Capitalization: Considerations for School Finance

Abstract

Variations in tax rates and public services across communities may cause property values to vary. This relationship is due to capitalization and although economists have studied it for a number of years, only recently have capitalization effects been considered in policy discussions. The process of capitalization holds special importance for school finance because it generally is assumed that property values are an indicator of the community's ability to pay and influence the property tax rates levied and the quantity of public services provided, particularly public education for elementary and secondary students. However, property values may be affected by taxes and public services. Stated differently, both better schools and lower tax liabilities generally lead to higher property values. Thus, the capitalization effects of school finance reform (or changes in other public programs) may produce secondround impacts that affect the original policy, and also may require that original