Picking up the Check: Who Pays for Act 60/68?

    Why have Act 60 and Act 68, which were supposed to solve Vermont’s perennial school funding problem, failed? Why are property taxes still a problem in Vermont? Here’s a way to think about it, courtesy of Russell Roberts, an economist at George Mason University and author of The Invisible Heart and The Choice: A Fable of Free Trade and Protectionism.

    Before Act 60 passed, think of each town in Vermont as a small group of people having lunch each week in a restaurant. Each table agrees to split the bill with the people at the table. The owner of the restaurant takes the wealth of the people at the table into consideration when he calculates the bill and for tables that are poor, he gives a discount. 

    People at each table tend to be careful about ordering because they know that if they order a cocktail, an appetizer, a main course, a dessert, and a beverage with dinner, the table’s bill will be higher than if they just order a main course and one beverage. Each person would like to order the appetizer and desert, but the value they get isn’t worth the extra cost.  If they were paying their own bill, they certainly would not order the extras.  Even when they split the table's bill, each person knows that if she alone orders a lot, her friends at the table will end up paying more and the negative stares and scowls from their more thrifty tablemates would not be worth it.  People are prudent spenders.

    One day the restaurant owner says that he has changed his policy. Everyone in the dining room, all 100 tables, will now split the entire room’s bill evenly. In addition, the owner finds a way to get people who aren’t eating in the restaurant to pay for part of everyone’s meal. Further, almost everyone’s bill will be capped at a certain fraction of each person’s income. Ordering more expensive food, a cocktail, appetizer, and dessert will cost each person more, but the additional cost will be less than what the menu’s posted price is.

    Not surprisingly, most dines in the restaurant now order a cocktail, an appetizer, a more expensive entrée, a dessert, and a more expensive beverage. The result is that the bill for all the diners is now higher than it was before, and even with the funds provided by the non-diners, each individual diner’s bill goes up every time they eat at this restaurant. 

    The basic problem of Act 60 is that it lowered the cost to each taxpayer of spending more money on education because it insulated taxpayers from the consequences of their decisions. Not surprisingly, spending increased dramatically.

     The only effective way to limit education spending, or in the jargon of policymakers, to impose cost controls on education, is to make sure that voter-taxpayers bear the cost of their decisions. It’s something that we take for granted when we purchase goods or services at any store.  The principle works just as well when we deal with services provided by local governments, less well when we deal with state government-provided services, and not well at all when we deal with federal government services.

Comments

Art,

You hit the nail on its head.

Funding mechanisms which dilute ones' responsibility from ones' spending is a recipe for economic disaster. Economics is about the allocation of scarce resources in a world of almost unlimited want. As Act 60's unintended consequences drain more state revenues from Vermont's limited coffers, we'll continue to see enormous budget shortfalls in important but grossly under-funded areas such as mental health and transportation.