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Designing state aid formulas

Author

Listed:
  • Bo Zhao

    (Federal Reserve Bank of Boston)

  • Katharine Bradbury

    (Federal Reserve Bank of Boston)

Abstract

This paper designs a new equalization-aid formula based on fiscal gaps of local communities. When states are in transition to a new local aid formula, the issue of whether and how to hold existing aid harmless poses a challenge. The authors show that some previous studies and the formulas derived from them give differential weights to existing and new aid in filling the gap and hence effectively treat communities receiving greater amounts of existing aid more favorably than communities receiving less or no existing aid. As a fairer alternative, the authors propose a new approach that considers existing and new aid as completely equivalent in filling the gap by focusing on the equalizing impact of combined (new and existing) aid. In addition, unlike most previous research that focuses only on a single year's new aid distribution, the authors simulate the dynamics of aid distributions over multiple years using Massachusetts data. They further provide and compare several possible methods by which state policymakers could direct extra aid dollars to communities with larger unfilled gaps in dollar terms. Although the proposed aid formula is designed for municipal aid and tailored to Massachusetts, the authors note that foundation aid formulas for education implicitly treat existing aid in the same way and suggest that the framework, principles, and policy recommendations might also be applicable to other states. © 2009 by the Association for Public Policy Analysis and Management.

Suggested Citation

  • Bo Zhao & Katharine Bradbury, 2009. "Designing state aid formulas," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 28(2), pages 278-295.
    • Handle: RePEc:wly:jpamgt:v:28:y:2009:i:2:p:278-295
    DOI: 10.1002/pam.20427
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    References listed on IDEAS

    as
    1. Ladd, Helen F. & Yinger, John, 1994. "The Case for Equalizing Aid," National Tax Journal, National Tax Association, vol. 47(1), pages 211-24, March.
    2. Paul D. Gottlieb, 2006. "State Aid Formulas and the Local Incentive to Chase (or Shun) Ratables," Urban Studies, Urban Studies Journal Limited, vol. 43(7), pages 1087-1103, June.
    3. repec:mpr:mprres:4101 is not listed on IDEAS
    4. Allen L. Schirm, "undated". "Choosing the Right Formula," Mathematica Policy Research Reports 7f1be69bfc7642ddb0f428974, Mathematica Policy Research.
    5. Ladd, Helen F. & Yinger, John, 1994. "The Case for Equalizing Aid," National Tax Journal, National Tax Association;National Tax Journal, vol. 47(1), pages 211-224, March.
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    Cited by:

    1. Bo Zhao, 2011. "Municipal aid evaluation and reform," New England Public Policy Center Working Paper 11-1, Federal Reserve Bank of Boston.
    2. Marques Benton & Lynn E. Browne & Prabal Chakrabarti & DeAnna Green & Yolanda Kodrzycki & Ana Patricia Munoz & Richard Walker & Bo Zhao, 2010. "Does Springfield receive its fair share of municipal aid? : implications for aid formula reform in Massachusetts," Public and Community Affairs Discussion Papers 2010-2, Federal Reserve Bank of Boston.

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