How States Fund Education: A Breakdown

How do states fund education? This blog post breaks down the different ways that states fund education so that you can be informed.

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Introduction

In the United States, education is primarily a state and local responsibility. In the 2018-19 school year, states are projected to spend $710 billion on elementary and secondary education, accounting for 89 percent of all public elementary and secondary education spending. Of that total, $634 billion will come from state sources and $76 billion will come from local sources. The federal government will provide the remaining 11 percent, or $78 billion.

How states raise revenue to fund their share of public education spending varies widely. Property taxes are the most common source of revenue, accounting for 45 percent of all state and local funding in 2016-17. Sales taxes are the second-most common source, accounting for 15 percent of funding, followed by income taxes (11 percent), corporate taxes (5 percent), and other sources (2 percent).

In recent years, a number of states have made changes to their school funding formulas in an effort to improve outcomes for students. These reforms have generally been driven by court cases in which plaintiffs argued that the state’s method of funding public schools was unconstitutional. As a result of these cases, many states have made changes to the way they fund schools, including increasing the role of state aid and decreasing the reliance on local property taxes.

How does the federal government fund education?

Education is primarily a state and local responsibility in the United States, with the federal government playing a secondary role. Federal funding for education programs totaled $59.2 billion in FY 2019, accounting for about 10 percent of all funding for elementary and secondary education and about 18 percent of all funding for postsecondary education.1

Title I Grants

Title I Grants are the largest federal education program. grants are awarded to states and then passed down to school districts to help schools with large concentrations of students from low-income families. The money can be used for a variety of purposes, including hiring teachers, providing professional development opportunities, and purchasing materials.

In order to receive a Title I Grant, states must submit an application to the US Department of Education. Once the application is approved, the state will receive a set amount of money based on the number of low-income students in the state. School districts then apply for funding through the state, and if they are approved, they will receive a portion of the state’s Title I Grant money.

Individuals with Disabilities Education Act

The Individuals with Disabilities Education Act (IDEA) was enacted to ensure that all children with disabilities have the opportunity to receive a free and appropriate public education, just like other children. The IDEA is a federal law that outlines the rights of students with disabilities and the responsibilities of the schools to meet those rights.

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Under the IDEA, schools must provide all students with disabilities, ages 3-21, with a free and appropriate education in the least restrictive environment. This means that students must be provided with the necessary supports and services to ensure their participation and progress in school. In order to receive these services, students must be evaluated and determined eligible for special education services.

Pell Grants

Pell Grants are direct subsidies from the federal government that do not have to be repaid. According to the Department of Education, in the 2018-2019 academic year, the maximum award was $6,095.

Pell Grants are awarded based on financial need, as determined by the Free Application for Federal Student Aid (FAFSA). The Department of Education reports that for the 2018-2019 academic year, 68 percent of Pell Grant recipients had family incomes below $30,000.

Pell Grants are an entitlement program, which means that any eligible student who meets the program’s criteria will receive a grant.

How does the state government fund education?

The states are primarily responsible for funding public elementary and secondary education. In most states, the legislature appropriates funds for education, and the state education agency distributes the funds to local school districts. However, states differ in the amount of money they provide to education and how they distribute those funds.

State Lottery Funds

Most states fund education through a combination of state income taxes, sales taxes, and property taxes. However, some states also generate revenue for education through lotteries. In 2016, 33 states and the District of Columbia operated lotteries, with combined annual sales of $73 billion. State lottery funds typically comprise a small share of total education funding—usually less than 3 percent—but in some cases, they can provide a significant boost to school budgets.

For example, in South Carolina, lottery revenue provided $438 million for education in fiscal year 2017, which represented about 4 percent of the state’s total education funding. In contrast, lottery funds made up less than 1 percent of total education funding in both Ohio ($586 million) and Michigan ($325 million).

Most states use lottery proceeds for specific purposes related to education, such as building new schools or funding scholarships and financial aid programs. In some cases, lottery funds are used to supplement other sources of education funding, such as when they are used to cover shortfalls in state budget appropriations for schools.

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Property Taxes

In order to fund education, most states rely heavily on property taxes. This is because property taxes are a reliable and consistent source of revenue that can be used to support schools year after year. In addition, property taxes are usually collected by local governments, which means that the money raised through this tax can be used to support schools in specific communities.

States typically set a minimum rate for property taxes, but they may also allow localities to levy additional taxes on top of this rate. For example, in Pennsylvania, the state sets a minimum rate of 18 mills (or $18 for every $1,000 of assessed value), but localities are allowed to charge up to 30 mills. In general, states that rely heavily on property taxes for education funding tend to have higher rates than states that rely less on this source of revenue.

Sales Taxes

Most state governments rely on sales taxes to fund education. Thirty-five states and the District of Columbia collect statewide sales taxes. (Arkansas, Illinois, Indiana, Kentucky, Michigan, Mississippi, Missouri, Oklahoma and South Dakota have local sales taxes in addition to their statewide sales taxes.) Sales taxes are generally imposed on the sale of goods and services. A few states exempt food and drugs from the sales tax base (and some states exempt other items as well), but the vast majority of items sold are subject to the tax.

Sales taxes are generally levied at a fixed rate per dollar of purchase. However, some states exempt certain items from taxation or impose lower rates on them. For example, many states exempt clothing from the sales tax or impose a lower rate on it than on other items. And a few states exempt groceries from the sales tax altogether. Some temporary rates are also in effect in a handful of states. For example, Louisiana’s general state sales tax rate increased from 4 percent to 5 percent on April 1, 2016 but is scheduled to revert back to 4 percent on July 1, 2018.

How does the local government fund education?

Education in the United States is primarily the responsibility of state and local governments. In most states, the primary source of funding for public schools is property taxes. Other sources of funding include state income taxes, federal grants, and private donations. Let’s take a closer look at how each of these sources of funding works.

Local Property Taxes

Most of the funding for K-12 education in the United States comes from state and local sources, with the federal government contributing about 10 percent. State revenue comes primarily from income and sales taxes, while local revenue comes mostly from property taxes.

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In fiscal year 2017, states spent a total of $698 billion on elementary and secondary education, or $13,433 per student.1 That’s an increase of 2.4 percent from the previous year, when states spent $681 billion, or $13,126 per student.2

Total state and local revenue for elementary and secondary education was $686 billion in fiscal year 2017, or $13,266 per student.3 That’s an increase of 2.9 percent from the previous year, when total state and local revenue was $663 billion, or $12,841 per student.4

The table below shows how states fund elementary and secondary education, by source of revenue, for fiscal year 2017.5

State Revenue
Income tax 31%
Sales tax 17%
Corporate tax 6%
Other taxes 3%
Federal funds 9%
Other state funds 24%

Local Revenue
Property tax 77%
Other local funds 23%

Federal Impact Aid

Federal Impact Aid is a program that provides supplemental funding to school districts located near federally-owned land, or in which a large number of children of federal employees reside. These areas typically have a low property tax base, which can result in poorer funding for public schools. The Impact Aid program was created in 1950 to offset this discrepancy and provide quality education for all children, regardless of their location.

Federal Impact Aid is the largest source of supplemental funding for public schools, and it benefits more than 1,200 school districts across the country. In recent years, the program has provided more than $1 billion per year in support. Most of this money goes to districts with high concentrations of children from low-income families, children with special needs, or students who are learning English as a second language.

The Impact Aid program is an important source of funding for many school districts, and it helps ensure that all children have access to a quality education.

Conclusion

The way states fund education has a big impact on the quality of education kids receive. Unfortunately, many states have cut back on funding in recent years, which has led to larger class sizes, fewer programs, and less one-on-one attention for students.

Despite the challenges, states are still required to provide a certain level of funding for education. The federal government also provides funding for specific programs, like special education or after-school programs.

It’s important for parents and taxpayers to understand how their state funds education and to advocate for more resources if necessary. We hope this breakdown has been helpful in understanding the issue!

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