IP-4-1998 (March 1998)
Author: Barry Poulson

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I. Introduction

The issue of public school finance is central to the debate over tax reform in Colorado. Several bills have been introduced in the Colorado Legislature that would significantly change the way in which Colorado finances our public schools. These bills call for replacing the property tax with a state income or sales tax as the major source of funding for the public schools.

A number of arguments have been used as a rationale for this change in school finance. The major argument is that Colorado is not providing sufficient funding for our public schools. Reliance on local property taxes, it is argued, not only provides insufficient funds for the public schools, but also results in inefficiencies and inequities in school finance. The ability to raise money from property taxes varies widely among the school districts. Differences in tax bases (assessed property values) result in differences in revenue collected, using a given mill levy. Proponents of the bills before the Colorado Legislature argue that substituting a state income or sales tax for the property tax as the major source of funding for the public schools will not only generate more revenues, but also increase the efficiency and equity of school finance.

In this issue paper we will explore these arguments in the debate over school finance in Colorado. The argument that Colorado public schools are underfunded does not stand up to careful empirical analysis. The Public School Finance Act of 1994 has significantly increased state funding for public education, and the share of state funds allocated to public education is projected to increase significantly in future years. The result has been a shift in the burden of financing public schools from local property taxes to state financing from the general revenue fund. Economic analysis reveals that this shift in financing is decreasing both efficiency and equity in public education.

The problems in public education can be traced to the legal monopoly that creates a guaranteed pool of consumers, and a guaranteed pool of revenue. The solution to the first problem requires reforms to introduce competition in the supply of educational services. We explore three reforms that will empower parents to make choices in educating their children:

reinvigorating the Charter School Movement; creating tax incentives for private funding of schools; and holding schools accountable for performance.

The solution to the second problem requires a return to the fiscal link between education consumers and education providers. We explore three reforms to reestablish this fiscal link: a return to local property tax based funding of public schools; education savings accounts; and replacing State general fund support with a Colorado Foundation Aid System.

Finally, we provide a blueprint for the transition to a free market system for education in Colorado in three stages.

• Stage One: Voucher Based Subsidies from the School Trust Permanent Fund
• Stage Two: Voucher Based Subsidies from the State General Revenue Fund
• Stage Three: Privatizing Education