Previously we wrote about Education Savings Accounts (ESA) in “Better Than Vouchers” (Here).  ESAs offer families the greatest flexibility in utilizing multiple outlets for education services, whereas a voucher must be given in total to one education provider.  Also, because balances may be carried over year to year and may even be used for college there is a strong incentive for parents to find and demand the best value for every dollar.

Another alternative to vouchers are Education Tax Credit Scholarships.  In this series we are going to examine education scholarships funded by tax credits and deductions.  What are Education Tax Credit Scholarships?  An education tax credit allows individuals or corporations to subtract a certain amount from their taxes if they have made education-related purchases or have made donations to scholarship programs.  There are typically two types of education tax credits:

  1. Personal-use tax credits, which reimburse parents for educational expenses spent on their children, and
  2. Donation tax credits, which give a tax credit to individuals or corporations who donate to an education scholarship fund.

 

Even though Tennessee doesn’t have a Blaine Amendment school choice funding programs are tirelessly sued by choice opponents on grounds of church/state separation.  However, the U.S. Supreme Court has ruled that neither education tax credit (ETC) nor deduction programs violate the Establishment Clause in the First Amendment of the U.S. Constitution.

Not only have ETCs been upheld as Constitutional, they make fiscal sense.  A report published by Florida’s Office of Program Policy Analysis & Government Accountability found:

The [Florida] corporate income tax credit scholarship program produces a net savings to the state.  We estimate that in Fiscal Year 2007-08, taxpayers saved $1.49in state education funding for every dollar loss in corporate income tax revenue due to credits for scholarship contributions.  Expanding the cap on tax credits would produce additional savings if there is sufficient demand for the scholarships.

Florida’s legislative fiscal agency has found that its scholarship tax credit program saves the state more than $30 million a year.

The Cato Institute has done an enormous amount of research on ETCs.  We would like to share highlights from three separate Cato papers.  However, keep in mind we are only sharing the necessary information for a basic understanding of ETCs.  For a full and complete understanding of ETCs we definitely recommend reading the research papers in full.  With that said, however, there is still a lot of information we wish to share, so we will break our report on ETCs into a five part series running the rest of this week.    The reports we will be reviewing are:

 

Today we begin our series with “Toward Market Education:  Are Vouchers or Tax Credits the Better Path?” February 23, 2001 by Andrew J. Coulson with the Cato Institute:

Efforts to bring good educational opportunities within reach of all families have been going on for thousands of years.  Though some have been more effective than others, none have worked as well as we might like.

State-run public schools are only the most recent attempt at providing universal access to education, and they have proven extremely problematic.  Far from diminishing the opportunity gap between rich and poor, they have exacerbated it. Despite 75 years of constant reforms to the system, and a 14-fold increase in inflation-adjusted per-pupil spending, literacy levels have stagnated or declined.

Modern tuition voucher and tax-credit plans attempt to remedy those deficiencies by combining the desirable qualities of market education with carefully designed financial assistance.  Vouchers and tax credits come in many forms. The specific plans considered in this paper are:

• Targeted vouchers

• Universal vouchers

• Education tax credits

Targeted vouchers are typically allocated on the basis of financial, educational, or geographic need.

The tax-credit proposal under consideration in this paper is a nonrefundable, education credit composed of two parts. The first part is a parental-choice credit for taxpayers with dependent school-age children. Only taxpayers whose dependent children were not enrolled in public schools would be eligible for the credit…its second component… would allow businesses and individuals to write off donations made to scholarship-granting organizations on a dollar-for-dollar basis, up to some preset limit.

The need for parental choice in education is based on two pragmatic considerations.  First, parents have consistently made better educational choices for their own children than state-appointed experts have made on their behalf. One can argue as to why this has been the case, but the evidence that it has in fact been the case is unambiguous.

Second, parental choice in education is key to harmonious social relations.  The fear that educational freedom would balkanize the public into warring factions is not only mistaken, it is exactly backward.  Historically, it has been coercion, not diversity and choice, which has lead to social conflicts over schooling.  When heterogeneous populations have been forced to pay for and/or attend a single official school system, it has inevitably led to a fierce contention to control the content of that schooling. Choice in education, much like choice in religion, has allowed diverse groups to coexist far more peacefully.  The record of state-run schooling is far grimmer, and the case of the United States is typical. Since its inception, U.S. public schooling has been a battle zone, as left-wing and right-wing activists have sought to wrest control of the system and bend it to their will. Public schools have, in the past, practiced racial apartheid and forced sectarian religious practices on students, both with the approval of the courts. In the process, they have fomented anger and dissension among parents, trampled on the rights of countless families, caused riots and book-burnings, and generally upset the communities they are meant to serve.

The parental-choice credit has the potential to allow parents an unfettered choice of educational options. Since the only eligibility requirement for the credit would be that the dependent child is not enrolled in public school, both home schooling and independent school expenses would qualify.

It is likely, however, that attempts would be made to attach strings to the credit, curtailing parents’ choices. No system of financial assistance will be totally immune to such regulatory encroachment, but  the  parental-choice  credit  would  offer  somewhat  more resistance to that encroachment  than  other policies. One defense against creeping regulation would be that the credit is fundamentally similar to the federal income tax exemption for dependents, which has no eligibility requirements.  The parental-choice credit, like the federal exemption for dependents, would be meant to make it financially less burdensome for taxpayers to discharge their duties as parents or guardians.

Since the parental-choice credit does not constitute “public money,” regulations and restrictions governing state spending do not apply.  In fact, the Arizona Supreme Court accepted that argument when it rejected a legal challenge (Kotterman v. Killian) to that state’s $500 education tax-credit program.  The U.S. Supreme Court did not take issue with the Arizona Court’s reasoning, refusing to hear an appeal of its decision.  The same argument was accepted in two separate Illinois Circuit Court rulings regarding that state’s 1999 education tax-credit law. Since parents would not be receiving state funds under the parental-choice credit (they would be keeping more of the money they have earned), no restrictions would be needed on their educational decisions.

The scholarship credit, though also potentially susceptible to regulatory encroachment, nevertheless offers low-income parents more freedom and control than any alternative assistance mechanism.  Because the scholarships disbursed under this credit would be privately funded, parents would be somewhat more insulated from direct regulation of their educational decisions by the state than if they were receiving “public money.”  Scholarship-granting organizations would have to follow state guidelines to be eligible to accept donations, however.

One of the most significant differences between tax-credit and voucher programs is that vouchers unarguably constitute state spending. As a result, efforts to impose a significant regulatory burden on the use of vouchers are more aggressive and have greater prospects for success.

Florida’s Opportunity Scholarships voucher program, which is available to children whose public schools are deemed by the state to be failing, is somewhat more restrictive. In order to participate in the program, oversubscribed private schools must admit children based on a random lottery—bypassing a school’s normal admissions process.  Restricting the freedom of educators to tailor their services to students with particular needs or goals will stifle specialization, diminishing the variety of educational choices open to families.  Participating schools must also administer mandatory state tests.  Though testing is valuable to parents, the imposition of a particular set of official tests by the state has historically been associated with a host of problems.

The U.S. experience with state-funded schooling has not been exceptional. In all cases, over the entire 2,500-year history of formal education, state funding of children’s education has eventually been followed by pervasive state control over the schools.

In the face of this remarkably uniform case history, there is every reason to expect that vouchers will precipitate a similar problem, with each successive administration adding a few of its own clicks to the regulatory ratchet.

Given the great importance of parental choice, it is crucial to understand the conditions required for its preservation.  Chief among those conditions is direct financial responsibility for parents.  Historically, schools funded by third parties have seldom taken the needs or preferences of families as their guiding principle.  Many have ignored those needs completely, preferring to deliver the sort of education favored by whoever was footing the bill.

A second crucial reason for parents to pay directly for their own children’s education is the beneficial effect this has on parental involvement in and expectations for that education.  As with any “free” service, “free” schools engender lower expectations and less involvement than schools for which parents have to regularly pay tuition.

The responsibility for directly paying all or even part of their children’s tuition forces parents to take a more active role, and gives them considerably more power over the content and direction of their children’s instruction.

In addition, when parents pay directly for their children’s education, they drive schools to improve and become more efficient. Schools funded  by  parents  have  only  a  few options if they wish to increase their net income: offer better or more comprehensive services  (for  which  they  can  charge  higher fees),  offer quality services at competitive prices  (thus  allowing  them  to  attract  more clients), or lower their operating costs (there-by realizing more net income from the same amount  of  revenue).  In all of these cases, schools must become more effective, more efficient, or both if they wish to improve their bottom line. This is categorically not the case under third-party payment systems.

When some outside agency, the state, for example, pays for a child’s education, schools turn to the state in their efforts to raise their income. Instead of lobbying their clients by offering better or more cost-effective services, they lobby legislators to simply increase state spending.  The results are plain:  inflation adjusted per-pupil  spending  by  public schools is 14 times higher today than it was 75 years ago, but achievement has either stagnated or declined over the same  period.   Parents can be assured that schools will focus on meeting their needs and demands only when they pay directly for their children’s education.

Fraud is another problem that is minimized when parents pay tuition directly.  All third-party payment schemes are susceptible to kickbacks, and to the creation of “phantom beneficiaries.”  Attempts to control these problems through the use of technology or heavy regulation have not been successful.

[youtube]http://www.youtube.com/watch?v=XKSXjBc4-DQ&feature=channel[/youtube]

Education Tax Credit Scholarships, Part II continued tomorrow…

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