Scholarship Tax Credits

Scholarship tax credits encourage private donations to expand educational opportunities for low- and middle-income families. STCs grant tax credits to individual and/or corporate taxpayers who contribute to nonprofit scholarship organizations. Those nonprofits use the money to provide financial assistance to parents so that they can choose the education that works best for their children.
 

Ideally, any individual or corporate taxpayer who donates to a scholarship organization should be able to claim a dollar-for-dollar credit. Since STCs are intended to serve families who do not sufficiently benefit from personal-use education tax credits (ETCs), scholarship should be restricted to families below a certain income threshold. The income eligibility cut-off should be high enough to allow middle-income families to participate since the personal-use ETCs may not sufficiently cover the cost of a child’s education. Within that framework, scholarship organizations should have the flexibility to tailor the size of scholarships to the particular needs of particular families. They should also have the freedom to set their own funding priorities and scholarship eligibility standards — just as other charitable organizations do.

Scholarship recipients should be able to use the funds for a wide range of education-related expenses, including tuition, tutoring, textbooks, educational materials, homeschooling curricula, online courses, and more. As with personal-use ETCs, flexibility in spending is crucial to the effective operation of the market. Granting parents broad discretion in their educational spending will foster innovation in educational services as entrepreneurs seek new ways of providing value to families. By contrast, limiting the credits to private school tuition or textbooks would enshrine the existing system of education. Likewise, policymakers should not impose additional regulations on private schools accepting scholarship students, thereby limiting the very diversity and innovation that give educational choice its value.

As of July 2015, 16 states have enacted 20 STC programs. The oldest of these is Arizona’s individual-donor tax credit, enacted in 1997. Montana and Nevada were the two most recent states to enact a scholarship tax credit. The programs vary in size and design from state to state. The two major factors that distinguish STC programs are the sources of donations (donor type) and the eligibility criteria for scholarship recipients:

• Donor Type: The criteria that a taxpayer must meet to be eligible to receive a tax credit in return for a donation to a scholarship organization. Some states limit the credits to individual taxpayers while others limit credits to corporate donations. Eight states allow both individuals and corporations to receive tax credits for donating to scholarship organizations.
• Scholarship Recipient Eligibility: The criteria that a student must meet to be eligible to receive a scholarship. Most states limit scholarships only to low-income students while others restrict eligibility to special needs students and/or students assigned to low-performing district schools.

Source: Friedman Foundation for Educational Choice, Alliance for School Choice Yearbook.

Studies of the financial impact of STC programs in three states found that they saved money by decreasing government expenditures more than they decreased tax revenue. The Florida legislature’s nonpartisan Office of Program Policy Analysis and Government Accountability found that their state’s STC program saved $1.44 in state expenses for everyone $1 of forgone state tax revenue. The Commonwealth Foundation reported that Pennsylvania saved $512 million a year and an independent study of Arizona’s STC program estimated savings of between $99.8 million and $241.5 million.

To ensure that the tax credits are fiscally neutral or save money at the state level, policymakers limit the size and growth of the scholarship tax credits in various ways, including

• Credit Value: The percentage of donations eligible for tax credits. These range from 50 percent to 100 percent in existing programs. Higher percentages encourage more giving, thereby increasing the amount of funds available to expand educational choice for families.
• Total Credit Cap: The total amount of tax credits available for eligible donors to claim in a given year. Ideally, states would not limit participation in STC programs through such caps, but policymakers sometimes view the cap as a fiscal (or political) necessity. Some states include “escalator” provisions so the caps automatically increase over time, allowing the supply of scholarships grow to meet demand.
• Credit Cap Escalator: The amount that the total credit cap increases each year, if at all. In some states, the escalator is triggered only when the total credits claimed in the previous year reach a certain percentage of the total credit cap. In other states, the total credit cap increases automatically.
• Donation Cap: The maximum amount that an individual or corporate taxpayer can donate. Sometimes these caps are a percentage of the taxpayer’s tax liability, other times they are a fixed amount for all taxpayers. Such caps make fundraising more difficult, necessitating scholarship organizations to attract more donors to raise the same amount of funding that they could without such a cap.
• Scholarship Cap: The maximum amount of money that a scholarship organization can disburse to each scholarship recipient. New Hampshire mandates a maximum average scholarship size, which gives scholarship organizations more flexibility while ensuring that the tax credits are fiscally neutral or save money. Larger scholarships are obviously more useful to low-income families.

Source: Friedman Foundation for Educational Choice, Alliance for School Choice Yearbook.

 

Additional Resources

Books

• Market Education: The Unknown History by Andrew J. Coulson

Studies

• “The Public Education Tax Credit” by Adam B. Schaeffer
• “Forging Consensus” by Andrew J. Coulson
• “On the Way to School: Why and How to Make a Market in Education” by Andrew J. Coulson
• “Do Vouchers and Tax Credits Increase Private School Regulation?” by Andrew J. Coulson
• “The Fiscal Impact of a Large-Scale Education Tax Credit Program” by Andrew J. Coulson
• “Live Free and Learn: A Case Study of New Hampshire’s Scholarship Tax Credit Program” by Jason Bedrick
• “Giving Kids Credit: Using Scholarship Tax Credits to Increase Educational Opportunity in Massachusetts” by Jason Bedrick and Ken Ardon
• “Choosing to Learn: Scholarship Tax Credit Programs in the United States and Their Implication for New Hampshire” by Jason Bedrick
• “Earning Full Credit: Learning from and Improving Indiana’s School Scholarship Tax Credit Law” by Jason Bedrick
• “The Arizona Scholarship Tax Credit: Giving Parents Choices, Saving Taxpayers Money” by Carrie Lips and Jennifer Jacoby
• “Reclaiming Our Schools: Increasing Parental Control of Education through the Universal Education Credit” by Darcy A. Olsen and Matthew J. Brouillette

Model Legislation

• Scholarship Tax Credits by the Cato Institute’s Center for Educational Freedom

Commentary

• “School Choice’s Ace in the Hole” by Adam B. Schaeffer
• “Design Matters: The Future of School Choice” by Jason Bedrick
• “Low-Income Parents Highly Satisfied with New Hampshire’s Scholarship Tax Credits” by Jason Bedrick
• “Expanding Educational Opportunity” by Jason Bedrick and Ken Ardon
• “A ‘Winn’ For Education and Freedom of Conscience” by Andrew J. Coulson