A Texas experiment that shifts money from rich to poor school districts is turning into a major policy disaster.

The New York Times, "Economic Scene" , October 07, 2004

Public policy experiments rarely produce complete successes or total failures. They usually leave room for people with different goals or values to keep arguing.

Occasionally, however, there's a policy disaster so catastrophic that everyone agrees that something has to change. California's convoluted attempt to deregulate electricity was one example. Texas's decade-long experiment in school finance equalization -- universally referred to as Robin Hood -- is another.

"In less than a decade, the system is approaching collapse; it has exhausted its own capacity," write Caroline M. Hoxby and Ilyana Kuziemko, economists at Harvard, in a new working paper for the National Bureau of Economic Research. "We show that the collapse was predictable." (The paper, "Robin Hood and His Not-So-Merry Plan: Capitalization and the Self-Destruction of Texas' School Finance Equalization Plan," is available here.)

As school budgets fall and property taxes rise, Texans know Robin Hood is in trouble. But most do not really understand why.

Some blame the very idea of equalization, others say schools are too dependent on property taxes, and still others argue that taxes are too low. Some declare that schooling has simply become more demanding and expensive.

"Although it is a financially efficient model, the current system, as it is now designed, cannot live up to the standards of our 'outcomes'-based accountability system," Lloyd Jenkins, a school district trustee in the Dallas suburb of Plano, recently wrote in The Dallas Morning News.

In fact, argue the economists, the Robin Hood system is anything but financially efficient. Robin Hood does not just move money from rich school districts to poor school districts. It does so in a way that destroys far more wealth than it transfers, and that erodes the tax base on which school funding depends.

"Our estimates suggest that Robin Hood caused Texas to lose a net of $27,000 per pupil in property wealth," write Professor Hoxby and Ms. Kuziemko, a doctoral student. That's real money.

To understand why Robin Hood is so destructive, consider the market price of a given house. The home's value depends not just on how big the house is or whether it has walk-in closets and granite countertops. "It also depends on how many property taxes the homeowner is going to pay and what he or she is going to get in return for those property taxes," Professor Hoxby explains.

Property taxes depress the value of a house. The amenities those taxes buy, including good schools, increase the value. The final price reflects the net value of the taxes the homeowner pays.

Robin Hood essentially raises taxes while reducing benefits, creating a downward spiral in home values and property tax receipts. For each district, the state divides the total assessed value of property in the district by the number of pupils. (Districts get higher per-pupil weightings for such factors as students with learning disabilities or limited English proficiency.)

The state then compares this number with a confiscation threshold. The district keeps the taxes on the property base below the threshold. But every single penny collected on the property value above the threshold goes to the state.

"When you have these districts that are being told, 'Your property value above a certain amount will never go to help your students -- it will go to the state' -- the property value of those districts will fall," Ms. Kuziemko explains. Homebuyers no longer get as much education for their taxes, so buyers will not pay as much for houses.

During the 1990's, "a period of unusually rapid income growth for the wealthy," the economists note, the property value per pupil actually fell in the state's wealthiest 5 percent of school districts, even without accounting for inflation.

That drop was bad news for everyone. Robin Hood assumed that house prices would stay pretty much the same, so that property-rich districts would continue to provide ample tax dollars to the rest of the state. Instead, every year the tax base became smaller in the rich districts.

To meet its commitments to poor districts, the state effectively lowered the real value of the confiscation threshold. Corrected for inflation, the threshold was $340,000 per weighted pupil in 1994, when the system was established. By 2002, it had fallen to $305,000.

But lowering the threshold further depresses home values. A death spiral sets in.

As homebuyers switch from the once-rich districts into moderately priced districts, property values hit the threshold in those districts, setting yet another spiral in motion.

And while the state is pushing down the confiscation threshold, districts try to keep up by raising their property tax rates, pushing down home values even more.

The economists are quick to note that their critique is not a condemnation of redistributing school funds. Rather, it's a brief for bringing well-established principles of efficient taxation to bear on school finance. Transfers, Professor Hoxby argues, should be funded through a statewide tax, while local taxes pay for local amenities.

But even local taxes could be more efficient. Instead of confiscating 100 percent of everything above a certain property-value threshold, says Ms. Kuziemko, the state could take a much smaller percentage of the whole tax base.

"One of the principles of public finance is that having a high tax rate on a small base is very inefficient," she says, "whereas having a lower tax rate on a larger base is less distortionary."

Just as ideological foes of electricity deregulation exploited the California experience to attack deregulation in general, some people opposed to redistribution on principle now point to Robin Hood. But just as California's complex system was not true deregulation, so Robin Hood does not represent the only way to transfer funds to poor school districts.

What was the fundamental reason for the failure, according to Professor Hoxby and Ms. Kuziemko? "Lawyers, not economists, designed the system."