Understanding Measures of Tax Effort and Tax Capacity

Many states incorporate measures of tax capacity and tax effort in their school funding formulas so the state government has a rational basis for providing additional aid to school districts with fewer local resources to fund schools. Pennsylvania historically has used the market value of real estate as an important element in measuring school district capacity and tax effort in relationship to capacity. Pennsylvania’s market value data have been criticized as inconsistently derived and therefore deeply flawed and unreliable by witnesses testifying in public hearings of the Basic Education Funding Commission. The median household income of districts has been suggested as an intuitively simpler and more reliable measure of tax capacity. CORP’s school funding advisors and our staff have produced a technical explanation of the strengths and weaknesses of various measures of tax need and capacity, without taking a position on which method is preferable. David Davare, one of our advisors, and Meghan Rubado, a graduate research assistant assigned to the project, have supplemented the text with spreadsheets and graphs showing how all 500 school districts would be differently affected by the two ways of measuring tax capacity.