Rejoinder to WaPo’s Primer on Private School Tax Credits

The debate over scholarship tax credit (STC) programs continues. Yesterday, Professor Kevin Welner of the University of Colorado at Boulder responded to my rebuttal of Valerie Strauss’ faulty analysis in the Washington Post’s blog. Welner, who wrote a book that was critical of STC programs, makes several points worthy of consideration. However, he ultimately fails to defend Strauss from any of my central criticisms. Contrary to Strauss’ claims, STC programs do benefit low-income families, donors do not “profit” from the tax credits, and STC programs are significantly different from vouchers. Finally, Welner is correct that the true fiscal impact of STC programs is unknown but the available evidence suggests that savings are likely.

STC Programs Do Benefit the Poor

In conceding that there is “no question that these programs … do indeed provide financial assistance to many lower-income families,” Welner flatly contradicts Strauss’ assertion that low-income families do not benefit. (Strauss correctly noted that tax-credit scholarships do not always cover full tuition, but then incorrectly concluded: “Poor families can’t make up the difference. Guess who can.”) So while Strauss did not directly admit that she was wrong, at least she was willing to let Welner do so on her behalf.

However, Welner then continues, “This [that low-income families benefit] is particularly true in states like Florida that means-test the recipients… It appears to be much less true in states like Arizona and Georgia… In those states, the programs also provide a great deal of assistance to upper-income families.”

Welner’s assertion is misleading because he neglects to provide context. Nine of the ten corporate-donor STC programs, including Arizona’s, contain means-testing provisions. The same is true for five of the seven individual-donor STC programs, the only exceptions being Arizona and Georgia. So when Welner refers to “states like Florida” he means every single STC program except for two, but when he expresses concerns about “states like Arizona and Georgia” he actually means just one of Arizona’s two STC programs and Georgia’s.

Welner notes correctly that I avoided “making many specific claims about the actual distribution of benefits” because there is little available evidence. That is why it is especially odd for him to claim that a “great deal” of upper-income families benefit in Arizona and Georgia. Though that’s technically possible in Georgia, he provides no evidence to support his claim.

Moreover, Welner did not address the evidence that I presented regarding Arizona’s non-means-tested individual STC program, which showed that more than two-thirds of scholarship recipients’ families earned less than 185% of the federal poverty line (the same threshold as both the federal free-and-reduced lunch program and Arizona’s means-tested corporate STC program). He also ignored the reports showing that the average annual family income of scholarship recipients was only $24,250 in Florida and $29,000 in Pennsylvania, far below the means-testing thresholds. If there is any reason to believe that recipients in other states should be significantly different, Welner doesn’t provide it.

STC Donors Still Do Not Benefit Financially From Credits

Here again, Welner’s argument is an implicit refutation of one of Strauss’ central assertions, namely that donors benefit simply by receiving tax credits. (She wrote: “Call it welfare for the rich. Why? Wealthy businesses and individuals are the folks who get the tax credits for putting up the cash to pay the tuition.”) Welner argues that donors can “make a profit on their donations, by taking a federal tax deduction on top of their 100% tax credit from the state.” While more nuanced than Strauss’ analysis, this claim is still flawed.

First, Welner again neglects to provide context. Of the ten corporate STC programs, only Arizona, Florida and Georgia offer 100% credits, and Georgia’s credit is capped at 75% of the donor’s total state tax liability. In the other seven states, where credits range from 50% to 90%, donors would save money by simply paying their taxes.

Second, even in the three states that offer 100% tax credits, donors merely break even. Donors could otherwise deduct the state taxes that they would have paid, so they do not “profit” in any way. Whether a donor reduces her federal tax liability by deducting the $1000 she paid in state income taxes or by making a tax-credit eligible donation of $1000 and taking the federal charitable donation deduction makes no difference with regard to the amount of federal taxes she pays. In each case, her taxable income is reduced by the same amount and she pays the same federal taxes.

Donors and Scholarship Swapping

Welner also raises a separate concern that some donors could benefit as recipients by designating a friend’s child as the recipient of their donation in return for the same. First it’s worth noting that “earmarking” is expressly forbidden in almost every state. Moreover, this practice should not be seen as problematic in states with means-testing provisions. That said, Arizona and Georgia should either means-test their STC programs or forbid earmarking, in line with the other states.

STC Programs Are Different From Vouchers

Contrary to Welner’s assertion, Strauss did in fact claim that STCs are vouchers. She wrote: “The program… allows individuals and businesses to take a dollar-for-dollar tax credit for a donation to an organization that offers school vouchers.” She also incorrectly claimed that STCs use “public money” at least five times. As I explained, vouchers and tax credits “differ greatly in terms of funding and administration.” Welner objects that they do not really “differ greatly”. Readers can decide.

Vouchers entail government appropriations of public funds. By contrast, as the U.S. Supreme Court has held, STC programs do not involve “public funds”. Welner wonders what I mean when I state that “every state supreme court to address the matter” has agreed. In addition to the Arizona decision that Welner cites, there were also two appellate decisions in Illinois that ruled that tax credits are not “appropriations” or “public funds”. (Illinois’ tax credits are for personal educational expenses.) The Illinois state supreme court, in declining to hear further challenges, affirmed the appellate courts’ rulings. Likewise, a trial court in Montana ruled that tax credits are not government appropriations. The Montana Supreme Court affirmed the lower court’s decision though on other grounds, neither rejecting nor directly affirming the trial court’s finding on that question. In most states, school choice opponents have not even bothered to challenge STC programs on these grounds.

The differences in administration are significant as well. In a voucher program, the state government collects applications and disburses funding. Allocations are made uniformly or by a set formula. By contrast, under a STC program, numerous private entities make these decisions and, within state guidelines, they can set differing rules for eligibility and tailor funding based on the distinct needs of families. For example, some scholarship organizations prioritize special-needs children, some consider academic merit, and others are concerned only with financial need.

Welner is correct that the “purposes and end result” of vouchers and STC programs are “largely the same,” but programs with similar ends can have very different means. Welner’s example of mortgage subsidies versus mortgage interest deductions is inapposite because there is no third party involved. A more apt comparison would be food stamps versus tax deductions for donations to food pantries. I assume Welner would not object to my claim these programs greatly differ in terms of funding and administration, even though the purposes of each are largely the same.

Fiscal Impact of STC Programs

Welner objects to my statement that “well-designed STC programs such as those in Arizona, Florida, and Pennsylvania actually save states money by decreasing state expenditures more than they decrease state tax revenue.” I based my assessment on academic and government studies of each state’s STC program.

An independent study of the fiscal impact of Arizona’s STC program in 2009 determined that it saves the state between $99.8 million and $241.5. In 2010, the Florida legislature’s nonpartisan Office of Program Policy Analysis and Government Accountability (OPPAGA) estimated that Sunshine State taxpayers saved $1.44 for every dollar of revenue reduced by the tax credits. In the same year, the Commonwealth Foundation reported that Pennsylvania saves $512 million a year as a result of its STC program, while reducing state tax revenues by about $40 million.

Welner takes issue with one of these, arguing that Florida’s OPPAGA study is based on questionable assumptions regarding the number of students who were induced to leave the public school system because of the STC program. Welner correctly notes that it is not possible to truly ascertain the number of switchers. It’s also worth noting that the average scholarship sizes in Arizona, Florida and Pennsylvania are $1,861, $3,664, and $990 respectively. By contrast, the most recently published per pupil expenditures in each state are $9,139, $9,975, and $14,167 respectively. Moreover, these figures do not account for the fact that low-income students and students with special needs are more expensive for the state to educate, so the savings are even greater when they switch.

Even Welner concedes that it is likely that Florida’s STC program does save money, though he is skeptical that Arizona’s does. It’s not clear why he thinks that, considering that the scholarships are 37% of public school spending per child in Florida compared to only 20% in Arizona. In states where the tax credits are worth 50% or 65% of donations, the likelihood of savings is even greater.