Public Finance Seminar Spring 2013, Professor Yinger

1. Public Finance SeminarSpring 2013, Professor Yinger NY’s School Tax Relief Program (STAR)

2. STAR Class Outline • Description of STAR • Theoretical Analysis of STAR • Estimating the Impacts of STAR

3. STAR Homestead Exemptions • STAR is a homestead exemption. • Recall the general formula: • The value of X is adjusted for assessing practices. • In NY, the school district is reimbursedby the state

4. STAR Homestead Exemptions, 2 • Popularity • Recall that almost all states (48 plus DC) have some form of homestead exemption. • Most states (45) have special exemptions, usually for the elderly or veterans • Several states (20) have general exemptions • Only a few states (13) join NY in reimbursinglocal governments for the exemptions

5. STAR The Education Finance System • Both property tax relief and state aid affect the demand for local public services. • This applies directly to a homestead exemption if it involves state compensation. • This effect could be avoided if average property tax rates, not district-specific property tax rates, were used to calculate the exemption. • State aid also provides property tax relief because it is not all spent on increased public services. • The view that state aid and property tax relief are flip sides of the same coin is not popular among politicians—but it is true!

6. STAR Basic Features of STAR • Types of exemption • The basic exemption, usually $30,000, is available to all homeowners • The enhanced exemption of $60,100 is available for senior homeowners with income below $79,050. • Exemptions are multiplied by a “sales price differential factor” (SPDF), which • Equals the ratio of median residential sales price in a district’s county relative to the state if it is above 1. • Equals 1 otherwise.

7. STAR Basic Features of STAR, 2 • The STAR homestead exemption applies to school property taxes only. • The first $30,000 of a homeowner’s house value is not subject to the school property tax, but is subject to city, town, and county taxes. • The exemption only applies to homeowners, not to rental, commercial, or industrial property. • This exemption costs the school district its effective tax rate multiplied by $30,000, but the state sends a check to the school district equal to this amount. • So this approach shifts the burden of property taxes from the school district to the state—just like state aid does!!

8. STAR How STAR Works

9. STAR

10. STAR STAR Timeline • 1997: Passed at end of legislative session • 1999: Implementation of enhanced exemption • 2000: Basic exemption: $10,000 • 2001: Basic exemption: $20,000 • 2002: Basic exemption: $30,000 • 2007: Middle class STAR income tax rebate—30% of STAR exemption • 2008: Income tax rebate was means tested— no rebate if income over $250,000 • 2009: Income tax rebate was eliminated.

11. STAR Modeling Strategy • We specify three equations: a cost equation, an efficiency equation, and a demand equation. • Spending equals cost divided by efficiency. • Efficiency reflects demand for performance measures other than the test-score measure we use.

12. STAR STAR Budget Constraints • With STAR the household budget constraint is: • Because of reimbursement, the community constraint does not change:

13. STAR Combined Budget Constraint • Putting these two constraints together leads to: • So the tax price is: • So STAR is equivalent to a matching grant with m = X/V

14. STAR STAR and Demand • The demand function with STAR is • which can be estimated with the techniques developed in previous classes.

15. STAR Impact of STAR on Demand • The impact of STAR (like the impact of matching aid) on the demand for S has two direct components and two indirect components, which operate through efficiency. • The two direct components are income and price impacts observed in the demand equation above.

16. STAR Indirect Impacts of STAR • By lowering the tax price, STAR lowers efficiency, which indirectly results in lower demand. • By lowering the value to a voter of $1 of aid, STAR lowers demand but this drop in augmented income also leads to higher efficiency which indirectly boosts demand. • The net impact is unclear!

17. STAR The Cost Equation • We assume that: • This implies that MC, which is part of tax price, is:

18. STAR The Efficiency Equation • The efficiency equation reflects both monitoring variables and demand variables (augmented income and tax price)::

19. STAR Circuit-Breakers and Demand • Other property tax breaks affect demand, too. • So if CB > 0, then • And a CB has both a lump-sum and a matching component!

20. STAR Augmented Income and Tax Price with Alternative Property Tax Relief Policies Note: I = 1/e

21. STAR Estimated Impacts of STAR • Duncombe, Eom, Yinger estimate the STAR model. • We find that STAR raises demand, lowers efficiency, and raises property tax rates. • The methodological issues are, as you know, difficult. We are currently working on revisions with a longer panel.

22. STAR Article by Rockoff • Jonah Rockoff also studies STAR in an article published in JUE (September 2010). • Rockoff does not attempt to separate cost and efficiency. • He finds that replacing 10 percent of school property taxes with STAR funds would raise school spending by 1.6 percent

23. STAR Data • The DEY model is estimated with data from 1998-2007 for about 600 school districts in New York State. • We exclude New York City, which has a unique income tax rebate as part of STAR (and some missing data). • We exclude non K-12 and other specialized districts.

24. STAR Methods • We treat the STAR tax share and the total aid ratio, which includes the STAR aid ratio, as endogenous. • In the cost model, the teacher salary and student performance variables are treated as endogenous. • Instruments are tested using both weak instrument tests and an overidentificationtest. • We include year but not district fixed effects.

25. STAR Methods, 2 • One unique feature of our procedure is that we use algebra to eliminate endogeneity in the demand equation. • S is a function of MC, which is a function of S, and of e, which is a function of MC and hence S. We solve for S. • Most studies ignore this and his mis-interpret their estimated coefficients.

26. STAR Results • Key preliminary results: • The elasticity of demand for school performance with respect to the STAR component of tax price is about -0.1. • The elasticity of efficiency in school performance with respect to this STAR component is about -0.1. • Aid adjusted for the STAR tax share affects both demand and efficiency.

27. STAR

28. STAR Simulations • We use the estimated structural parameters to simulate the impacts of STAR on key variables. • These impacts are small on average, but vary widely across districts. • The impacts are much larger upstate (where the STAR price effects are largest) than downstate.

29. STAR

30. STAR

31. STAR Offset to Tax Relief • Tax rate increases apply to V, not just to X, so a small tax increase can offset the initial tax savings from the exemption. • For a $200,000 house in a district with a $30,000 exemption the average property tax increase (4.92%) offsets 27.9% of the initial STAR tax savings. • In an upstate big city, this offset is 86.3%!

32. Reforming STAR STAR • Eliminate the “sales price differential factor,” which undermines the equity objectives of the school finance system—and has no justification. • Base state compensation on the statewide average property tax rate, not a district’s own rate. This step would eliminate the price effect and hence the incentive to raise taxes and spending. • Increase the income tax credit (“circuit breaker”) for renters because they do not benefit from STAR.