Evaluating the Success of Need-Based State Aid in the Presence of Property Tax Limitations

Massachusetts uses an aid formula that accounts for differences among local communities in both fiscal resources and costs. To assess the success of this aid program in reducing fiscal disparities, it is necessary to estimate the costs of providing public services. Implementing these estimates introduces difficulties arising from the presence of Massachusetts' property tax limitation, Proposition 2½. Our solution is to estimate local government expenditure equations using separate, selection-corrected regressions for communities proposing property tax overrides and those not proposing overrides. This approach produces reasonable results that suggest that the distribution of aid does serve to diminish fiscal disparities.