Bush Proposes Education Tax Credits

Published April 1, 2002

President George W. Bush’s budget for Fiscal Year 2003 seeks to build on the momentum of the recently enacted “No Child Left Behind Act” by offering parents new financial clout to choose better-performing schools when their children’s public school has been identified as failing.

The President’s proposals include a new federal tax credit that would cover 50 percent of the first $5,000 of expenses a family incurred to transfer a child from a failing public school to a school of choice, including a private or parochial school or home school. The credit would be refundable–i.e., a direct refund from the federal Treasury–for families with incomes so low they don’t pay taxes. The President’s budget includes $3.5 billion over five years to fund the tax credit.

“Low-income parents in disadvantaged communities with failing schools should have the same education choices that affluent parents have,” said House Education Committee Chairman John Boehner (R-Ohio). “Giving parents this choice will broaden the escape route for students trapped in failing schools. It will also energize the public education system and spur struggling schools to succeed.”

States Lead the Way

In embracing the concept of federal tax credits for school choice, Bush is following the lead of several states. Illinois, Iowa, and Minnesota offer credits or deductions on state income taxes for private school education expenses, and Arizona, Florida, and Pennsylvania have rapidly growing tax credit programs for private contributions to scholarships that empower needy children to enroll in private schools. However, use of the state tax credits is not limited to families whose children are in designated failing public schools.

The President’s budget also includes a program that would set aside $200 million to stimulate the further growth of charter schools, with an emphasis on those for students from economically disadvantaged backgrounds. In addition, a proposed $100 million Credit Enhancement for Charter School Facilities will help charters acquire, lease, and renovate school facilities by assisting with activities that facilitate private lending, such as loan guarantees and debt insurance. Facility acquisition is often the greatest obstacle facing charter school entrepreneurs, and safe and functional housing for charter schools can be most difficult to find in urban areas where their mission is most vital.

A third proposal in the budget is for a $50 million school choice demonstration fund to support research that develops, implements, and evaluates innovations to provide parents with increased educational options, including both private and public school choice.

The tax credit proposal represents Bush’s continuing aim to enhance parental choice in education at the federal level. His “No Child Left Behind” Act, reforming the 1965 Elementary and Secondary Education Act, helps low-income parents by allowing their child’s federal Title I subsidy–up to $1,000—to follow the child from the failing school to remedial education providers such as private tutors, including those affiliated with faith-based institutions. Congress agreed to such aid being made retroactive so that parents at as many as 3,000 public schools already identified as chronically failing will be able to use the stipends to choose supplemental services as early as this fall.

The tax reform championed by the President last summer offers broad-based tax breaks for parents exercising choice via expanded Coverdell Education Savings Accounts, which now cover not just higher education but also the expenses of public, private, or home schooling of children in kindergarten through grade 12. Parents or other private benefactors–including corporations–may contribute up to $2,000 a year to a child’s ESA. The build-up of interest in the accounts is tax-free, and neither principal nor interest is taxable upon withdrawal if families use the money for legitimate education purposes, such as tuition, tutoring, books, or computer hardware/software.

Robert Holland is senior fellow and Don Soifer is executive vice president with the Lexington Institute.