.67)** -2.4E-08 (-1.36)(Monitoring Pressure)Log of tax share 0.146 (3.15)** 0.154 (4.57)** 0.249 (6.65)**Log of STAR tax price 0.954 (3.29)** 0.272 (2.45)* 0.126 (2.39)*Ratio of operating aid to median incomeb -2.355 (-1.96) -2.081 (3.50)** -5.622 (3.42)**Percent of adults with college educationc 0.004 (4.23)** 0.004 (3.80)** 0.003 (3.18)**Percent of owner occupied houses 0.006 (5.01)** 0.004 (4.00)** 0.003 (3.23)**(Competition Factors)Density 1.5E-05 (0.38) 5.0E-05 (1.29) 1.2E-04 (3.38)**Log of square qumiles 0.021 (1.56) 0.021 (1.60) 0.035 (2.66)**Percent of private school enrollment -0.001 (-1.06) -0.002 (-1.92) -0.001 (-1.11)(Cost Variables)Log of teacher salary -0.038 (-2.08)* -0.039 (-2.68)** -0.197 (-3.41)**Log of enrollment 0.379 (3.97)** 0.366 (4.16)** 0.245 (4.10)**Square of log of enrollment -0.025 (-3.92)** -0.024 (-4.11)** -0.015 (-3.97)**Percent of limited Eng. profiency students -0.007 (-2.74)** -0.005 (-2.15)* -0.006 (-2.28)*Percent of free lunch students -0.007 (-7.17)** -0.007 (-7.03)** -0.007 (-6.97)**Percent of chileren with female -0.012 (-5.13)** -0.014 (-5.64)** -0.011 (-4.83)**household head(Omitted Outcome Measures)Per pupil software expenditure -0.001 (-1.81) -0.001 (-1.18) 0.001 (-1.04)Per pupil library expenditure -0.001 (-1.12) -0.002 (-2.21)* -0.002 (-2.03)*Per pupil textbook expenditure -0.001 (-4.05)** -0.001 (-3.35)** -0.002 (-6.28)**Ratio of students taking Regent Exam in:Chemistry 0.488 (2.95)** 0.301 (2.08)* 0.481 (3.38)**English -0.287 (-1.84) -0.203 (-1.33) 0.242 (1.50)Physics 0.693 (3.44)** 0.564 (2.91)** 0.383 (2.04)*Math sequence1 -0.092 (-1.33) -0.088 (-1.64) -0.103 (-1.91)Math sequence2 0.209 (1.77) 0.078 (1.07) 0.040 (0.53)Math sequence3 0.082 (0.51) 0.027 (0.17) 0.170 (1.02)(Other Factors)City districts (yes=1) 0.020 (0.73) 0.029 (1.08) -0.022 (-0.83)Percent of urban housing 0.046 (1.17) 0.000 (0.92) 0.000 (0.15)

Constant 8.664 (10.20)** 8.028 (10.73)** 9.953 (11.99)**Observations 638 643 639LR Chi-Sqauared Statistics 629 537 642

2000 2001 2002

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Variables Coefficient (t-stat) Coefficient (t-stat)(Fiscal Capacity)Log of median Income -0.107 (-5.06)**Per pupil property value -1.1E-07 (-10.44)** -4.0E-09 (-0.17)(Monitoring Pressure)Log of tax share 0.088 (5.99)** 0.070 (3.83)**Log of STAR tax price 0.181 (11.20)** 0.125 (6.22)**

Ratio of operating aid to median incomea -0.913 (-2.39)* -1.219 (-3.28)**

Percent of adults with college educationb 0.005 (6.15)**Percent of owner occupied houses 0.003 (4.56)**(Competition Factors)Density 3.8E-05 (1.12)Log of square qumiles 0.039 (4.91)**Percent of private school enrollment -0.002 (-2.72)** -2.0E-04 (-0.24)(Cost Variables)Log of teacher salary -0.025 (-3.22)** -0.016 (2.15)*Log of enrollment 0.225 (4.45)** 1.069 (2.16)*Square of log of enrollment -0.015 (-4.50)** -0.032 (-0.94)Percent of limited Eng. profiency students -0.003 (-1.38) -0.03 (-1.22)Percent of free lunch student -0.004 (-7.42)** -0.001 (-1.65)(Omitted Outcome Measures)Per pupil software expenditure 0.001 (2.82)** 9.0E-04 (0.94)Per pupil library expenditure -0.002 (-3.09)** -1.7E-03 (-0.98)Per pupil textbook expenditure -0.001 (-5.78)** -1.0E-03 (-1.12)Ratio of students taking Regent Exam in:Chemistry 0.107 (2.03)* 0.118 (2.15)*English -0.125 (-2.35)* -0.175 (-3.34)**Physics 0.299 (3.22)** 0.321 (3.22)**Math sequence1 -0.042 (-1.62) -0.026 (-0.99)Math sequence2 -0.063 (-1.62) -0.107 (-2.75)**Math sequence3 -0.042 (-0.59) -0.143 (-2.02)*(Other Factors)City districts (yes=1) -0.14 (-3.04)**Percent of urban housing 1.8E-04 (2.58)**

Constant 4.678 (14.63)** -1.576 (-0.90)Observations 2552 2552Number of School Districts 638 638Wald Chi-Squared Statistics 1765F-statistics 10.64

Tobit GLS Fixed Effect OLS

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Discussions

The First Evidence on Potential Unintended Consequences of State Efforts to Reduce Local Property Taxes Through State-Funded Homestead Exemptions

Taxpayers Behavioral Responses Matter

Higher Efficiency also Induce Higher Spending and Lower Demand

Duration of the Policy

Overall Tax Burden Increased Due to the Budget for STAR

Equity Issues Caused by STAR