The failure to maintain local tax effort or to respond fiscally to increases in State Aid by lowering tax rates has been a traditional concern of public finance experts. In view of the Regents’ emphasis upon the targeting of aid to high need school districts, and ensuring adequate resources are available to achieve high learning standards, such fiscal behavior has posed considerable concern to New York State policymakers as well. Any diminution of local tax effort in high need school districts, particularly if local tax effort is "inadequate" to begin with, poses a significant policy concern.

As part of the State Aid Work Group’s ongoing research agenda, two related study objectives were identified:

• First, to describe the scope of the "tax effort" problem; and,
• Secondly, to analyze school district tax changes in response to State Aid increases.

This analysis was conducted to address the tax effort problem. The fiscal response of school districts to increases in State Aid is currently being analyzed and will be described in a separate report. Two different measures of tax effort were used to describe the problem: a) lost levy – which refers to the amount of local tax revenue lost in 1996-97 because a district failed to tax itself at the median statewide tax rate of $16.75 per $1,000 in property value; and, b) effective lost levy – which refers to the portion of the lost levy that would have to have been raised to achieve a statewide median spending level per pupil of $9,211. Since many high wealth districts are able to achieve high spending levels with relatively low tax effort, such districts may fall into the "lost levy" category, but are invariably eliminated from the "effective lost levy" category.

Some districts may have a below-median tax effort and spend less than the median district whose students achieve high standards. In order to identify low spending, low taxing and districts needing to improve academic performance, the same notion of effective lost levy was used in conjunction with student performance on the New York State Fourth Grade English Language Arts (ELA) examination. A district with an average exam score of 645 points or above was considered to be achieving at an acceptable level, and was therefore removed from the "pool" of effective lost levy districts.

It should be noted that the cost of providing identical educational services varies among the different geographical areas of the State. Variations in regional cost were not factored into this analysis. If they were, some of the districts identified for low tax effort and low spending might not have been so identified since their spending adjusted for regional cost differences would have been sufficient to meet the spending level of the median district. Conversely, some districts which presently spend above the median could be identified as low spending districts, if a regional cost adjustment were used.

• The magnitude of the lost levy problem statewide was $1.73 billion in 1996-97. When the tax effort problem is restricted to districts of both low tax effort (i.e., who fall below the median statewide tax rate of $16.75 per $1,000) and low spending per pupil (i.e., who fell below the statewide median spending level of $9,211 per pupil), the effective lost levy is $960 million.

• A total of 185 districts fell into the effective lost levy category.

• New York City accounted for 87.6 percent ($841 million) of the $960 million effective lost levy for low tax effort and low spending districts.

• If the effective lost levy districts are further restricted to only those whose performance on the 4^th grade English Language Arts examination was below the acceptable Level III cut point of 645, only 70 districts were found in this category. For these 70 districts, the effective lost levy amounted to $878 million, of which New York City’s levy loss share of $841 million represented about 96 percent.

• Effective lost levy districts were disproportionately concentrated in the rural category. For example, 94 of the 185 effective lost levy districts (50.8 percent) were rural districts – roughly double the representation of rural districts statewide (26.5 percent). Additionally, the concentration of rural districts is equally high when the sample is limited to low tax, low spending, and low achieving districts. (Thirty-nine or 55.7 percent of the 70 districts in this category were rural.).

• The percentage of districts in each Need/Resource decile characterized by inadequate tax effort and below average spending increased as Need/Resource status worsened. Among the first five (lowest need) deciles, for example, only 9.6 percent of these districts were both low effort and low spending districts. In the five highest Need/Resource deciles, the comparison figure was approximately 46 percent.

• As district Need/Resource capacity worsens, the probability of being identified as a low tax effort-low spending district increases, as noted; the probability of also being a district whose 4^th grade English Language Arts performance is below the passing level also increases. Thus, among the 70 districts falling into a low tax effort-low spending-low performance category, 75.7 percent (n=53, including New York City) fall into the three highest Need/Resource deciles. No districts in the three lowest Need/Resource deciles fall into this category.

• New York City stands apart from all other districts in having large student need and average income and property values . Thus, the relatively minor emphasis placed by the current aid system on student need in relation to that placed on wealth tends to minimize the aid allocated to New York City.

• The 70 districts with low tax effort, low spending and low performance have small district size, a greater percentage of high need pupils, lower wealth, greater teacher turnover, and fewer certified teachers when compared to districts in the rest of the State as well as to those 115 districts that are low spending, low taxing, but have acceptable student performance. Since these 70 districts are burdened by additional costs associated with the education of high-need pupils, and in many cases do so in higher than average cost areas, it is recognized that this added challenge may contribute to the phenomenon of low tax effort and low spending.

• 1.15 million students attend these 70 low performing, low effort school districts, representing 41.08 percent of students statewide. If New York City were excluded from this group, the other 69 districts represent 96,604 students, which is 3.46 percent statewide.

• Out of the 70 districts with effective lost levy, and low performance, 18 had a residential property tax to income ratio above the state median of 3.03 percent. This indicates that in such districts, it may be difficult to raise the tax levy. In the remaining 52 districts (including New York City) the residential property tax to income ratio was below the median. Such districts may have the fiscal flexibility to raise taxes.

• Three of the Big Five Cities (Buffalo, New York City and Syracuse) had a tax rate below the median. However, only one Big Five district (New York City) had low tax effort, low expenditures and low ELA performance.

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