The Tax Credits Program for School Choice

Policy Reports | Education

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

The Tax Credits Program for School Choice

Figure I - Average Per Pupil Cost of Education Nationwide

"The Tax Credits Program for School Choice would provide more money per pupil to the government schools."

Despite growing budgets over the last few decades, government schools most often say more money is the answer to many of their problems. The Tax Credits Program for School Choice would provide more money per pupil to the government schools, while at the same time giving taxpayers control of more of the money spent on elementary and secondary education and more choice over where and how it was spent. The playing field would not be level; this proposal is tilted in favor of government schools. Nonetheless, government and nongovernment schools would compete.

Taxpayer Choice. Using $1,000 per child to illustrate the general concept, the Tax Credits Program for School Choice would work as follows:

  • Taxpayers -- both individuals and businesses -- would receive a dollar-for-dollar tax credit up to a maximum of $1,000 per child for money they spent on tuition expenses at nongovernment schools.
  • The credit also could be applied against gifts to charitable foundations set up to pay tuition for children from low-income families.
  • Taxpayers who homeschool their children would be eligible for a $1,000 per child tax credit without having to document any expenses.
  • The budget of the education district in which the child lives would be reduced by the amount of the credit.

Qualifying for Tax Credits. To receive a tax credit for out-of-pocket expenses, taxpayers would not have to pay a child's full tuition.6 They could pay only part. Taxpayers also could pay part or all of the tuition of children other than their own. Only a maximum credit of $1,000 per child could be claimed, even though actual tuition might be greater than that amount. For example, three taxpayers could not contribute $1,000 each to pay the $3,000 tuition for one child and then claim $3,000 of tax credits. However, a business or individual could pay $1,000 tuition for each of 10 children and claim a $10,000 tax credit. The $1,000 per child limit could be audited by using the child's Social Security number. (See "Administering the Program" below.)

Selecting the Amount of the Credit. This study uses a $1,000 tax credit for illustrative purposes because it seems to work well in various Pennsylvania school districts sampled by the author. However, the preferred tax credit amount might be more or less in other states, depending on current spending in government schools and current enrollment in nongovernment schools. (In departures within this study, a $1,200 tax credit is used in New York City and Washington, D.C., examples.) Choosing a limit well below the per pupil cost of government schools would:

  • Ensure that spending on students who remain in government schools would in most cases stay the same or increase.
  • Reduce the likelihood that nongovernment schools would raise tuition in response to the tax credit program.

The U.S. Department of Education reports that the average per pupil cost of government schools nationwide is $6,857. Thus government schools would have $5,857 ($6,857 minus the $1,000 revenue loss) extra to spend on the remaining students after a student transfers to a nongovernment school.

Is $1,000 enough to induce families to transfer their children to nongovernment schools? That amount would put a small dent in the $12,000 tuition charged by elite private schools. However, such expensive schools are in the minority. As Figure I shows, most nongovernment schools charge far less.7

  • The average annual private elementary school tuition nationwide is less than $2,138.
  • With private secondary schools included, the average tuition is $3,116.
  • About 67 percent, more than 17,000 private elementary and secondary schools, charge $2,500 or less, and 19 percent charge less than $1,000.

"The 'cost' of all tax credits would be deducted from the school district budget where the taxpayer pays taxes."

Options for Funding the Credit. Policymakers have numerous options for designing a tax credit. A reasonable approach would be to apportion the credit between state and local taxes, based on the way public schools are currently funded. For example, if states and localities fund schools in roughly equal proportions, a $1,000 credit might be divided into a $500 state tax credit and a $500 local tax credit. Tax credits could be applied against state general fund taxes that support education such as personal income taxes, corporate net income taxes and inheritance taxes. At the local level, the credit could be taken against direct school district taxes (usually property taxes) or against taxes on income. The "cost" of all tax credits would be deducted from the appropriate school district's budget.

Potential Use of the Credit. Not all parents would choose to transfer their children from government schools to nongovernment schools. Many would be unable to afford it even with the tax credit. Others would not immediately find a nongovernment school that fit their children's needs. But the high percentage of parents with children in government schools who say they would prefer nongovernment schools clearly indicates the potential demand. The response of low-income families in a number of cities to the private scholarship programs discussed below is another indicator.

Even "School Choice," published in 1992 by the Carnegie Foundation for the Advancement of Teaching and widely criticized as biased against school choice, demonstrated a significant demand for private schools. The report included a nationwide telephone survey of about 1,000 parents, who were asked, "Is there some other school to which you would like to send your child? This school could be public or private, inside or outside of your district, within your child's grade level." Nineteen percent said they would like to send their child to a private school. According to the National Association of Independent Schools (NAIS), total enrollment in independent schools in the last decade jumped 11 percent, with elementary school enrollment rising even faster, at 18 percent.

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