Our kids finish their school year in two weeks. And after a year of instruction that was either remote, in-person, or a mix of both, they look forward to summer vacation and then to September, when public school will feel more “normal.” 

But they may have fewer classmates. Here in Michigan, public school enrollment has fallen by 53,000, or 3.5 percent, since the fall of 2019. About 14,000 left to be homeschooled and thousands switched to private school. Should states use tax credits to accelerate this shift?

In 2019, about 10 percent of the nation’s 56.6 million elementary and secondary school students were enrolled in 35,000 private schools. During the pandemic, many private schools with more space, fewer students, and teachers willing to teach in person, provided in-person full-time education when public schools could not. 

However, the national average annual tuition in private elementary and high school is about $11,200. No surprise: Family income is a pretty strong predictor of private-school enrollment. 

Should tax policy help? “School choice” might make you think of state governments directing tax dollars to support private schools. But there’s a specific tax policy that may be neither the most direct nor broadest path to supporting families who want school choice: Tax credits for businesses that support private schools. 

So far, 18 states have established these credits, so called "tax-credit scholarship programs.” Businesses or individuals get a credit of up to 100 percent for donating to nonprofit organizations that provide scholarships to private school students. 

While the US Treasury barred individuals in 2019 from also claiming a federal income tax charitable deduction for making the gift, businesses can still claim a charitable deduction. A 2020 US Supreme Court decision allows religious schools to benefit from these scholarship programs.

Other states are intrigued. Missouri lawmakers passed a $50 million Empowerment Scholarship Accounts Program to offer donors a 50 percent tax credit for gifts to educational assistance organizations, including those providing scholarships to private schools. Kansas just expanded student eligibility for its $10 million version. Efforts to establish tax credit programs in Illinois and Nebraska are stalled, but retain support. 

Are tax credit scholarship programs the best way to support choice in K-12 education? Are they giving parents more control over their child’s education, reaching students who need the help, and improving students’ educational outcomes? Or are they simply a nice tax break for business and a way to cater to public school critics?

Consider Florida, home to about 2.7 million K-12 students and the 20-year-old Florida Tax Credit Scholarship Program. In the 2020-2021 fiscal year the program allowed a maximum of $873 million in tax credits to donors. The dollar-for-dollar tax credit for businesses applies to state income tax, but also can be used to lower Florida’s insurance premium tax, severance taxes on oil and gas production, and alcoholic beverage taxes on beer, wine, and spirits. 

Florida’s scholarships are designed for students whose household income level does not exceed 185 percent of the federal poverty level, or $49,025 for a family of four. In the 2019-2020 school year, about 111,000 students, less than 5 percent of K-12 enrollment, received $671 million in scholarships averaging from $6,775 to $7,250.

The Urban Institute found that Florida’s tax credit scholarship program enrolls largely low-income students from low-income schools and has a positive effect on college enrollment, mainly in community colleges, but with no consistent effect on college degree attainment. It could not, however, shed light on what makes the program work or which students benefit most.

Oklahoma, with 703,650 students in its K-12 public schools, recently expanded its tax credit scholarship program by a factor of ten, from $5 million to $50 million. Half is reserved for donors to private school scholarship funds, and half is for donors to grant-making organizations that support public schools. Before the expansion, most credits went to donors to private school scholarship organizations. Credits are allowed for up to 50 percent of a single year donation or 75 percent of a two-year donation. 

Unlike Florida, Oklahoma’s tax credit scholarships are available to higher-income households. Students in a family of four with up to $147,075 in household income can receive a scholarship to a private school. Before the state expanded the program in 2020, about 1,000 students received $3 million in scholarships to private schools. Perhaps now as many as 8,000 students will receive up to $6,900 in annual scholarships. Oklahoma’s now-expanded program has not been evaluated. 

I understand the appeal of tax credit scholarship programs. A corporation might appreciate the chance to support students in its community. And who wouldn’t like to pay fewer taxes? It’s admirable to give students who wouldn’t otherwise be able to attend a private school the money to do so. 

But one could also argue that states could improve the outcomes of more students if they used the tax credit money to increase funding for public education. As the credit programs are designed now, they help a few students who choose private school and reduce tax revenues that benefit students who attend public school. Why pit students against each other?

And why should state governments provide a significant subsidy to the businesses that choose to make contributions to private schools? Have policymakers looked for a better way to use the money, a way that directs more resources to more families in search of quality elementary, middle or high school instruction?

Finding it will require more evaluation. And maybe more education.

 

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.