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No. 414

September 17, 2001

The Arizona Scholarship Tax Credit

Giving Parents Choices, Saving Taxpayers Money

by Carrie Lips and Jennifer Jacoby

Executive Summary

We also estimated the impact of the credit on

In 1997 policymakers in Arizona created a

Arizona's budget. Although the state forgoes rev-

$500 tax credit for contributions to organizations

enue as people exercise the credit, taxpayers save

that give students scholarships to attend private

money when students who would have been edu-

elementary and secondary schools. At that time

cated at public expense use the scholarships to

there was, and there still is, much debate and

transfer to nonpublic schools. Therefore,

uncertainty about the program's likely effect on

although Arizona lost $13.7 million in 1999, we

students, taxpayers, and the education system.

find that, once savings are taken into account,

This analysis informs that debate by considering

the credit was revenue neutral. Using moderate

Arizona's experience with the tax credit and

assumptions about the growth of taxpayer par-

assessing its likely impact in the future.

ticipation, we estimate that by 2015 the scholar-

To assess the credit's impact, we surveyed

ship credit will be raising $58 million per year,

Arizona's private schools, surveyed and inter-

funding 35,000 to 61,000 scholarships annually,

viewed representatives of Arizona's scholarship

and helping send 11,000 to 37,000 students who

organizations, and supplemented original data

would otherwise have to attend public school to

collection with information provided by the

schools of their choice. The cost of the credit is

Arizona Departments of Revenue and Education.

likely to be significantly less than the savings

Research shows that from 1998 through 2000 the

that result from student transfers. The data sug-

tax credit generated more than $32 million, which

gest that the scholarship tax credit will be a net

funded almost 19,000 scholarships through more

winner for Arizona taxpayers; it will extend

than 30 scholarship organizations. More than 80

school choice to thousands of families and save

percent of scholarship recipients were selected on

taxpayers millions of dollars.

the basis of financial need.

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Carrie Lips, a former policy analyst at the Cato Institute, holds a master's degree in public policy from the John F.

Kennedy School of Government at Harvard University. Jennifer Jacoby also has a master's degree in public policy

from the Kennedy School.