URRENT research interest in school finance stems from reforms aimed at narrowing the range of expenditure variations among school districts. These reforms have attempted to compensate for tax base differences by providing state matching aid inversely proportional to tax base.' While expressed in different forms in different states and variously termed Percentage Equalization,' District Power Equalization (DPE), or Guaranteed Tax Base (GTB), these formulas, in their basic form, amount to the state guaranteeing all districts the same tax base per pupil, call it v*. Districts taxing themselves at a tax rate, r (adjusted at the state level to compensate for assessment variations so that r reflects the rate on true market value), are guaranteed revenue equal to rv*. The difference between what is raised locally in a district, rv, and the guarantee at that tax rate is provided through the state aid formula.2 In practice, legislative limitations on aid formulas in most states have led to richer districts maintaining a tax base advantage. For example, districts with a tax base above v* can raise more revenue at the same tax rate than districts at vor below. Also, placing limits on reimbursable expenses (e.g., not to exceed E* = r*v*) means that beyond a certain point, even in districts with tax bases below v*, raising tax rates will not engender any additional state matching aid, as would be required under a strict guarantee. Hence, while the introduction of GTB formulas provided a theoretical improvement, these limits made them equivalent to the foundation aid formulas they were intended to replace, effective improvement coming only when the limits were made more generous.3 In studying these reforms, research has concentrated on models relating current operating expenditures to the following: tax base, some price term reflecting the local share in the matching formula, block grants, and demographic variables. The most popular form has been the single equation log-linear model4 where coefficients are elasticities, which allows for easy comparability of the effects of the independent variables. However, the assumption of constant elasticities and the lack of interaction terms can be misleading in capturing behavioral responses and in making projections. This may be especially true when one is using data from less than equalized systems, where districts are operating in a tax and expenditure range different from what would occur under a fully (tax base) equalized system and when there are different responses to the state aid formula depending upon relative tax burden and educational need. For example, the expenditure response to state aid in poorer districts may be high for small increments in state aid, but, as district expenditures move beyond minimal requirements, increases in state aid may go increasingly into tax relief, depending upon the tax burden. The richer districts, in terms of property, generally face a price of one, i.e., no matching aid at the margin. However, most legislation guarantees some minimal funding for these districts. In order to make aid formulas fully effective, either poorer disReceived for publication October 1, 1981. Revision accepted for publication April 16, 1982. * The American University. This work was supported by National Science Foundation Grant Number SES-8013080. I am indebted to Anthony Boardman for getting me interested in the topic, to Robert Summers, Anita Summers, Janet Pack and Ralph Ginsberg for moral and intellectual support, to numerous people in the Michigan state government, especially Bob Witte and Bob Bosscher, for their expertise and cooperation, and to the School of Public and Urban Policy, University of Pennsylvania, for its encouragement of this research. I Usually property per pupil, which we denote by v. 2 I.e., state aid per pupil is r(v* v). The local share, or net price that the district pays per dollar of educational expenditure, denoted a, is a = v/P*. Under GTB, districts control expenditure levels through their choice of tax rate. 3For a detailed analysis of aid formulas see Reilly (1982). 4 Initially postulated by Feldstein (1975). Park and Carroll of Rand (1979), Black et al. (1979, 1980), and Johnson and Collins (1978, 1979) also use the same model. Other models of local expenditures have been used by Akin and Auten (1976), Barro (1972), Gatti and Tashman (1976, 1978), Grubb and Michelson (1974), Inman (1971, 1978), Ladd (1975), Lovell (1978), Slack (1980), Stem (1973), Welch (1981), and Wentzler (1980).