Federal Opinion

Federal Tax Credits Poised to Make a Big Education Impact

By Charles Taylor Kerchner — May 10, 2017 7 min read
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(Revised and corrected to eliminate editing errors.)

Federal tax credits may not be public education’s death star, but a large asteroid is headed our way and not enough people are gauging its impact.

Many scoffed when candidate Donald Trump pledged to put $20-billion into school vouchers. A tight fisted GOP would never support massive expansion of the hated domestic discretionary funding, it was said. But scholarships funded by federal tax credits don’t appear in the federal budget even though they are a drain on tax receipts.

Here’s how a federal tax credit scholarship program would likely work: A taxpaying individual or corporation could donate to any recognized “scholarship organization” authorized to support student tuition at a private school. Students would apply, and the scholarship organization would then write a check to the school for the student’s tuition.

Divert Public Money

Like direct government voucher payments to families, tax credits divert money from public schools in support of private schools. But vouchers come from the public budget. They are visible and therefore contestable and debatable. Tax credits divert money from public treasuries before the funds even get there. They are different politically and legally. [A briefing from the National Conference of State Legislatures on the differences between various privatization vehicles.]

Tuition tax credit programs operate in 17 states. Florida and Arizona have the largest programs followed by Indiana, Louisiana, and Georgia. [A state-by-state guide.]

Although some versions of a federal tax credit would simply top off existing state programs, the more common idea is for a 50-state solution. Thomas Carroll, president of the New York based Invest in Education Coalition writes:

“it’s the only way President Trump can effectively bring school choice to families in the blue states that voted for him in 2016 and others that might in the future.”

“A good federal tax credit...impacts everyone and doesn’t require state approval, shielding it from teachers unions and state and local pols who would otherwise try to muck it up. And it skirts Blaine Amendments in state constitutions that have no power over federal policies.”

A Prototype for Federal Law

The only prototype for a federal tax credit program is the Educational Opportunities Act bill introduced by Sen. Marco Rubio (R-Florida) and Rep. Todd Rokita (R-Indiana) in 2015. That bill would have created a federal tax credit of up to $4,500 for individuals and $100,000 for corporations to gifts to Scholarship Granting Organizations (SGO). That bill would have allowed scholarships for students from families with incomes of less than 250% of the federal poverty level, currently $61,500.

It’s not certain the Rubio-Rokita bill will serve as the blueprint for a new tax credit measure. The American Federation for Children, formerly led by U.S. Secretary of Education Betsy DeVos, strongly supported the measure, but as Education Week‘s Andrew Ujifusa reported, other egos may intervene.

Opposition already exists from both the left and the right. Critics on the right are concerned that a federal tax credit would increase scrutiny of private schools, including unwanted attention to existing state programs. For public school advocates, tax credits are just back door vouchers. Charter school advocates are afraid that they will be caught in the middle. In a letter to legislators last December, the California Charter School Association said that, “we believe that vouchers would be at odds with the needs of California’s public school system.”

The Easy Path Through Congress

Regardless of opposition, federal tax credits are likely to take a path through Congress that will be difficult to stop. They will be bundled with other legislation rather than face congressional scrutiny on its own. Most likely, the proposal will be attached to either a tax reform package or a budget reconciliation measure. Education tax credits would be a relatively insignificant part of a tax reform package and thus less likely to face heavyweight opposition. Budget reconciliation measures require only a majority vote in the Senate, and thus Democrats could not filibuster the measure.

Let’s assume that outright opposition won’t destroy the tax credit asteroid. States, including California, can change the impact in at least three ways.

Given DeVos’ repeated states-rights pronouncements, it also seems likely that individual states will have substantial ability to shape how tax credits scholarships are distributed in their jurisdictions to support their vision of public education.

Protect against Abuse

Each state will have to protect itself, and its children, against waste, fraud and abuse that are already apparent in state tax credit programs.

Some existing state programs are little more than tax avoidance schemes for the wealthy. Because state tax credits also generate federal deductions, it’s possible to make money by buying tax credit scholarships. This table from the Institute on Taxation and Economic Policy illustrates how it’s possible to receive up to a 33% profit on a scholarship “donation.”

The Georgia Pay-It-Forward scholarship includes this language in its announcement for its 2018 funding solicitation: “When you donate, you will receive both a Georgia state tax credit AND a federal charitable deduction. You will end with more money than when you started, and you will be helping students receive a good education.” Little wonder that this year’s fund was fully subscribed in just one day.

Other state programs have become notorious for self-dealing. Arizona diverts $100-million a year from the state treasury to private schools. According to this New York Times story, State Senate president Steve Yarbourgh is also the $125,000 a year executive director of the Arizona Christian School Tuition Organization. He and his wife also run a data processing firm that collected $636,000 in 2014 for back office supports for scholarships, and their company rents space to the scholarship organization.

The invitation for self-dealing is built into many voucher programs. The Rubio-Rokita bill, like many state tax credit measures, allows scholarship organizations to charge 10% for processing. However, state programs vary widely. Arizona has more than 50 SGOs, Florida has 2, and in Pennsylvania, private schools can accept tax credit for scholarships directly.

Which Private Schools?

What authority would states have to determine which private schools get scholarships? Some states vet schools closely, while others are relatively unregulated.

California already has a scholarship agency for higher education: the California Student Aid Commission (CSAC), whose 100 employees distribute $2-billion in Cal Grants to students attending both public and private higher education institutions. CSAC also determines which non-profit and proprietary private organizations are eligible in a process that the Trump Administration would respect as extreme vetting.

Among private institutions, those that participate must be eligible for at least 3 federal programs and have a loan default rate of 15.5% or less and a graduation rate of 30% or greater. These must provide CASC with an institutional participation agreement, including financial statements and student aid policies, student completion rates, financial audits and accreditation status.

Only Privates?

What role would the state have in determining what kinds of organizations could apply for tax credit scholarships?

The Rubio-Rokita bill would have funded only private schools and specifically excluded public schools that were fulfilling the state’s constitutional requirement of providing a free public education. But in practice, many states have forms of public-private partnerships, dual enrollment practices, non-profit public school foundations. Many non-profits provide extended services for students, including after school care, tutoring, experiential learning programs, and enrichment.

The ability of a state to tailor services to all its students would be crucial if a tax credit scholarship program would be of benefit to all its students.

DeVos Likes Florida

Betsy DeVos is on record as seeing Florida as a national model. “Florida is a good and growing example of what can happen when you have a robust array of choices,” she told a radio audience. At least some Floridians disagree. Even “reformers” are regretting what they did in Florida, writes Orlando Sentinel reporter Scott Maxwell. Public schools got overtested while privates got government money and virtually no oversight.

DeVos’ ideological filter blinds her to the effects of the tax credit scholarship asteroid on public schools or their potential for abuse in private schools.

States can’t afford to be so blind. They need to divert the asteroid if they can. If they can’t and the asteroid is headed our way, states need to use its energy to fuel all its schools.

The opinions expressed in On California are strictly those of the author(s) and do not reflect the opinions or endorsement of Editorial Projects in Education, or any of its publications.