Education Tax Credits Can Solve City’s Budget Problems

February 28, 2007 • Commentary

Money problems have once again hit the Philadelphia school district, which might be as much as $140 million over budget next year. This news comes after the district came up $73 million short this fall, and is only the latest example of its outrageous inefficiency and financial mismanagement.

School Reform Commissioner James Gallagher said recently that the problem could be solved by firing chief executive Paul Vallas. But changing personnel won’t solve a systemic problem. Philadelphia can save the $140 million it needs through education tax credits, which have already proven themselves as a cost‐​saving and education‐​improving reform in Pennsylvania.

These programs allow businesses to receive tax credits for donations to scholarship granting organizations, which help low‐​income children choose good private schools. And since it costs around $5,300 for the average private school to educate a child – as opposed to around $10,500 for the average public school – the credits are quite a cost‐​cutting measure.

In Pennsylvania, businesses can get a 90 percent income tax credit on every dollar they donate. That means if a business owes the state $5,000 in taxes and donates $5,000 to a scholarship organization, it only has to pay $500 in taxes. Programs in other states make that a 100 percent tax credit, so that business would owe nothing in taxes after donating.

And tax credits can also apply to individual income taxes, so that parents can get help paying for education expenses such as tuition or textbooks for their own children. You can even apply an education tax credit to property and sales taxes.

All of these education tax credit programs allow businesses and individuals to spend more of their own money on good schools that cost less. Pennsylvania’s business tax credit program is already saving the state a lot of money, even as it helps low‐​income children escape expensive and failing schools. Pennsylvania now provides tax credits to corporations for a total of up to almost $36 million in scholarship donations per year, up from $27 million in 2005.

A $27 million tax credit program amounts to about one third of one percent of Pennsylvania’s education expenditures, but because the amount spent on each scholarship is so much less than the amount spent per pupil in the public system, these credits are estimated by a Cato Institute study to save between $150 and $200 million annually.

A 2003 study by the Commonwealth Foundation, a Pennsylvania think tank, found that the state business tax credit program was already saving $136,000 a year by supporting 23 children in the Philadelphia school district. And what’s pocket change to a bureaucrat could be a life‐​line to better education for thousands of children. By covering just what a family needs to send their child to a better, less expensive school, a program that supported around 11 percent of Philadelphia students with $39 million in tax credits would save enough to cover the $140 million budget shortfall that has Commissioner Gallagher up in arms.

A big part of this savings goes to the state government, which pays for the biggest chunk of education. But if the equivalent of just 5.5% of the Philadelphia school budget — that’s $110 million out of over $2 billion — were devoted by the state to education tax credits supporting about a third of students in the city, the local district would have another $140 million to spend and no budget shortfall at all.

The City of Philadelphia could even start an education tax credit program of its own. The City could give individuals or businesses credits for donations against any of the many taxes they levy, like the net profits tax, or the real estate tax, or the school income tax, or the wage and earnings tax.

And after all, the time has come to stop the fiscal madness and put parents and communities in charge of education decisions. The District overspends year after year, and even with over $2 billion to play with, it’s clear Philadelphia is not getting its money’s worth. We should enable taxpayers to spend their own money on education and allow parents to choose the best schools for their children.

Taxpayers spend their money more wisely than boards of bureaucrats, and parents know what’s best for their children. It’s past time to give them back the power to make those decisions.

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