The Tax Credits Program for School Choice

Policy Reports | Education

No. 213
Sunday, March 01, 1998
by Linda Morrison


Questions and Answers About the Tax Credits Program for School Choice

1. How can taxpayers use the tax credit to transfer money from government schools to nongovernment schools?

No government money is transferred from government schools to nongovernment schools. Individuals and businesses can avoid transferring their money to the government schools in the first place by showing on their tax return that they have relieved the government schools of the task of educating a child.

2. Isn't there a difference between the timing of tuition payments (September) and tax payments (often the next April)? How would the program deal with this difference?

Since different taxes are due at different times of the year, it's up to individual taxpayers to budget their funds to be available when their child's tuition is due, or when they want to contribute to pay another child's tuition. Most nongovernment schools have payment plans allowing tuition to be paid in installments through the school year.

3. How does the government know which credit goes with which student, and if or when the $1,000 per student maximum has been exceeded?

For auditing and record-keeping purposes, taxpayers claiming the credit would be required to provide either (for parents) the child's Social Security number or (for nonparents) a number assigned by the school to the child who was benefiting. Schools would issue an annual statement (like the federal government's W-2 employment statement) to those taxpayers who plan to take the tax credit. [See the appendix for an example.] Like any tax collection process, these tax credit claims would be subject to random audits.

4. Isn't this a roundabout way of using government money to subsidize private and religious schools?

No, allowing citizens to keep their own money to spend as they choose is not a subsidy. Our country was not founded on the premise that the government owns everything and allows citizens to keep portions of it.  Taxpayers have every right to spend the money they have earned. While the program does not end tax coercion for education, it does give taxpayers more control over how much and where the money is spent.

5. If parents owe only $500 of state and local taxes, where does the rest of the tuition come from?

It is true that parents with very low incomes who pay only $500 in total state and local taxes may not realize the full benefits of the Tax Credits Program for School Choice if they pay tuition over $500. However, parents like these with very small incomes are likely to benefit from school-based scholarship programs at individual schools. Further, they are the ones who would benefit from general tuition assistance programs that would be established as individuals and businesses use their tax credits to help the children of others attend nongovernment schools. As mentioned in the study, this one program - the Tax Credits Program for School Choice - will not solve all education problems for everyone everywhere. Other policies and programs are in place or are being proposed for the kinds of circumstance not addressed by tax credits.

6. Why is this a tax credit, not a tax deduction?

In general, only a tax credit can provide a dollar-for-dollar exchange between the government schools' budgets and individual taxpayers' tuition payments. This is an issue in Pennsylvania, where some of the case studies were based, and it may be in other states. The Pennsylvania Supreme Court has ruled that tax deductions are unconstitutional because they violate the uniformity clause of the Pennsylvania Constitution, which requires that all taxpayers be treated the same. However, tax credits have not been ruled unconstitutional in Pennsylvania. In fact, Pennsylvania has four tax credits to taxpayers who perform certain actions deemed beneficial to society: Neighborhood Assistance Credit, the Employment Incentive Payment Credit, the Mortgage Emergency Assistance Fund Credit and the Job Creation Tax Credit. A previous credit, the Economic Revitalization Tax Credit, has expired. In addition, Pennsylvania allows property tax and rent rebates for lower-income taxpayers.

7. What happens when a special (more-expensive-to-educate) student transfers out of a government school?

States should consider offering a bigger tax credit for special education students - especially if the state's accounting systems are set up to identify all costs for special education students, and it can be shown that significantly more money is being spent for these students and significantly more money would be saved if they left.

8. Wouldn't this program radically alter the complicated funding formulas many states use to subsidize local school districts and thus cause political turmoil?

In terms of accounting at the state budget level, the tax credits would be "deducted" from department of education accounts that currently assist local government schools. For example, Pennsylvania allocates more than $5 billion of state tax money to local school districts, including school district employees' retirement costs. Seven major subsidy programs provide state funding to school districts. The Equalized Subsidy for Basic Education, or ESBE, formula serves as the base for the state's subsidy funding for school districts. In most programs, the funds are distributed inversely according to wealth in the local district and are based primarily on enrollment (often using "average daily attendance" calculations). The ESBE formula might have to be altered somewhat to accommodate the Tax Credits Program for School Choice, but its basic emphasis on levels of enrollment, relative wealth and special characteristics of school districts need not be changed. If enrollment decreases 5 percent, 10 percent or 15 percent because of tax credits, state subsidies could be adjusted and assistance decreased by the amount of the tax credits. The concern expressed here is an accounting problem that may be difficult for internal managers at the department of education to solve. The Secretary of Education (the title varies from state to state) should issue a Request for Proposals asking knowledgeable and experienced professional accounting firms to propose internal accounting procedures that would least disrupt the current funding formula.

9. What happens to the tax credit if a student moves to a nongovernment school - or returns to a government school - during the school year?

Probably the best way to keep administration of the tax credit simple is to allow the tax credit for a full school year only.

10. Could taxpayers in one school district pay tuition for students in another school district?

Since a taxpayer gets a credit only for taxes paid, there would be no local tax credit for paying tuition in a school district where the taxpayer had paid no local taxes. However, assuming the credit was apportioned between local and state governments, a taxpayer who had paid state taxes would qualify for the state portion of the credit.

Appendix Table I - Impact of Tax Credits on Three Pennsylvania School Districts If 5% of Students Transfer

Appendix Table II - Impact of Transfers on Philadephia

Appendix Table III - Impact of %241%2C200 Tax Credit on New York City

Appendix Table IV - Impact of %241%2C200 Tax Credit on Washington%2C D.C.

Appendix Figure I - Schedule TCIE (Taxpayer Choice in Education) Credit

Appendix Figure II - Schedule TCIE-1

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