Fiscal Analysis of a $500 Federal Education Tax Credit to Help Millions, Save Billions

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On January 20, 2001, President George W.Bush entered office committed to two main goals:first, creating an education system that "leaves nochild behind" and, second, providing tax relief. Byadopting an education tax credit, the new presidentcould take a significant step toward accomplishingboth of those important goals.

The education tax credit under considerationhere has two components. The first is a parentalchoice credit, under which any parent couldreceive a dollar-for-dollar reduction in income-taxliability of up to $500 per child for money spenton tuition. The second is a scholarship credit,which would raise funds for children in low-incomefamilies. Under the scholarship program,any individual could receive a dollar-for-dollarreduction in income-tax liability of up to $500 fordonations to a nonprofit scholarship clearinghouse,which would pair the money with needychildren, much as a highly successful program ofthis kind does in Arizona.

In this analysis, we assume that every dollar spenton the tax credit would result in a direct revenue lossto the federal government, for a total cost of $9.2 billion.At the state level, however, use of the tax creditresults in tremendous savings. By reducing the costof private schooling, the credit would encouragesome parents to transfer their children from publicto private schools. As students transfer, state governmentshave fewer pupils to educate and canreduce expenditures accordingly.

The parental choice component of the creditcould help approximately 330,000 new studentsattend a school of their parents' choice, in additionto making private schooling more affordable forthe millions of families with students currentlyenrolled in private schools. We project an estimatedsavings across the states of $2 billion, with significantvariation by state. Savings to taxpayers instates such as California would be an estimated$250 million; in states like New Mexico, an estimated$8 million. We also find that the credit'sscholarship component could raise enough moneyto give nearly 3 million students scholarshipsworth $2,000 apiece. If 2 million of those scholarshipswere used to move low income students frompublic to private schools, taxpayers would reap $12billion in savings. Taking both componentstogether, the parental choice and scholarship creditswould enable roughly 2.3 million new studentsto attend a school of their parents' choice at a savingsacross the states of $14 billion.

Darcy Ann Olsen, Carrie Lips, and Dan Lips

Darcy Ann Olsen is director of education and child policy at the Cato Institute; Carrie Lips, a former policy analyst at the Cato Institute, is pursuing a master's degree in public policy at the John F. Kennedy School of Government at Harvard University; Dan Lips is education research assistant at the Cato Institute.