Schaffer Introduces Tuition Tax Credit Proposal

Published August 1, 2002

Last year’s No Child Left Behind Act gave parents new accountability tools to keep informed about their children’s schools. But 2001’s two prominent federal advances for parental choice—Education Savings Accounts and Title I portability of supplemental services for children in failing schools—remain limited, both by dollar amount and by circumstance, in their capacity to help parents use that accountability.

Now, a proposal by Representative Bob Schaffer (R-Colorado) for a scholarship tax credit would create another school choice option for parents and strengthen their ability to exercise another powerful accountability tool: Taking their child out of an unsatisfactory school.

At this writing Schaffer expected to introduce his bill shortly after the Fourth of July in the House Ways and Means Committee. The plan as it is currently configured would provide a 50 percent income tax credit for contributions either to qualified scholarship organizations—called “education investment organizations”—or to any public or private elementary or secondary school directly. Credits would be capped at $250 for individuals, $500 for married couples, and $50,000 for corporations, which would take the credit against their corporate income tax liability.

“Federal education tax credits can provide a massive cash infusion toward a competitive, free-market education system in America,” Schaffer said.

Tax Credits in the States

Today, six states have education tax credits in place: Arizona, Florida, Illinois, Iowa, Minnesota, and Pennsylvania.

The Arizona law, passed in 1997, was the nation’s first scholarship tax credit, as opposed to general education tax credit. It allows individual taxpayers to receive dollar-for-dollar tax credits for up to $500 against their state income tax for contributions to recognized scholarship organizations. The limit for married couples is $625. The law does not provide for corporate tax credits.

A recent study of the Arizona scholarships, conducted by the Cato Institute, found that in the first three years the credit was available, more than $32 million was donated to scholarship organizations, resulting in the award of more than 19,000 scholarships.

The Arizona law also provides a $200 tax credit for contributions to public schools for extracurricular activities. According to the state’s Department of Taxation, more tax credit dollars are claimed for public school donations than for donations to scholarship organizations. In 2000, $15.8 million was raised for scholarship organizations and $17.5 million for public schools.

Last year, Pennsylvania approved a corporate tax credit for contributions either to scholarship organizations, which help fund tuition at nonpublic schools, or educational improvement organizations, which fund innovative programs in public schools. The credit is capped at $100,000 per business and is worth 75 cents on the dollar for a one-year donation, and 90 cents on the dollar for a two-year commitment.

To date, more than 1,100 businesses in Pennsylvania have pledged approximately $19 million, and the program is expected to provide some 10,000 private school scholarships this year. Total credits for each year are capped at $20 million for private school scholarship organizations and $10 million for public school improvement organizations.

Florida also passed corporate tax credits for contributions to scholarship organizations last year. Illinois, Iowa, and Minnesota offer income tax credits for individuals or families for K-12 education expenses, including tuition, in public or private schools.

Other Federal Proposals

President George W. Bush’s Fiscal 2003 budget includes $3.5 billion for an education tax credit. The administration had originally proposed a refundable tax credit that would be limited to children in designated failing schools, but Congressional leaders have so far favored the Schaffer approach.

Other tax credit proposals have already been the focus of some attention in the 107th Congress. Representative Eric Cantor (R-Virginia) first proposed his Education Empowerment Tax Credit last year, a refundable $1,000 per-child credit for any educational expenses, including tuition in a private or parochial school.

Another Congressional leader for education tax credits, Representative Pete Hoekstra (R-Michigan), has introduced in the current session his own proposal, the Voluntary Opportunities for Increasing Contributions to Education (VOICE) Act. His plan would allow taxpayers a 75 percent tax credit up to $500—$1,000 for joint filers—for contributions to qualified tuition scholarship funds or to local public schools for construction or technology. Businesses would be eligible for a 75 percent tax credit up to $100,000.

“Education tax credits will open new avenues of support for all of our schools—both public and private,” Hoekstra told a House Education Committee hearing in April. “They provide meaningful incentives for parents, concerned citizens, and businesses to take an active role in supporting schools in their communities.”

Representative Ron Paul (R-Texas) also introduced three education tax credit measures last year:

  • the Family Education Freedom Act (HR 368), which would give parents a $3,000 per-child tax credit for education-related expenses;
  • the Teacher Tax Cut Act (HR 369), which would grant all teachers a $1,000 tax credit, effectively raising their salary; and,
  • the Education Improvement Tax Cut Act (HR 370), which would allow individuals to claim a tax credit up to $3,000 per year for donations of cash or educational materials to local schools.

Paul has proposed similar legislation in previous sessions of Congress. (See, for example, “Congressman Introduces Tuition Tax Credit Bill,” School Reform News, September 1997.)

Credits Upheld in Court

Education tax credits have a strong track record when challenged in court. Six Illinois courts have upheld the constitutionality of the Illinois tax credit law, and in 1999 the Arizona Supreme Court ruled the Arizona scholarship tax credit law violated neither the Arizona Constitution nor the U.S. Constitution. The Arizona court concluded the money in question in a tax credit is not “public money” because it has not entered the state’s control.

Don Soifer is executive vice president of the Lexington Institute in Arlington, Virginia. His e-mail address is [email protected].