Effect of a School Finance Reform on Housing Stock and Residential Segregation: Evidence from Proposal A in Michigan

Local financing of public schools in the U.S. leads to a bundling of two distinct choices - residential choice and school choice - and increases the degree of socioeconomic segregation across school districts. A school finance reform can go a long way in weakening this link. In this paper I study the Michigan school finance reform of 1994 (Proposal A) which resulted in a comprehensive equalization of per pupil expenditures. Using panel data on Michigan K-12 districts and data from the decennial censuses I investigate whether the reform had any significant effects on spatial segregation. I find that Proposal A has been responsible for increases in housing stock and property values in the lowest spending school districts, and for improvements in several socioeconomic indicators, implying a decline is neighborhood sorting. However, there is continued high demand for residence in the highest spending communities, which points to the importance of neighborhood peer effects (‘local’ social capital).