Education Tax Credits to the Rescue

April 12, 2007 • Commentary
This article appeared in the National Review Online on April 12, 2007.

Spiraling violence in the Philadelphia school district may be making most of the headlines, but the district faces another, less well‐​known crisis: a runaway budget that threatens to sink an already floundering school system.

The School Reform Commission recently adopted a “lump sum” budget statement last week projecting that the Philadelphia school district will be $82.5 million over budget next year. And as the Inquirer reports, Public Financial Management of Philadelphia, a financial consulting firm specializing in government clients, produced an independent assessment projecting “a shortfall of nearly $1 billion in five years.” This was after the district came up $73 million short in fall 2006 and now projects it will end the fiscal year with a $37 million deficit.

Paul Vallas, the Chief Executive Officer for the School District of Philadelphia, suggested recently that the problem could be solved by borrowing money and increasing the district’s share of property‐​tax millage. But going back to taxpayers’ wallets won’t solve a systemic problem. Philadelphia can save the millions it needs through education tax credits, which are already saving costs and improving education 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 cut costs a lot.

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 offer 100 percent tax credits, so that business would owe nothing in taxes after donating.

Tax credits can also apply to individual income taxes. This helps parents pay for education expenses like tuition and textbooks for their own children.

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. That’s pocket change to a bureaucrat, but it could be a lifeline to better education for thousands of students. By covering just what parents need to send their child to a better, less expensive school, a program that supported just over 8 percent of Philadelphia students with about $24 million in tax credits would save enough to cover the $82.5 million budget shortfall the School Reform Commission predicts.

Much of this savings goes to the state government, which pays for the biggest chunk of education. But if the state devoted the equivalent of only 3.2% of the Philadelphia school budget — that’s $65 million out of over $2 billion — to education tax credits supporting about 20 percent of students in the city, the local district would save $82.5 million, eliminating its budget shortfall altogether.

The City of Philadelphia could even start an education tax credit program of its own, giving individuals or businesses credits for donations against any of the many taxes it levies, like the net profits tax, the real estate tax, 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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