April 22, 2011 2:54PM

“Tax Credits Only or Die”?

Responding to a post yesterday by Cato’s Adam Schaeffer, Matt Ladner characterizes our education policy recommendations as: “Tax credits only or die!!!!!!!!

But our recommendations are not of the form:  You must do “x.” They are of the form:  If you do “x,” “y” will happen.

Our goal is to identify the policies that produce the educational results people say they want: universal access to a good education, better academic outcomes, higher efficiency, greater responsiveness to the individual needs of each child and family, more harmonious relations among different ethnic/religious/ideological groups, less socially corrosive compulsion to consume or support types of instruction that violate their convictions.

So we do comparative policy research to find out what works and what doesn’t in pursuit of these ends and disseminate our findings. Adam’s post was a response to a commentary touting a type of government-funded school voucher program as “the future of school choice” in America. He pointed out that the evidence actually favors tax credits as the most effective means of achieving the goals of school choice supporters, and identified some shortcomings of vouchers in achieving those goals. In the process, he linked to some of our research on these issues so readers can judge for themselves.

We think this is the right mission and methodology for a public policy organization.

As for the specific points Matt raises, I have no opinion of the legal viability of Education “Savings” Account vouchers in Arizona, not having studied that particular issue. I think they are legally doomed in Florida, where I have studied the question, and that their inevitable defeat in the courts there could have negative repercussions for other school choice programs in that state.

For the rest, I agree with Adam: in the three fundamental areas in which voucher and tax credit programs differ (proclivity to regulate, socially corrosive compulsion, and reliance on third-party payment), ESA vouchers are equivalent to traditional vouchers and therefore inferior to tax credits.

Direct personal-use education tax credits avoid third-party payment entirely, and while Matt is right that scholarship donation tax credits are a third-party payment mechanism (like vouchers), they differ substantially in practice. Under existing k-12 scholarship donation tax credit programs, parents are typically expected to directly pay at least a fraction of their children’s tuition themselves, with the scholarship making up the difference. When they cannot afford even a modest co-payment (which is rare) they are often asked to volunteer some of their time to the school. As the “third-party payment” link above notes (scroll down to “System-wide…”), school efficiency has been empirically tied in the academic literature to the share of funding that comes from parents in the form of fees.

ESA’s, by contrast, are inherently designed to cover the entire cost of schooling out of the government disbursements, indeed to allow some surplus government funding to be retained by parents, completely eliminating their direct personal financial responsibility. For this reason, the term “Education Savings Account” is a misnomer. The policy is in fact a government voucher surplus account. Milton Friedman warned that people are far less careful with other people’s money than they are with their own, but he was hardly the first. The observation actually dates back at least two thousand years.

Finally, it is inconsistent for Matt to cite Florida’s special needs student voucher program as being larger and more far reaching than a tax credit program could be when Florida also has a scholarship tax credit program that serves … 50 percent more students than the special needs vouchers. Moreover, the tax credit program had been legislatively capped at a fixed level prior to last year, while the special needs voucher had not. The credit is now expected to grow by 25% annually in the coming few years at least, now that an automatic cap-lifting provision has been passed.

There is no inherent reason why credits would grow less than vouchers over time and serve fewer students—in the past, all school choice programs for a general student population had been legislatively capped. And it is the credit programs that had, to date, seen the most rapid growth.

The real question is: in the absence of caps, which program is more likely to fulfill the public’s goals, and the answer to that question can be found in the links above.