Do Education Tax Credits Save Money?

October 20, 2009 • Commentary
This article appeared on cato​.org on October 20, 2009.

The Arizona Republic recently offered a rough fiscal impact analysis of the state’s k‐​12 education tax credit programs. While the story was clearly a good faith effort, there are problems with its data and assumptions, as well as its headline.

The reported analysis finds a savings of up to $3 million for AZ taxpayers due to the education tax credits. Nevertheless, the headline tacked above the story screams “Tuition tax credits drain state money.” While that’s not factually incorrect, it is utterly misleading. As the story explains, the reduction in state revenues is more than offset by savings at the local level, so the headline misrepresents the story’s key finding. (After all, what do you care about most as a taxpayer – the total amount of your money that you get to keep, or the distribution of the taxes you owe to state and local governments?)

Furthermore, the public school spending numbers provided to the Republic by Arizona Director of School Finance Yousef Awwad are lower than the numbers in the state’s official 2007-08 financial report. The real numbers are $4,867 (state) and $3,675 (local), computed from data on pages 6 and 8 of that report.

Based on a conversation with reporter Ron Hansen, it seems that Awwad’s lower numbers may be due to the unjustifiable exclusion of capital spending. An apples‐​to‐​apples comparison must look at total cost to taxpayers for both the scholarship program and the public schools, and that means including all public school costs, including capital costs. As soon as public schools stop holding their classes inside taxpayer‐​funded buildings, they can stop counting the money taxpayers spend constructing those buildings. Not before.

Correcting this error nearly triples the savings estimate of the Republic’s analysis, raising it from $3 million to $8.3 million.

Next, the story assumes that the increase in private school enrollment since tax credits were passed is an upper limit on their effects. That would only hold true if private school enrollment would have remained constant or risen even without these programs. But that’s not what the data suggest. Private school enrollment was rising rapidly until the state’s strong charter school law was passed in 1994. At that point, and especially after the first charter schools were created in 1995, private sector enrollment growth slowed, stopped, and then actually declined between 1997–98 and 1999–2000. It is well known that rapidly‐​growing charter school sectors cannibalize private enrollment, and this appears to have happened in Arizona.

Though the first education tax credit program was passed in 1997, it was tied up in the courts until 1999, when it was finally upheld by the state Supreme Court in Kotterman v. Killian. Then, between 2000 and 2002, private enrollment reversed course and began to climb again. It seems likely that the charter school sector (now nearly twice the size of the private sector) would have further eroded private school enrollment without the tax credit program. So the actual amount of migration from public to private schools fostered by tax credits could very well be larger than the Republic’s estimate; if so, the savings would be correspondingly larger.

Finally, the Republic’s analysis makes no effort to project the savings from the continued growth of the tax credit program. At present, nearly two‐​thirds of Arizona private school students are already benefiting from credits, which means that future growth is increasingly apt to come from public school students migrating to the scholarship programs, and that’s where the savings are.

The total cost of Arizona public schools in 2007-08 was about $9,500 per pupil, $8,551 of which came from state and local taxes. The average cost of a private school scholarship, including overhead, was $1,923. If just 5 percent of the state’s public school students were to migrate to the scholarship program, it would save Arizona taxpayers about $331 million. In fact, even if the average scholarship had to double in order to generate such a migration, state taxpayers would still save around $238 million. If 40 percent of Arizona public school students were to migrate to the private sector, it would save the state billions of dollars every year – even if the scholarship amount had to triple to achieve that level of migration.

Anyone concerned with the welfare of state taxpayers and the desire of parents for more educational options should support Arizona’s education tax credit programs. Raising the tax credit donation caps will do a great deal of good for the state’s financial and educational bottom lines.

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