The Effects of Homestead Exemptions for Seniors and Disabled People on School Districts

Abstract

Homestead exemptions for senior and disabled homeowners disproportionally erode rural tax bases but may still stimulate local educational spending. This article examines one such exemption in Kentucky. Two-stage generalized method of moments is used to estimate the demand for local education spending, then spending in the absence of the exemption is simulated to estimate effects on school district expenditure and academic performance. We combine Census and National Center of Education Statistics data with detailed exemption and academic performance data from Kentucky’s Departments of Revenue and Education into a panel spanning 1999–2013. Results suggest the exemption provides relatively generous tax relief without increasing resource and academic achievement gaps between rural and nonrural districts. This is largely attributable to Kentucky’s strong school finance equalization effort. Our findings can help states with a similarly targeted exemption consider such impacts in relation to their own demography and funding systems.