BY ASHLEY BERNER & MAI MIKSIC | Of the many school reform proposals of the last twenty years, one of the least discussed but most fascinating is the granting of tax credits for donations to public and private schools. New York is now considering a bill that would allow tax credits to individuals and corporations when they donate to public schools, to non-profits that support public schools, or to scholarship organizations that offer tuition for private schools.
What is an Education Tax Credit?
What exactly is an education tax credit, and how does it differ from other tax policies and educational innovations?
Tax credits reduce the tax liability that is owed by an individual or corporation, while a tax deduction reduces taxable income. Money that is raised through tax credits never goes through the state’s coffers, but it reduces overall state revenues. A voucher, by contrast, comes from money that has already been collected by the state and allocated to education. Vouchers thus affect education budgets directly. Although money from tax credits can support scholarships for religious schools, such programs do not implicate the religious establishment clauses of state constitutions – an issue that sometimes plagues voucher legislation, as it did in Florida.
States with education tax credits are evenly distributed across the country. Arizona pioneered tax credits in 1997, but states in the Southeast, Midwest, and Northeast have enacted them as well.
In 2012, an estimated 245,854 children participated in school choice programs all across the country, and more than half of them (148,300) were enrolled in a scholarship tax credit program (Alliance for School Choice, 2013). Here, “choice programs” refers to the selection of a school other than one’s neighborhood school, such as magnets, charters, and non-local public schools.
Types of Programs
The programs vary considerably across the thirteen states that currently allow them. The most common application of tax credits is for so-called Scholarship Tuition Organizations (STOs), which are state-approved non-profits that provide tuition for children to attend private school, most often for low-income students. Other state programs support various aspects of public education, such as after-school activities or educational non-profits that provide supplies, instruction, or materials to public school classrooms.
Some of the more significant differences between programs concern student eligibility for scholarships, the requirements placed on participating schools, and the limits on donations and credit values.
On student eligibility, Arizona’s 1997 individual tax credit program, the nation’s first, places no means test upon the scholarship recipients. Its 2006 corporate program, in contrast, funds only students from low-income families (set at 185% of the income level for free and reduced lunch). Florida’s program only accepts children who qualify for free and reduced lunch. Other programs restrict scholarships to children with special needs, while some require recipients to have been in public schools during the year prior to application (New Hampshire, Florida). Sometimes STOs impose their own eligibility requirements in addition to those set by the state.
State requirements of participating private schools also vary. Some states, such as Arizona and Georgia, place no requirements upon such schools beyond existing private school regulations, such as health, safety, and civil rights codes. Other states, like Florida, Indiana, and Virginia, mandate that participating private schools administer national or state norm-referenced tests to scholarship recipients.
States also differ in the value of the tax credit that can be applied. Arizona, Florida, and Georgia allow 100% of the value, while the other ten states permit between 50-90% to be applied to individual or corporate tax liability. Because tax credits reduce the state’s overall revenues, all programs except for Louisiana’s are capped, and at a level commensurate to their state budgets; Florida’s cap currently stands at $358 million, Rhode Island’s at $1.5 million.
New York State’s Pending Legislation
How does the legislation now in Albany compare with other programs? Many of the bill’s features are in negotiation between the two houses, since the State Senate passed one version in 2012, and the Assembly has not brought the matter to a vote. A final analysis is thus not possible.
In both houses, New York State’s bill allows the support of STOs, public school foundations, and educational non-profits, and specifies that 50% of the money must go to the latter two categories. New York State’s bill includes the novel feature of allowing public school teachers to take an individual tax credit of $100 for out-of-pocket classroom supplies. A major difference between the houses is that the Senate version allows support for charter schools, whereas the Assembly version specifically prohibits this.
In terms of eligibility, school requirements, and credit value, the Senate version places no restrictions upon student eligibility for tuition scholarships, while the Assembly version sets the family income at $250,000 with an extra $10,000 per child for up to five children. The bill places no requirements upon participating schools, although it does require public school foundations, educational non-profits, and STOs to undergo annual reviews and accounting protocols. The total funding is capped at $250 million in Year 1 and $300 million in Year 2, and the bill allows 100% of the credit value to be applied to individual and corporate tax liabilities.
Analysis of Tax Credit Programs
For some education reformers, the mere expansion of parental choice, which education tax credits generally facilitate, constitutes a good in and of itself. For defenders of the current system, tax credit programs disrupt the default to a traditional neighborhood school and thus represent a threat. For others, the key question is neither philosophical nor political but practical: do tax credit programs increase access and improve educational quality? Research to date is limited but suggests that outcomes depend upon the structure of the program. Research on Arizona’s individual and Florida’s corporate tax credit programs is illustrative.
Arizona’s 1997 individual tax credit allows donations to STOs and also to public school extra-curricular activities, such as band uniforms and sports participation fees. Unusually, the state places no restrictions on student scholarship eligibility, and allows parents to specify a particular public school whose activities receive funding – including one their own children attend. Two findings relate to these policies: scholars found that wealthier public schools received more money than poorer schools, and that middle-income families took better advantage of the scholarships than did low-income families. (The median income of scholarship families was only $5,000 less than Arizona’s statewide median income; in 2010, only 12.8% of scholarship students lived below the poverty line). The absence of a means test for scholarships, and the ability of parents to support their own children’s after-school activities, go a long way towards explaining these outcomes (Melendez, 2009; Murray, 2010; Wilson, 2000; Wilson, 2002).
Perhaps as a corrective, Arizona’s two subsequent corporate tax credit plans (one in 2006, the second in 2009) give scholarships only to those students who live at or below 185% of the threshold for free or reduced lunch, who are in the foster care system, or who possess special needs. Indeed, most programs subsequent to Arizona’s 1997 legislation do include means testing for scholarships and prevent parents from benefiting their own children.
Florida’s only education tax credit program (corporate), enacted in 2001, includes more rigorous student eligibility requirements. Only students who qualify for free or reduced lunch, and who attended public school for at least one year prior are allowed to receive scholarships to attend private schools. Florida’s program does not allow tax credits to support public school activities.
A recent study (Figlio & Hart, 2014) suggests that the Florida scholarship program has benefited not only those who leave the public schools, but also those who remain in them. The authors hypothesized that with students able to transfer more easily, public schools competed with private schools for students and were thus incentivized to improve the quality of education. They compared public school students in “high-competitive environments” with those in “low-competitive environments” and found a modest increase in test scores in the former. This competitive effect was particularly evident in schools that were at risk of losing their Title I funding. At the very least, the study suggests that Florida’s program does not harm public school students academically, particularly if they live within districts that offer a variety of educational options.
Another study (Figlio, Hart, & Metzger, 2010) concluded that, prior to transferring to private schools, Florida’s scholarship students were more likely to have had lower state test scores and to have come from lower-achieving public schools, than those who did not apply for the scholarships. This suggests that the program reaches some of the more vulnerable students in the public system – as it was intended to do.
An analysis of these two programs shows that the structure of tax credit programs matters greatly in which students are served and in how resources are distributed. A clearer picture of which statutory levers create optimal outcomes for children at risk will emerge once research on tax credits expands.
February 25th Discussion
New Yorkers now have a chance to examine their own education tax credit bill. Legislation has passed the State Senate and may be brought to the Assembly for a vote in the next few months. We therefore have an opportunity – and a responsibility — to debate the merits and liabilities of the bill as currently construed.
The CUNY Institute for Education Policy is providing a forum for discussing the bill on February 25, 2014. Please follow this link for registration and more information: http://ciep.hunter.cuny.edu/albany-education-tax-credit/.
Ashley Berner is Deputy Director and Mai Miksic Equity Research Fellow at the CUNY Institute for Education Policy.
Alliance for School Choice. (2013). School choice now: The power of educational choice, school choice yearbook 2012–13. Retrieved from http://s3.amazonaws.com/assets.allianceforschoolchoice.com/admin_assets/uploads/167/School%20Choice%20Yearbook%202012-13.pdf
Foundation for Opportunity in Education. (2013). Education tax credit programs: An analysis of provisions by state. Retrieved from http://opportunityined.org/wp-content/uploads/2013/11/Education-Tax-Credit-Programs-An-Analysis-of-Provisions-By-State.pdf
Filgio, D., & Hart, C.M.D. (2014). Competitive effects of means-tested school vouchers. American Economic Journal: Applied Economics, 6(1), 133-156.
Filgio, D., Hart, C. M. D., & Metzger, M. (2010). Who uses a means-test scholarship, and what do they choose? Economics of Education Review, 29, 301-317.
Melendez, P. L. (2009). Do education tax credits improve equity? (Doctoral dissertation). Retrieved fromhttp://arizona.openrepository.com/arizona/bitstream/10150/194044/1/azu_etd_10499_sip1_m.pdf
Murray, V. E. (2010). An analysis of Arizona individual income tax-credit scholarship recipients’ family income, 2009-10 school year. Retrieved from http://www.hks.harvard.edu/pepg/PDF/Papers/PEPG10-18_Murray.pdf
Wilson, G. Y. (2000). Effects on funding equity of the Arizona tax credit law. Education Policy Analysis Archives, 8(38). Retrieved from http://epaa.asu.edu/ojs/article/view/429/552
Wilson, G. Y. (2002). The equity impact of Arizona’s education tax credit program: A review of the first three years (1998-2000). Retrieved from http://epsl.asu.edu/epru/documents/EPRU%202002-110/epru-0203-110.htm