We continue our discussion of Education Tax Credit Scholarships (Part I, Part II) with a review of “The Public Education Tax Credit” December 5, 2007 by Adam B. Schaeffer, Cato Institute.

This study begins with a detailed analysis of the two most powerful kinds of school choice reform:  education vouchers and tax credits.  Tax credits are more popular with the public and politicians, less likely to be challenged in court, and more likely to survive most court challenges.  The school choice movement’s focus on targeted programs is not a helpful short- or long-term strategy, regardless of whether the goal is specifically to serve disadvantaged children or children from all families.  Such regulations  limit  those  programs’  effectiveness  in delivering choice and increased student achievement, and sideline many of the most natural allies of school choice reform.  Toward that end, this paper:

    • Explains why nonrefundable personal use and donation education tax credits are preferable to vouchers;
    • Explains the importance of passing broad based rather than narrowly targeted school choice programs;
    • Illustrates why education providers, in addition to parents and children, need to be free of burdensome regulations;
    • Summarizes the model tax credit legislation presented in Appendix B in accessible, layman’s terms, and gives examples  in  Appendix  A  of  how  it would work in the real world; and
    • Presents model tax credit legislation that provides for educational freedom by funding choice through personal use and donation tax credits on state individual and corporate income taxes, state sales taxes, and property taxes.

However, while vouchers and tax credits are both improvements on the status quo, each has particular strengths and weaknesses.  All existing voucher and tax credit programs are seriously compromised and limited.

Prohibitions against the use of government funds to support religious organizations are not the only serious legal threats to vouchers. Recent defeats in court have been based upon seemingly innocuous education clauses common in state constitutions. In Colorado, vouchers were brought down by a clause mandating local control over local revenue, and in Florida they were overturned on the basis of a clause mandating a “uniform” system of education. Neither of these rulings had anything to do with religion, but both were possible because vouchers are considered government funds.

Thus, although the use of government funds does not automatically cause vouchers to run afoul of state constitutional restrictions, it does open up myriad avenues of attack—to which nonrefundable tax credits are not vulnerable.

The decisions in Florida and Colorado overturning their voucher laws vividly illustrate that courts disposed against vouchers can find creative ways to overturn the programs, relying upon vouchers’ status as government funds as well  as other constitutional provisions.

Politicians and other political actors consider the disposition of the courts and are much less likely to fight for and pass controversial legislation that has a high probability of being voided by the courts.

The courts have never overturned modern education tax credits or deductions—they have been upheld in all state and federal legal challenges.

School choice opponents have a more politically and legally compelling case for burdensome regulations on voucher-redeeming schools than they do for schools that benefit only indirectly from tax credit programs. Under most voucher programs, participating private schools must accept students through a random lottery or on a first-come basis.

School choice opponents can be expected to call for many onerous restrictions regardless of the program design.

One of the driving factors in increasing government control of the economy is the call for government to remedy perceived problems in the functioning of markets.  But consider this example:  in the case of a Florida school that had a close relationship with a terrorist-connected professor, Sami al-Arian, individual donors and scholarship organizations were able to judge the situation for themselves and take what action they felt was appropriate. For one scholarship organization that meant ending its support of the school.   This situation illustrates what is at the very heart of a free- market system: the non-coercive interaction of individuals and organizations within civil society.  In a voucher system, taxpayers have no direct control over how their money is spent. It all goes into one pot and is distributed according to the single set of rules on which a majority of legislators could agree. Those who see the government-funded system as inefficient have no alternative but to keep paying into it. In a tax credit system, taxpayers direct their own money to the programs they support.

Tax credits command support from a larger coalition of conservatives, free market advocates, and private schools than do vouchers, for many of the reasons discussed above: they are not  government  funds, they are more viable legally, and they pose less danger to the autonomy  of  private  schools  that  accept  them.

Tax credits establish a self-implementing form of school choice that relies on the private sector alone.  Voucher laws must establish a new government apparatus to implement school choice or rely on a state education system that is generally hostile to school choice.  Regardless of the procedure, the need for this apparatus increases costs and significantly complicates implementation. It also establishes an additional venue for undermining school choice and an additional issue on which to attack the policy.  Tax credits are more certain in their translation from bill to practice because they require minimal participation from intervening government agencies.

Perhaps the most important post-passage effect of tax credits compared with vouchers is that tax credits create a new and permanent institutional support system for the choice program.

Everyone who participates—individuals, businesses, and scholarship organizations—has personally invested in the tax credit program and will have a strong and direct interest in defending and expanding the law.  Vouchers simply do not create that kind of communitywide, direct, and personal investment because it is the government that decides how and where to allocate funds.

Voucher programs do have some practical advantages over tax credits in terms of the simplicity of the concept and its enabling legislation. Vouchers are easier for the public and politicians to understand and therefore potentially easier to sell to both. That advantage, however, is tempered by the considerations laid out above; and tax credits have practical advantages of their own.

Most prominent among these practical advantages is that credits maximize direct payment of education expenses by parents, a factor strongly correlated with academic achievement and efficiency.

Sometimes, as is the case with the scholarship program administered by the Black Alliance for Educational Options in Philadelphia, volunteering at the school of choice is used as an alternative or addition to parents’ direct payments.

States with no income taxes generally rely on sales taxes for the bulk of the government’s revenue and the state’s share of education funding. The model legislation presented here provides an easy way for individuals to claim a credit on sales taxes for either direct spending on education services for their children or donations to scholarship organizations.  All states with a sales tax can use the tables already developed by the federal government to determine the amount a taxpayer can deduct on their federal taxes for sales tax paid to their state government.  Furthermore, as presented in the model legislation, every state can offer credits (for educational expenses) on property taxes, which are the second largest source of education funds. Concern about the sufficiency of funds is thus not an issue for a properly designed tax credit program.

In some cases, complications may arise when executing a property tax credit at the state level because of variations in the collecting entities, tax rates, and purposes to which the revenue is directed.  These issues can be overcome; however, a simpler and perhaps politically more palatable approach is to pass state legislation authorizing, rather than requiring, counties and other municipalities to give property tax credits for education expenses.  Although this option has the disadvantage of kicking the issue down the road to other levels of government, it has the advantage of allowing counties with special need and support for school choice to enact a program first and provide a political base and policy example to the rest  of  the  state.  Furthermore, because local officials will retain power over the property tax issue, it will likely incite less opposition and more support from these local officials.

Regardless of the taxes tapped for credits, low-income families typically cannot claim a personal credit large enough to cover the cost of their own children’s education because they owe little in taxes.  Two solutions present themselves:  donation tax credits and refundable tax credits.  Donation tax credits have already been described.  Refundable tax credits mean that families with little or no tax liability are given government funds to pay for an education of their choice.  Unfortunately, making a tax credit refundable is legally equivalent to folding a voucher program in with a tax credit program. The primary legal distinction between tax credits and vouchers is that vouchers are government funds and tax credits are a taxpayer’s own money. When a tax credit is made refundable, this distinction is eliminated, leaving the refundable credit program vulnerable to the same legal attacks that have overturned some voucher programs.

The need for families to rely on scholarships will be mitigated by the enactment of sales tax credits, as even low-income families pay a substantial sum in sales tax, especially where this constitutes a major source of government revenue.  Nonetheless, low-income children must largely be supported through scholarship organizations that collect money from individual and/or corporate donors who receive tax credits for their donations.

Education tax credits are most frequently criticized on the basis of two practical concerns.  For one, critics have argued that credits are incapable of providing sufficient financial assistance to produce meaningful, universal school choice. Clearly, however, a system of educational freedom can be supported through personal use and donation credits against income, sales, and property taxes for both individual and corporate taxpayers.  This is particularly true when all taxpayers are able to take advantage of these credits; extended families, friends, and communities can pool their resources to support the education of many children in families that might not have a very high tax burden. These multiple sources of state and local revenue provide a huge reservoir of funds.

Second, some critics of tax credits express concern that using donation tax credits to fund low-income  children  unfairly  subjects  these families to the dictates of scholarship organizations.  Current donation tax credit programs, however, demonstrate that a diverse range of scholarship programs arise to meet the demands of both donors and parents. Only education tax credits provide a civil-society mechanism for balancing the needs and prerogatives of parents and taxpayers. By contrast, voucher programs subject all recipient families and all participating schools to a single set of government-imposed constraints.  That scenario provides low-income families no escape from restrictions they find onerous, and provides tax-payers no escape from the compulsion to fund education they find morally objectionable.

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We continue Part IV tomorrow with more from “The Public Education Tax Credit” December 5, 2007 by Adam B. Schaeffer, Cato Institute.

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