The Arizona Scholarship Tax Credit: Giving Parents Choices, Saving Taxpayers Money

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In 1997 policymakers in Arizona created a$500 tax credit for contributions to organizationsthat give students scholarships to attend privateelementary and secondary schools. At that timethere was, and there still is, much debate anduncertainty about the program's likely effect onstudents, taxpayers, and the education system.This analysis informs that debate by consideringArizona's experience with the tax credit andassessing its likely impact in the future.

To assess the credit's impact, we surveyedArizona's private schools, surveyed and interviewedrepresentatives of Arizona's scholarshiporganizations, and supplemented original datacollection with information provided by theArizona Departments of Revenue and Education.Research shows that from 1998 through 2000 thetax credit generated more than $32 million, whichfunded almost 19,000 scholarships through morethan 30 scholarship organizations. More than 80percent of scholarship recipients were selected onthe basis of financial need.

We also estimated the impact of the credit onArizona's budget. Although the state forgoes revenueas people exercise the credit, taxpayers savemoney when students who would have been educatedat public expense use the scholarships totransfer to nonpublic schools. Therefore,although Arizona lost $13.7 million in 1999, wefind that, once savings are taken into account,the credit was revenue neutral. Using moderateassumptions about the growth of taxpayer participation,we estimate that by 2015 the scholarshipcredit will be raising $58 million per year,funding 35,000 to 61,000 scholarships annually,and helping send 11,000 to 37,000 students whowould otherwise have to attend public school toschools of their choice. The cost of the credit islikely to be significantly less than the savingsthat result from student transfers. The data suggestthat the scholarship tax credit will be a netwinner for Arizona taxpayers; it will extendschool choice to thousands of families and savetaxpayers millions of dollars.

Carrie Lips and Jennifer Jacoby

Carrie Lips, a former policy analyst at the Cato Institute, holds a master's degree in public policy from the John F. Kennedy School of Government at Harvard University. Jennifer Jacoby also has a master's degree in public policy from the Kennedy School.