Tag: education tax credit

NH Court: You Can Choose a School So Long as It’s Secular

Earlier today, a New Hampshire district court upheld the “Live Free or Die” state’s nascent scholarship tax credit (STC) program, but limited the use of scholarships to non-religious private schools.

Earlier this year, the ACLU and Americans United for the Separation of Church and State filed a lawsuit claiming that New Hampshire’s school choice law was unconstitutional under the state’s Blaine Amendment, which prohibits the public funding of religious schools. The law grants tax credits to corporations in return for contributions to non-profit scholarship organizations that fund low-and-middle-income students attending the schools of their choice.

The decision hinged on whether or not tax credits constitute “public money.” Previously, the U.S. Supreme Court held that they do not, noting that when “taxpayers choose to contribute to [scholarship organizaions], they spend their own money, not money the State has collected from respondents or from other taxpayers.”

Likewise, the Arizona state supreme court upheld the constitutionality of Arizona’s STC program, forcefully rejecting the “public money” argument:

According to Black’s Law Dictionary, “public money” is “[r]evenue received from federal, state, and local governments from taxes, fees, fines, etc.” Black’s Law Dictionary 1005 (6th ed.1990). As respondents note, however, no money ever enters the state’s control as a result of this tax credit. Nothing is deposited in the state treasury or other accounts under the management or possession of governmental agencies or public officials. Thus, under any common understanding of the words, we are not here dealing with “public money.”

While neither the Arizona supreme court nor U.S. Supreme Court serve as binding precedent for how a New Hampshire court may interpret the New Hampshire state constitution, their reasoning should have carried great weight as the question before the court was the same. Nevertheless, the NH trial court rejected this traditional understanding of “public money” in favor of the plaintiff’s “all your money are belong to us” argument. In the words of the trial court judge:

This Court concludes that the program uses “public funds,” or “money raised by taxation” … Money that would otherwise be flowing to the government is diverted for the very specific purpose of providing scholarships to students.

This is precisely the understanding of “public money” that the U.S. Supreme Court rejected: 

Respondents’ contrary position assumes that income should be treated as if it were government property even if it has not come into the tax collector’s hands. Private bank accounts cannot be equated with the … State Treasury.

The U.S. Supreme Court held, in essence, that your money is your own whether or not it qualifies for a tax deduction of some kind. A taxpayer’s money only becomes “public money” once the government actually collects it in the form of taxes. The NH trial court judge, by contrast, holds that any taxpayer’s income on which the government might have a claim is instantly “public money,” even before collection, and it remains so even if the existence of a tax credit or deduction means that government will never collect it.

Unfortunately, the legal theater of the absurd doesn’t end there. Charlie Arlinghaus, President of the Josiah Bartlett Center, which advised legislators on crafting the law, noted that the trial court’s logic leads to another absurd conclusion:

This ruling is particularly odd. The entire program is fine unless a parent by their own choice chooses a religious school. By this logic a program is illegal if neutral and only legal if actively hostile to religion. 

The Institute for Justice, which intervened on behalf of the Network for Education, the state’s first scholarship organization, will be appealing the decision to the state supreme court. IJ Senior Attorney Richard D. Komer stated:

The court’s ruling inflicts again the blatant discrimination that motivated New Hampshire’s bigoted Blaine Amendment in the first place.  We will immediately seek a stay of the court’s decision so that parents receiving scholarships can choose the educational options that best suit their child’s unique educational needs, regardless of whether that is a religious or secular school.

The trial court’s order halting the program is wrong on both the facts and the law. As a factual matter, the program is funded with private, not public dollars.  As a legal matter, the federal Constitution prohibits states from preferring non-religious schools over religious schools, which is precisely what the court’s ruling does.

We can only hope that the Granite State’s supreme court will exercise better judgment.

Market Structure & Barriers to Entry in Education Tax Credit Programs

I want to thank John Kirtley for his gracious reply to my criticism of his policy guidelines. He has spilled a tremendous amount of blood, sweat, and tears on the ground fighting to establish, protect, and expand the largest private school choice program in the country, and I, quite simply, have not. I think this kind of policy debate is good for the health of the school choice movement, however, so on it goes …

Andrew Coulson posted a response to many of John’s points, but I think some areas deserve an expanded treatment. One of the primary issues in our discussion is centralization vs. diversification of scholarship organizations. I did not claim there was a “mandated” monopoly, which I take to mean government-mandated. Step Up for Students is, however, the only active scholarship organization in the state. It became the sole scholarship organization through hard work and good performance. John mentions Microsoft in his defense of market dominance, but Microsoft never fully monopolized any product or service. There is, however, a literal monopoly of the education tax credit system that was produced and is maintained by problematic provisions in the credit program that create a very high barrier to entry. The structure of the education tax credit in Florida all but ensures a monopoly in the education tax credit program.

For the first six years of the program, scholarship organizations were required to spend 100 percent of the credit funds they raised on scholarships. In other words, they had no money for overhead, which made establishing and running a scholarship organization difficult and expensive … a non-profit would need to seriously cannibalize its established charitable funding, likely already committed, and/or fundraise along two separate tracks for administrative and scholarship funding.

To put this in context, Charity Navigator, which rates non-profits, considers it acceptable for a charity to spend close to one-third of its revenue on non-program expenses. Even the 4-star rated Inner-City Scholarship Fund spends over 13 percent of its revenue on overhead expenses.

Scholarship programs, especially ones with relatively high compliance costs such as requiring detailed checks on a family’s income, require significant but entirely normal overhead spending. Furthermore, local scholarship organizations in a decentralized system act as more than a high-volume processor of financial applications. They act as community organizations that consider the needs and struggles of individual families and children, which requires spending more time and resources on each family. A 10 percent overhead allowance is eminently reasonable, indeed, within the bounds of best practices for such charities. Denying any overhead to non-profits ensured that few charitable organizations would be capable of fundraising and processing scholarships under the law.

Exacerbating this problem, scholarship organizations are not allowed to target the use of scholarship funds they raised to particular kinds of educational environments. What this means is that a non-profit would have to a) cannibalize money raised from other sources and for other purposes, and b) possibly fund educational environments that directly conflict with their conscience, mission, or best judgment. For instance, a Catholic charity would be required to fund an atheist, Wiccan, Protestant fundamentalist, Lutheran, Islamic, or any other school which met the basic requirements of the legislation. Even a non-sectarian scholarship organization is required to issue scholarships to any school, regardless of quality, as long as it meets the basic legal requirements.

In addition, the Florida tax credit applies only to corporate taxes, the vast majority of which are paid by large corporations based outside of the state of Florida. This means that fundraising is relatively difficult and time-consuming, not to mention extremely volatile, as large corporations shift revenue and expenses to minimize their tax burden year to year. It can take two years for a large corporation to begin disbursing funds after first being solicited. And fundraising requires expensive out-of-state traveling.

The corporate-only credit acts as an additional barrier to entry that grows over time and with centralization. Step Up for Students entered this constrained market efficient and well-capitalized, and spent the next decade bringing on the biggest corporate taxpayers in Florida as donors. A new entry into the credit scholarship realm would need to raise very substantial funds for fundraising for years before they saw a return in credit donations. Even should the very high quality of Step Up decline in the future, its relationships with the biggest donors, scale, and general dominance would pose a very formidable wall to climb for any non-profit. Indeed, it is far more likely that the state government would intervene long before any non-profits entered the market to impose the discipline of competition.

With extremely high start-up costs, low return for many non-profit missions, a fully established monopoly, and no profit motive or access to investment funding, the Florida education tax credit scholarship organization opportunities are all but nonexistent under current law.

School Choice Murder-Suicide in Pennsylvania

A huge school choice opportunity has been lost for the moment in Pennsylvania. But that lost opportunity is not the voucher program that has  drawn so much attention.

The political conflagration touched off by the push for a targeted, failing-schools voucher program incinerated along with it a massive expansion of an existing, popular, successful, bipartisan-supported, and better program; the Educational Improvement Tax Credit (EITC). The House passed this expansion of credit program by a massive margin. And when I say “massive,” I mean 96 percent in favor to 4 percent opposed. Unfortunately, a stand-alone credit bill was not considered in the Senate, and the expansion fell by the wayside as the voucher battle raged.

In the next session, it would be good policy and politics to consider vouchers and credits separately. They are substantively different means of fostering choice, and the public deserves a clear debate and vote on both policies in separate bills.

The Educational Improvement Tax Credit program is vastly superior to all of the voucher bills. Vouchers are open to credible legal challenges, afford no accountability directly to taxpayers, and government money brings stifling government regulations. Furthermore, giving vouchers only to kids in or around “failing schools” won’t produce a dynamic market because there is an ambiguous, limited, and potentially shifting customer base. A failing-schools voucher program is a terrible policy design.

The EITC should not be legislatively handcuffed to vouchers. Vouchers are an inferior policy and a proven political liability. For once the popular, politically smart, most principled, and most effective thing to do are all the same; drop the voucher drama and expand the education tax credit program.

Dear Journalists, Donations Are Not ‘State Money’

Oklahoma has just joined the ranks of a half-dozen other states by enacting a K-12 education tax credit program. Under the new program, individuals or businesses that donate to non-profit School Tuition Organizations receive a tax cut worth 50 percent of the donation. STOs then use the funds to help low income families afford private schooling.

Journalists for the Associated Press and countless other media outlets routinely refer to donations made under education tax credit programs as “state money.” According to the United States Supreme Court’s recent ACSTO v. Winn decision, “that is incorrect.” This is a matter of settled law. To call these private donations “state money” is to misrepresent the facts and mislead readers.

It would be bad enough if the journalists and wire services misrepresenting these programs were simply unaware that they were distorting the facts, but in at least some cases they continue to do so even after having been apprized of their error. Brandon Dutcher, vice president for policy at the Oklahoma Council of Public Affairs, wrote to the AP last week to correct their earlier erroneous coverage. He received no reply and the errors continue.

I never cease to be amazed by this kind of behavior from an industry that is clinging for its life. The purpose of journalism is to apprize customers of the facts. Demonstrating indifference to the facts cannot be good for business.

Ensuring that Indiana’s New Voucher Program Lives up to Budgetary Expectations

A new voucher program in Indiana looks likely to be signed by Gov. Daniels soon, but without a slight modification it may not have the benign budgetary impact that is expected.

As written, the program could have a significant negative impact on state finances if families claim both the vouchers and funds from the state’s existing education tax credits.

There is nothing that precludes children who receive a voucher from also topping off that amount with private funds from the existing education tax credit program. That means a voucher student could accept, for example, $4,500 in government funds and then apply for a tax credit scholarship that reduces state revenue by, say, $2,000. The voucher student would cost the state $6,500, not the $4,500 that would be counted on the books. If state funding is 100 percent sensitive to enrollment, the state would save $5,000 on that student switching, and the net impact on state finances would be a $1,500 loss. In other words, the program could have a negative net impact on state finances due to double-dipping.

From a fiscal standpoint, the state would show an apparent “savings” based on the $4,500 voucher, but this would fail to take into account the reduced revenue due to the credit. And the law requires these on-paper-only savings to be passed out to public schools districts. The result? The state government could be out $7,000 on the student in this example, not the $4,500 it paid out in a voucher. The net impact wouldn’t be neutral, it would be a $2,000 loss.

This scenario looks only at how the vouchers might impact state finances. At the local level, the program is likely to have a strongly positive impact on the resources available for each student. But a school choice program’s impact on state finances – ensuring financial transparency, certainty, and a neutral or positive impact – is a critical concern in its own right.

Critics of expanding educational freedom always claim, incorrectly, that school choice programs are a drain on public resources. But the double-dipping that is allowed under this program could inadvertently prove them right – it would also make Indiana’s existing education tax credit program a mere appendage to the new government voucher system. In short, it’s an unforced error, and worth fixing.

SCOTUS Issues a Super-Zelman Decision on Education Tax Credits

Today, the Supreme Court of the United States issued the Zelman decision for education tax credits. More than that, it’s Super-Zelman.

The findings in Zelman apply just as well to education tax credit programs, but only credit programs allow taxpayers to spend their own money on education.

As Andrew Coulson explained in detail earlier, the Court ruled that education tax credits are not government funds, and the plaintiffs therefore have no standing to bring suit in the first place. They were not harmed because none of their money was collected and then disburse by the state.

Children are rightly our primary concern, but taxpayers deserve more consideration than they often get in debates over education reform.

Education tax credit programs can expand educational choice and freedom while respecting the preferences and values of the individual taxpayers who earned that money in the first place.

Voucher programs simply cannot provide this kind of accountability to both parents and taxpayers.

VICTORY! Supreme Court Upholds Education Tax Credits

Ruling in ACSTO v. Winn today, the United States Supreme upheld Arizona’s k-12 scholarship tax credit program. Under this program, individuals receive a tax cut if they donate to a non-profit scholarship fund that gives out private school tuition aid.

Today’s decision, a reversal of an earlier ruling by the 9th Circuit, found that the respondents had no right to sue to stop the AZ program because they have not been harmed by it. And the reason they have not been harmed is central to why, for nearly 20 years, I have favored education tax credit programs over both traditional public schooling and voucher programs.

Respondents alleged that cutting a person’s taxes is equivalent to spending government money – and since taxpayers are receiving credits for donations to religious organizations, that was ostensibly equivalent to the government giving to those organizations. The Court answered, quite simply: “That is incorrect.” Elaborating, the Court ruled that:

tax credits and governmental expenditures do not both implicate individual taxpayers in sectarian activities. A dissenter whose tax dollars are “extracted and spent” knows that he has in some small measure been made to contribute to an establishment in violation of conscience…. [By contrast,] awarding some citizens a tax credit allows other citizens to retain control over their own funds in accordance with their own consciences.       [emphasis added]

That is precisely the argument I have been making for a very long time (last Friday, at a conference in Berkeley; last year in a blog post, here; a dozen years ago, in my book Market Education: The Unknown History).

With this ruling, the way forward for the school choice movement is clearer than it has ever been. Education tax credits – both the scholarship form operating in Arizona and the direct form operating in Illinois and Iowa – allow for universal access to the education marketplace without forcing any citizen to subsidize instruction that violates their convictions. No other school choice system offers that advantage and it is an advantage that is central to the values of our nation. As Thomas Jefferson wrote in the Virginia Act Establishing Religious Freedom:

To compel a man to furnish contributions of money for the propagation of opinions which he disbelieves… is sinful and tyrannical

Public schooling has long been a source of social conflict because it engenders just such compulsion. Education tax credits offer a way of securing universal public education without this blight. It is time to adopt them more widely.

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