Court-ordered school finance reforms have been shown to improve the long-term economic outcomes of low-income students. Critics, however, highlight a potential trade-off between equity and efficiency resulting from their binding obligation. For example, state-mandated equalization of per-pupil expenditures may induce local governments to strategically prioritize self-interests, such as regional economic development, over the statewide general welfare. This structural design often raises concerns about free-riding behavior and its potential to trigger a ``race to the bottom" scenario. A representative example was the California State Legislature's decision to restrict local governments' use of property taxes, culminating in the California Supreme Court's 2011 ruling on the state's taxing authority to dissolve local redevelopment agencies and transfer their assets to state oversight. Using this natural experiment with variation in the asset transfer size and timing, as well as a formula-based legally binding apportionment, I show that higher-level authority can be an effective channel for internalizing negative externalities. Difference-in-differences with a predicted dosage instrumental variable model finds that state oversight led to positive continuous treatment effects: a 1% increase in the (instrumented) share of property tax revenue allocated to state control resulted in a 0.6% to 1.1% increase in per pupil education spending and a 1.5 to 2.2 percentage point increase in land development growth in school districts. These benefits stem from internalizing negative externalities, enhancing the state's discretionary budget capacity and enabling more effective spending on direct educational priorities in the greatest need. The implications suggest that higher-level interventions can reduce the social costs associated with free-riding and a ``race to the bottom," thereby promoting more equitable education funding alongside sustainable and balanced regional economic development.