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The School Stimulus

What if increasing taxes to pay for schools actually improved the economy?

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Making difficult decisions has become the new mantra for school administrators and politicians facing down enormous budget shortfalls in the wake of the recession, and more specifically, the housing collapse. Richmond, and Henrico and Chesterfield counties are laying off teachers, increasing class sizes and cutting teacher pay to close funding gaps, which appears to be a new rite of spring.

In reality, it's all perception. Richmond, Henrico and Chesterfield had another option: to raise real estate taxes. It could have come cheap, perhaps a penny or two on the dollar, which would generate millions. Instead the big three jurisdictions held property tax rates steady despite waning real estate values, which mean less tax revenue to pay for public services such as police, trash pickup and of course, schools.

Raising taxes isn't easy, especially when there's a national backlash against big government and tea partiers dominate headlines. But what if raising real estate taxes helped improve the economy? What if increased spending on schools actually led to an increase in property values, which lured businesses and generated jobs?

“Residential housing is critically tied to schools,” says Timothy M. Diette, an assistant professor of economics at Washington and Lee University, referring to something economists have known for years. “There is a very clear connection in terms of understanding housing prices, what people are willing to pay.”

A mountain of research shows a direct correlation between housing prices and the quality of schools. In practice, it's a theory as old as the popular real estate maxim — location, location, location — which really translates to houses in neighborhoods with little crime and good schools.

“There is clearly a link between school quality and house prices,” says David M. Brasington, an assistant professor of economics at the University of Cincinnati and co-author of “Educational Outcomes and House Values: A Test of the Value-Added Approach,” which appeared in the Journal of Regional Science in 2006. There are several bodies of research on the topic, much of which focus on the relationship between school test scores and house values — again, a correlation — and earlier bodies of work studying the relationship between school spending and house values.

The problem is determining exactly what makes for better schools. Is it spending — on better teacher salaries, programs and infrastructure — or external influences, such as parental input and peers? “Look, there is just not a big direct relationship between expenditures on schools and results,” Brasington says. “Most studies find no effect, and the ones that do find a very small effect.”

Thomas A. Downes, a professor of economics at Tufts University, has studied the relationship between spending, test scores and property values and found evidence that all three are linked, but it might simply be chalked up to natural coincidence.

“Does putting more money into schools, does it translate to higher property values? When we did our estimations, we found that property values are higher in school districts where spending was higher,” Downes says. “What if we were to spend an additional $100? Would that raise property values? That's a more difficult problem. It is still pretty hotly debated whether putting more resources into schools will necessarily translate into better student performance.”

But don't confuse performance with the economics. Putting performance aside, Brasington says, it's clear that spending on schools has a direct impact on house values. It's more of a perception issue. Running the numbers from his most recent research, Brasington finds that “house prices are more responsive to changes in school expenditures than changes in tax rates.”

Not that it has anything to do with pupil performance.

“Independently of test scores, spending on schools raises house prices for some reason,” Brasington says. “It signals something to the housing market that people in this community have a strong preference for education.”

So is the inverse true? If one school district cuts spending while the others maintain or increase spending, will property values fall? Controlling for other factors, Brasington's research suggests it would.

“If one district selectively had a decrease in spending and everyone else stayed the same, that would send a signal” to the housing market, Brasington says, and “house prices would probably fall.”

The lesson? In this economic environment, a strong case can be made for raising real estate taxes to increase spending on schools. In the wake of a recession, it appears to be one of the surest ways to stimulate the economy. The school district that does it first, for a sustained period of time, could reap the rewards of a more robust housing market.

“If I had to put money on this,” says David N. Figlio, a professor of education and social policy at Northwestern University, “if everybody except that one district [cut spending], the one district that doesn't cut is very likely to be rewarded.”

Whether it's politically realistic is another matter. These days many people don't seem to trust government to do much of anything. How do you raise taxes when the voters are skeptical that you're spending money efficiently to begin with? And it isn't a quick fix. It would take a few years of increased spending on schools to begin reaping the rewards in the housing market, economists say. And if everyone starts throwing money at schools, all bets are off.

“The basis of the argument is that we are investing now in education in order to see positive returns later,” Diette says. “The biggest reason why people would not raise this sort of issue now is that it would be a long-run effect.”

William Shobe, the director of the Center for Economics and Policy Studies at the University of Virginia, says the argument could be put another way. “People believe in investing in their community even now, even with the tea party being out there, as long as they think they are getting good value,” he says. “You've got to make the case for public education.” If there are those resisting raising taxes in a responsible way for the purpose of making schools better, the onus is on them, Shobe says.

After all, people who don't want to invest in schools are sending their own signals, and are likely oblivious to another real estate reality: Underperforming schools tend to correlate neatly with higher crime rates and weaker economies.

“If you think about communities within a metropolitan area competing for future businesses and for where people choose to live, the quality of the schools is certainly going to play a significant role in that,” says Diette, who's also studied the effects of dropout rates on the economy. “The cost of incarceration as compared to the cost of education is pretty staggering.”

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