The Effect of School Finance Centralization on School Revenue and Spending: Evidence from a Reform in Michigan

Abstract

In 1995, the Michigan state government centralized a school finance system by removing local discretion on school revenue. The theoretical framework says that centralization has the price and income effects on the pivotal voter’s demand for school spending, probably reducing overall spending levels. Using the district-level panel data on school finance in Michigan and neighboring states for the period of fiscal year 1990-2004, this paper provides evidence for the effect of the Michigan school finance reform on the level of school revenue and spending. The study finds that the reform decreases the level of school revenue and spending with a time lag at the state level. The results also suggest that the reform equalizes revenue and spending among school districts at the expense of high-revenue district’s resources without a large increase in low-revenue district’s resources.