<<  <  >  >>

From 1998 to

schools have fewer pupils to educate and can

Introduction

reduce spending accordingly. We examine

2000 Arizona's

trends in credit use to determine the overall

tax credit generat-

Arizona's scholarship tax credit enables

impact of the tax credit on Arizona's current

ed roughly $32

taxpayers to receive a dollar-for-dollar tax

and future budget.

credit for contributions made to nonprofit

To assess the effects of the tax credit, we sur-

million in dona-

scholarship organizations that give students

veyed all organizations that the Arizona

tions that funded

scholarships to attend nonpublic elementary

Department of Revenue identified as school

and secondary schools. When the tax credit

tuition organizations. We also called the orga-

19,000 scholar-

nizations to gather supplemental data.4 The

became law in 1997, there was much uncer-

ships for students

tainty about the probable impact of the pro-

Center for Market-Based Education, which was

overwhelmingly

gram on students, taxpayers, and the educa-

collecting similar information at the time,

shared data on the scholarship organizations.5

tion system. This paper informs that debate

identified as com-

by considering Arizona's experience with the

We created a survey for private schools in

ing from low-

tax credit and assessing its likely impact in

Arizona in order to gain a better understanding

of the private school marketplace.6 In addition

the future.

income families.

For example, there is widespread disagree-

to data provided by the surveys, we examined

ment about whom the tax credit benefits and

data collected by the Arizona Department of

the potential impact of the program on

Revenue, the Arizona Department of Education,

Arizona's schools. Opponents of the tax cred-

and the U.S. Department of Education.

it believe that the program will subsidize pri-

We find that from 1998 to 2000 Arizona's

vate schools and undermine the public

tax credit generated roughly $32 million in

school system. Ginny Chin, a school board

donations to more than 30 scholarship orga-

member in Arizona, stated her opposition to

nizations. That money funded 19,000 schol-

the tax credit: "Philosophically, I'm so

arships for students overwhelmingly identi-

fied as coming from low-income families.7

opposed to taking money away from public

schools and using it to supplement religious

Furthermore, the data suggest that roughly

and private schools."1 Supporters of the cred-

20 percent of the scholarships were given to

students who would otherwise have had to

it argue that most of the scholarships will

attend public school. Although the state for-

assist children in lower-income families and

goes revenue as people exercise the credit, tax-

that all schools will improve as they compete

to attract students.2 For example, Jeff Flake,

payers save money when students who would

have been educated at public expense transfer

who was the executive director of the

to nonpublic schools. Therefore, although

Goldwater Institute in Arizona and is now an

Arizona lost $13.7 million in 1999, we find

Arizona Republican representative to

that, once savings are taken into account, the

Congress, argued in 1997 that competition

credit was revenue neutral.8

would benefit students: "The tuition tax

credit, if it is allowed to go forward, will take

As awareness of the tax credit grows, we

us one step closer toward this educational

expect the amount of money available for

3

marketplace."

scholarships to increase considerably.

Using moderate assumptions about the

The credit's potential impact on taxpayers

growth of taxpayer participation, we

is also a source of debate. Many people worry

expect that an increasing number of stu-

that, as awareness of the tax credit grows, the

dents who would have attended public

state will lose significant revenue as taxpayers

schools will use scholarships to transfer

exercise the credit. Others counter that tax-

to private schools. As a result, while the

payers stand to save money over time.

amount of potential revenue lost as a

Although the credit initially "costs" the state,

result of the tax credit will increase, so too

as the scholarships enable students to trans-

will the number of students able to trans-

fer from public to private schools, the public

2