Pennsylvania’s Popular Tax Credit Hit by Budget Cuts

Published October 23, 2009

Under a new budget adopted by the state legislature, Pennsylvania will reduce educational opportunities for students statewide receiving scholarships through the Educational Income Tax Credit Program (EITC).

The budget for FY 2009, passed by the General Assembly and signed by Gov. Ed Rendell (D) in October, slashes the program by $15 million. That means thousands fewer students will be able to use the scholarships to attend the school of their parents’ choosing.

“During the 2008-09 school year, over 44,000 students received a K-12 EITC scholarship. Over 6,000 children received a Pre-K EITC scholarship,” said Andy LeFevre, executive director of the REACH Alliance and REACH Foundation, which administers the scholarships.

Linda Croushore, executive director of the Consortium for Public Education, a 22-year-old public school improvement group based in McKeesport, Pennsylvania, was also upset by the changes.

“I’m deeply disappointed that the deep cuts had to be made to EITC,” she said. “We have many business partners who made generous contributions to the Consortium for Pubic Education each year because they believe deeply in our work, and it was a true win-win situation for everyone. The fact that this particular pot of money is always exhausted on the first day it is offered each year is a true testament to the buy-in business has to it.”

Deep Impact

The effects of the cuts remain to be seen, but LeFevre warns they will be deep.

“There is a possibility of 6,000 students losing scholarships with the loss of $6.7 million in K-12 EITC credits,” he said.

According to the state’s Department of Community and Economic Development, businesses had already applied for $79 million worth of tax credits by donating to the scholarship program when the new budget was determined. Since businesses will now be cut off after receiving $60 million in tax credits, language was put into the statute to allow all applications to be approved for the remainder of 2009 at a pro-rated amount.

“This was done to hopefully not have any one organization lose a majority of its funding,” LeFevre said.

Outlook Poor

Next year’s prospects aren’t promising, either, said Nathan Benefield, director of policy research with the Commonwealth Foundation, a free-market think tank in Harrisburg.

“It certainly is a possibility that funding will be cut next year as well, given questions about the future sustainability of the budget,” he said. “The deal was for a 33 percent reduction in the EITC and other tax credits over the next two years. But lawmakers may find themselves in similar circumstances next year and the years following.

“This budget exhausts the state ‘rainy day’ fund and other onetime revenue sources, relies on new revenue sources that are not predictable, and spends more than the state collects,” Benefield added. “In two years, the federal stimulus money vanishes, and in three years, the state will face dramatically increased costs for state pensions—driving up the demand for more tax hikes and cuts to programs like the EITC.”

“The budget that was just passed calls for an additional $10 million cut to the EITC program in the 2010-2011 fiscal year,” LeFevre added. “Funding will be restored to the $75 million level during the 2011-2012 fiscal year. REACH is already working to make the case for funding to not be further cut, and if possible, restored next year.”

Unreasonable Cuts

Neither Benefeld nor LeFevre thinks the program cuts were justified.

“With the federal stimulus funding—both through the state and directly to school districts—public schools are getting an increase in funding of over $1 billion,” Benefield noted. “Yet one item that continued to prolong the budget stalemate was Gov. Rendell’s insistence that basic education funding get an additional $300 million from state revenues.

“This increase for public schools dwarfs the entire cost of the $75 million EITC—much less the 33 percent reduction—and shows how the Rendell administration has prioritized the public school establishment rather than children,” he concluded.

EITC Savings

Even more telling than that, though, is the fact that the EITC saves Pennsylvania massive amounts of taxpayer dollars every year Benefield notes.

“By providing 44,000 scholarships that average a bit over $1,000 apiece, compared with school district spending of around $13,000 per pupil,” Benefield said, “the EITC saved state and local taxpayers over $500 million [last year] over what it would cost to educate those students in public schools.”

LeFevre concurs.

“A fiscal analysis of the EITC program shows it saves state and local taxpayers $12 for every $1 spent on a private K-12 scholarship,” he said. “The cuts to the EITC program over this year, and next if the additional $10 million is cut, could put 10,000 students’ scholarships in jeopardy. If only one quarter of those students are forced to go back to public schools, it will cost Pennsylvania taxpayers $30 million to pay for them—costing the state $5 million more than was saved by cutting the program.”

Sarah McIntosh ([email protected]) teaches constitutional law and American politics at Wichita State University in Kansas.