NCPA - National Center for Policy Analysis

$500 Tax Credit And Scholarship Program

June 28, 2001

Policymakers attempting to satisfy parents' demand for choice in education are giving increased consideration to education tax credits. Among other benefits, education tax credits reduce the cost of choosing independent and parochial schools and thereby enlarge the pool of schools available, say researchers. Education tax credits or deductions exist in 4 states, and at least 7 state legislatures considered adopting education tax credits in 2001.

A proposed federal education tax credit has two components:

  • The first is a parental choice credit, under which any parent could receive a dollar-for-dollar reduction in income-tax liability of up to $500 per child for money spent on tuition.
  • The second is a scholarship credit, which would allow any individual to receive a dollar-for-dollar reduction in income-tax liability of up to $500 for donations to a nonprofit clearinghouse, which would give scholarships to children in low-income families of up to $2,000.

According to a Cato Institute study, the adoption of this tax credit system would result in greater choice as well as increased saving to parents and states. The study found:

  • The parental choice component of the credit could help more than 330,000 new students attend choice schools, in addition to making private schooling more affordable for the families of the more than 5 million students currently enrolled in private schools.
  • The credit's scholarship component could raise enough money to give nearly 3 million students $2,000 scholarships.
  • Savings would be greatest in states with large urban areas, where demand for private schooling tends to be high, and in states where government's per pupil expenditures are greater than the national average.
  • All together, the parental choice and scholarship credits would enable roughly 2.3 million new students to attend a school of their parents' choice at a savings to taxpayers of $14 billion a year.

Source: Darcy Ann Olsen, Carrie Lips and Dan Lips, "Fiscal Analysis of a $500 Federal Education Tax Credit to Help Millions, Save Billions," Policy Analysis 398, May 1, 2001, Cato Institute, 1000 Massachusetts Avenue, N.W., Washington, D.C. 20001, 1-800-767-1241.

For study text

http://www.cato.org//pubs/pas/pa398.pdf

 

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