Taking (Tax) Credit for Education

One of the most promising recent developments in education policy has been the widespread interest in education savings accounts (ESAs). Five states have already enacted ESA laws, and several states are considering ESA legislation this year. Whereas traditional school vouchers empower families to choose among numerous private schools, ESAs give parents the flexibility to customize their child’s education using a variety of educational expenditures, including private school tuition, tutoring, textbooks, online courses, educational therapies, and more.

Today the Cato Institute released a new report, "Taking Credit for Education: How to Fund Education Savings Accounts through Tax Credits." The report, which I coauthored with Jonathan Butcher of the Goldwater Institute and Clint Bolick (then of Goldwater, now an Arizona Supreme Court justice), draws from the experiences of educational choice policies in three states and offers suggestions to policymakers for how to design a tax-credit-funded ESA. Tax-credit ESAs combine the best aspects of existing ESA policies with the best aspects of scholarship tax credit (STC) policies. Like other ESA policies, tax-credit ESAs empower families to customize their child's education. And like STC policies, tax-credit ESAs rely on voluntary, private contributions for funding, making them more resistant to legal challenges and expanding liberty for donors.

Here's how it would work: individuals and corporations would receive tax credits in return for donations to nonprofit scholarship organizations that would set up, fund, and oversee the education savings accounts. There's already precedent for this sort of arrangement. In Florida, the very same nonprofit organizations that grant scholarships under the state's STC law also administer the state's publicly funded ESA. Moreover, New Hampshire's STC law allows scholarship organizations to help homeschoolers cover a variety of educational expenses, similar to ESA policies in other states. 

For more details on how to design tax-credit ESAs, how they would work, and the constitutional issues involved, you can read the full report here. You can also find a summary of the report at Education Next.