Public Spending on Schools Is Linked to Housing Prices

Spending on K–12 education is highly correlated with local resources, specifically housing. This is because local taxation of housing and property plays a major role in school funding. Though annual public expenditures on K–12 schools is quite high, totaling $640 billion, or 3.6 percent of total 2015’s gross domestic product, testing the efficacy of school spending and teacher salaries is difficult because of the tight relationship between household income, housing prices, and school funding.

In this study, the authors use the relationship between housing and education spending to test whether school funding is provided efficiently. They argue that salary spending levels are efficient if a marginal tax-funded increase in salary spending has no impact on house prices.

The authors use the rollout of court-mandated school finance reforms, which change the way school finances are redistributed, to measure the relationship between school district spending and taxes with house price indices. They create a panel of school district expenditures, revenues, demographics, and house prices from 1990 to 2015 that covers 6,300 districts across 35 states. Their house price measure in each school district used the local house price indices constructed by the Federal Housing Finance Agency, which provides a local-level measure of housing appreciation and value over the study period. The school district and demographic data focused on school expenditures in various categories, including salaries, capital, construction, and school revenues from different sources.

Findings indicate that households will pay more for additional salary spending regardless of whether it is used to increase the teacher-student ratio or the average salary expenditure per teacher. This suggests that on the margin, increasing local taxes to spend more on teacher salaries would result in higher house prices.

Key findings

• A 1 percent increase in school spending increases house prices on net by 1.03 percent, suggesting households value school funding.
• When school spending is disaggregated into spending on salaries and nonsalary spending, salary spending translated more into house prices than nonsalary spending. This is consistent regardless of school district spending levels, suggesting households are willing to pay more in housing when salary funding is increased.
• Housing values increase in response to additional salary spending regardless of whether it is used to increase the teacher-student ratio or the average salary expenditure per teacher, supporting other studies that have found increases in salaries improved student test scores and reduced dropout rates.

Policy implications

• In the average school district, salary spending is provided at inefficiently low levels, and hiring more teachers and increasing teacher pay could more effectively fund public schools. In currently underfunded districts, that translates into higher house prices.
• Increased spending on teacher salaries could create broad social and civic returns to education and could improve equitable provision of educational opportunities, especially in school districts with lower incomes.
• The efficiency gains from greater teacher pay may be so large because real average wages for teachers in the US have slightly decreased since 1990, and compared with similarly credentialed workers in the US, teachers experience a 22 percent pay gap.
• Higher house prices from tax-funded salary spending increases represent the capitalization of improvements to school quality. The authors show robust results that account for high-income household sorting that follows increased school spending.