Education tax credits would save states billions

Cato study offers tool for evaluating fiscal impact of tax credits

July 1, 2008 • News Releases

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WASHINGTON — Education tax credits — programs that allow individuals to deduct education expenses from their tax liabilities, or corporations to do the same for donations to scholarship funds — will save money for states that enact them, finds a new study from the Cato Institute.

In “The Fiscal Impact of a Large‐​Scale Education Tax Credit System,” Andrew Coulson, director of Cato’s Center for Educational Freedom, and Ball State University economist Anca Cotet estimate the effect that model legislation for tax credits would have on the budgets of five different states. Accompanying the report is a generalized spreadsheet tool capable of calculating the fiscal impact of education tax credits on other states.

According to Coulson, “in its first 10 years of operation, savings from our model education tax credit bill would range from $1.1 billion for South Carolina to $15.9 billion for Texas,” adding that “Illinois, Wisconsin, and New York are estimated to enjoy 10‐​year savings within that range.”

Coulson finds that a gradual phasing in of tax credit programs can ensure that they generate savings from year one, and that these programs will benefit public school budgets as students migrate to private schools. “Our model bill is not only predicted to save money overall, it is expected to increase the funding available per pupil in public schools at the same time,” Coulson explains.

Since the Fiscal Impact Calculator tool can be easily applied to any state, Coulson recommends that other states consider implementing education tax credits. “Based on the findings of this study, and given the parameters it assumes, all five states examined would begin saving money under Cato’s model tax credit bill from its first year of operation, and these savings would run into the billions after just a handful of years,” he concludes. “Any state contemplating the introduction of a school choice program or facing budgetary difficulties would thus do well to consider a large scale education tax credit program.”