It is the second largest single source of local government revenue, after the property tax. It accounts for more than one-quarter of the state's annual budget. State aid to local schools serves a number of purposes. Aid is delivered to support vocational and special education, and to reduce class sizes in grades one, two and three, for example. Without the aid devoted to these functions, local school corporations might not provide them at levels the state sees as appropriate.
Aid reduces reliance on property taxes, and increases reliance on sales and income taxes.
Aid adjusts the tax mix to the levels that state policy makers think are appropriate. Aid equalizes local school spending among corporations. Some school corporations have lots of valuable property to tax, others have very little. Left to themselves, poorer corporations would spend less, richer corporations would spend more. The aid formula delivers more aid to poorer corporations, and less to richer corporations, in an effort to equalize the resources available to school corporations across the states.