A Taxing Argument over School Choice

Today’s Tucson Citizen column by Robert Robb echoes a point I made a couple of weeks ago:  it is difficult to argue with the AZ appellate court decision striking down that state’s voucher programs for disabled and foster children.

But Robb goes astray when he asserts that:  

Vouchers are much preferable to tax credits. Good tax policy involves low rates on broad bases. Tax credits erode the tax base and depreciate in value as tax rates are lowered. So, reliance on tax credits puts good education policy at odds with good tax policy.

First, it is a mistake to compare two policies solely in terms of their impact on tax policy. There are important substantive advantages of credits over vouchers that outweigh tax policy considerations.

Second, the tax policy case does not actually favor vouchers as it might at first seem. Robb’s argument implicitly compares education tax credit programs with the absence of any government education policies at all, but we must compare credits to the voucher and government schooling alternatives.

Robb advocates low tax rates, but vouchers require much more money to be raised in taxes than do tax credit programs. Tax credits are targeted tax cuts, leaving more money in private hands. Thus, credits win on the “low rates” measure.

Next, the two main reasons for supporting a “broad base” for taxation are:

1) To minimize the extent to which there are favored classes among taxpayers who do not carry their share of the tax burden, and who thus breed resentment among those who must carry a greater burden [undermining public support for the system, and hence the voluntary compliance on which it relies], and

2) To minimize the government’s distortion of taxpayer behavior in the marketplace that can be expected when the state favors some activities and disfavors others.

On both of these scores, tax credits are superior to both vouchers and conventional government schooling.

First, under all three systems – tax credits, vouchers and public schooling – there is a favored class: parents with school-aged children. That class benefits at the expense of all other taxpayers. Nevertheless, tax credits offer the taxpayer a level of discretion and accountability that does not exist under vouchers and government schooling. Under credits, taxpayers choose either the individual recipient of their money or the non-profit scholarship organization that will disburse their money. If a particular scholarship organization ceases to meet their expectations, they can shift their donations to another. This flexibility can reduce the resentment that arises when taxpayers are compelled to pay for types of schooling they find fundamentally objectionable (which can happen under both vouchers and government schooling).  This taxpayer choice also exerts market pressure on scholarship organizations to behave wisely and efficiently in order to keep attracting donations. Voucher programs and government schooling undergo no comparable pressure.

Second, both vouchers and government schooling distort taxpayer behavior more than do tax credits. In fact, under those systems, taxpayer behavior is reduced to one of two options: paying one’s education taxes, or going to jail. Tax credits at least offer the taxpayer some level of choice: the option of choosing the specific child or specific scholarship granting organization who will receive his money. Since tax credit programs, to date, impose fewer restrictions on schools than either vouchers or government schooling, they also exert a less distorting effect on the choices of education consumers.

Credits are thus better not only on their intrinsic merits as a means of ensuring universal access to a free and dynamic education marketplace, they are also better from a tax policy standpoint.