School District Income Taxes: New Revenue or a Property Tax Substitute?

Abstract

Though a few states have permitted school districts to adopt an income tax, most have statutory requirements for the use of funds or otherwise limit the eligibility of the school districts to a subset of circumstances. Ohio, by contrast, has permitted schools to adopt a residency based income tax for any permissible use of public funds since the 1980's. Using a panel of 609 Ohio school districts from 1990 to 2008, this paper investigates the implementation of a school district income tax on property tax revenue. After correcting for endogeneity, the short-run effect of increasing revenue from income taxation is mostly to increase total revenue, but it also partly offsets the property tax. Specifically, a school district which receives about 30 percent of its revenue from income taxation will use about 25 percent of additional income tax revenue to offset the property tax while retaining the rest for new spending. These districts are then able to spend the early offset in the form of higher property tax levy growth rates in the future for approximately the next decade. These results suggest that the income tax has been a complement to school district fiscal administration, rather than a substitute away from other instruments.