VOTING FOR FREE PUBLIC SCHOOLS Christiana Stoddard Montana State University Department of Agricultural Economics and Economics Bozeman MT 59717 Email: [email protected] Phone: (406) 994-5634 November 2012 When do voters choose to fully fund education through taxation? This paper examines theories of public provision, in particular focusing on the role of political power of the poor, rising incomes, and the external benefits of education. In the early 1800s, common schools in New York were funded through a combination of public funds and private tuition charges, much as in other states at the time. Private charges were sizable--about 60 percent of common school revenues in 1830 and 37 percent in 1850. In 1849 and 1850, New York held two direct voter referenda over an act requiring all public schools to be free of tuition charges. This paper tests theories of public provision using county level variation in private tuition charges, the relationship between subsidies and attendance, and direct voter support for free schools. The findings indicate a reversal of the effect of inequality over this period. The econometric results suggest that there may not be a uniform relationship between inequality and public funding, but one that is dependent on both political institutions and the external benefits of education. I thank Rob Fleck, Jon Sonstelie, Nancy Beadie, William Fischel, and David Mitch for helpful comments, and participants at the Association for Education Finance and Policy meetings. I. Introduction Public schools in the United States have not always been fully publicly funded. In the early 1800s, most public primary schools in the United States had revenues from a combination of public funds and private tuition charges known as “rate bills.” During the late 1800s, northern and western states gradually abolished rate bills in favor of “free” common schools that were fully tax supported. Similarly, in many developing countries, public schools often require fees or other private charges. Public universities in the United States typically rely on a combination of public and private sources of revenue. Why would voters choose to subsidize education? And under what conditions will that subsidy be only partial? This paper examines these questions using the transition to free public schools in New York State. New York is an excellent place to test theories of public provision for several reasons. First, New York underwent a substantial transition in its reliance on rate bills, from supplying about 60 percent of revenues for common schools in 1829 to about 15 percent in the mid-1850s. Second, unlike most states, New York voters directly indicated their preferences in two referenda in 1849 and 1850 over the Free School Act. This act would have eliminated rate bills and required full tax support of schools, and the referenda took place before most other states had mandated free schools.1 Third, during this period, counties varied widely in how reliant they were on rate bills, from New York City, which discontinued rate bills in 1832, to Erie and Rockland Counties, where rate bills were still more than 60 percent of revenues 1 Rate bills were never used in New Hampshire, and were abolished before the NY referenda in Massachusetts (1826), Maine (1820), and Wisconsin (1848). The next several years saw their elimination in most of the northern states, including Indiana (1852), Ohio (1853), Illinois (1855), Iowa (1858), and Vermont (1864), Connecticut (1868), Rhode Island (1868), Michigan (1869), New Jersey (1871), and Pennsylvania (1873). (Pennsylvania districts chose individually when to switch from the old pauper school law to the new free school law. The first district switched in 1834, the last in 1873.) See Cubberley (1920) and Goldin and Katz (2003) for details. in 1850. Finally, New York expanded voting rights in this period to individuals without property, allowing for an examination of how political institutions affect public provision. This transition allows for a test of theories related to public provision. The theoretical literature on public funding often emphasizes the redistributive motives for publicly funded education.2 In some of these models (e.g., Meltzer and Richard 1981), public education is essentially a transfer from voters with wealth above the mean to voters with wealth below the mean. A number of theorists taking this starting point have modeled a positive effect of inequality on public education: all else equal, higher gaps between mean wealth and the wealth of the median voter lead to a lower tax price to that voter and higher public funding.3 This motivation is described (in negative terms) by an opponent of New York’s Free School Law: “Of all the acts of popular government, there are none so ruinous to the principles of honesty as to sanction taxation by popular voice. Thousands of voters are not tax-payers, but will profit themselves by the violations of their neighbors’ rights. If B. takes A.s money and purchases bread for his children, he is a felon and punished for the act, but if he pays for their schooling with it, it is a virtue sanctioned by law.” (Letter to the Rochester Daily Democrat, Feb 1850)4 Other work has emphasized that public education may be associated with social gains, whether due to faster growth, lower crime, a better functioning democracy, socialization of immigrants, network externalities, mitigation of credit constraints, or higher returns to physical 5 capital. In this case, voters may transfer resources from themselves to others in order to realize 2 For examples, see Epple and Romano (1996a, 1996b), Glomm and Ravikumar (1998), Fernandez and Rogerson (1995). 3 See Corcoran and Evans (2010) for some empirical support for a positive relationship between inequality and public funding using contemporary data. 4 Quoted in Finegan (1921) pg 256. 5 For example, see Lucas (1988) on growth; Chiswick (1972) and Lochner and Moretti (2004) on crime; Lott (1990) for social control and belief formation; Milligan, et.al.’s (2003) for democratic participation; Field (1979) for assimilation of immigrants; Becker’s (1964) on capital market imperfections; Soares (2003) and Acemoglu (1995) for human capital’s effect on returns to capital; Moretti (1999) and Ciccone and Peri (2002) on network externalities. these social gains. A proponent of the Free School Law described this motivation in the following editorial: “To the assertion that it is wrong to tax A to provide instruction for the children of B, we reply that we would tax both A and B, for school purposes, each in proportion to his ability, not as parents but as possessors of property, because property is deeply interested in the education of all. There is no farm, no bank, no mill, no shop (unless it be a grog shop) which is not more valuable and more profitable to its owner if located among a well educated, than if surrounded by an ignorant population.” (Letter to Canojoharie Radii, July 1850)6 Models incorporating these external benefits can generate the opposite predictions about the impact of inequality, arguing that more equal areas may have better human capital institutions. These models also typically incorporate variation in political power across voters. Benabou (2000), for example, argues that with limited political power of the poor, more equal societies favor greater redistribution when middle income voters benefit from the higher education levels of lower income voters, who are credit constrained from optimal education investments. In a similar vein, Galor, Moav and Vollrath (2008) argue that human capital promoting institutions emerge only when capitalists are the political elite and benefit from a better educated labor force. In their model, inequality prior to industrialization prevents the development of human capital institutions. Internationally, Engerman and Sokoloff (2000) and Chaudhary, Musacchio, Nafziger and Yan (2012) also emphasize the connection between political institutions and public education Most of the empirical work on the growth of public schooling in the United States has focused either on attendance rates or on expenditures levels and has documented the period either after schools became free or the very early period, with somewhat mixed results. For example, Goldin and Katz (1997, 1998) find higher attendance in areas with more equal income 6 Quoted in Finegan (1921), pg 377. distributions. Go and Lindert (2007, 2010) report the effects of raising the vote share on enrollment, finding that the expansion of the franchise was associated with increased attendance, although their work does not examine the role of public funding in this transition.7 A few studies have examined the connection between public funding and inequality in the early American experience: Stoddard (2009) finds more equal states had higher public subsidies in 1850-1870, and Ramcharan (2010) finds higher public education expenditures in more equal counties in 1890-1930. However, these results are not linked to direct voting outcomes or voting institutions. The New York referendum was described in an early account by Cubberley (1920), and Go (2009) examines the passage of free school laws and the New York referendum returns, although not the level of public subsidies. Go (2009) finds mixed results of the effect of inequality. This paper helps to reconcile these findings using a wider range of outcomes (including subsidy levels, voting outcomes and attendance) in a period when voting laws were changing to see how the effect of economic inequality varied as voting institutions changed. The 1830 results represent some of the earliest analysis of public funding, coming only a few years after voting laws in New York had changed to allow property-less men to vote, and the outcomes in 1850 come from a period when many counties had already made the transition to fully funded schools. This allows for a cleaner test of how the equilibrium shifted as voting institutions and the economic base changed.