Did federal COVID aid allow states to cut back on school spending?

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Nearly $200 billion in federal COVID relief money left schools in a relatively strong financial position in recent years. But new data highlights a potential unintended consequence of all the federal aid: states cutting back on their own efforts to fund education. 

A report, released by the Albert Shanker Institute, a think tank affiliated with the American Federation of Teachers, tracks the share of each state’s economy devoted to public schools. Researchers call this “fiscal effort.” I like to think about it as the tax rate applied to the states’ economy to fund education (though it’s really multiple taxes). Crucially, this does not count federal dollars, just state and local money.

By this measure, funding effort dropped sharply between 2020 and 2023, as the figure below from the report shows. This doesn’t mean that states are spending less in real dollars on schools because the economy has also been growing during this time. They’re spending less as a percentage of the economy.

The decline in effort could have happened because states felt less pressure to fund education themselves since the federal government poured in so much money. This is just a hypothesis, though report author Bruce Baker tells me it’s a reasonable one.

If the federal COVID money crowded out state funding, that suggests it was not quite as large a boon to school budgets as it initially seemed. This is worth keeping in mind the next time there’s discussion of putting a lot more federal dollars into education.

The other key point is that states may have more economic capacity to increase funding for schools — if politicians want to. This is all the more reason why the recent rise in school staffing is not inherently unsustainable, as I recently wrote. 

The COVID money is now essentially gone so the question is how states are responding. We don’t have the data yet to fully understand how this is playing out nationally. Baker says in preliminary analysis he sees a bounce back in state effort in 2024.

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