Schundler’s Tax Credits

Published October 1, 2001

New Jersey Gubernatorial candidate Bret Schundler’s proposals for school finance reform have received much attention, not all of it favorable. While Schundler claims tens of thousands of children would benefit from the program and taxpayers would save hundreds of millions of dollars, Democratic opponents of tax credits and the state’s Office of Legislative Services (OLS) claim that very few parents would benefit and taxes would have to go up. Who is right?

Schundler often cites the results of research I conducted last April, at his request, of two draft tuition tax credit plans. The legislation, which has since been introduced by Assemblyman Guy Gregg, would provide tax credits of 75 percent of the amount contributed by individuals and companies to nonprofit organizations that provide educational scholarships to children attending nonpublic schools. Parents would earn credits against their state income tax liability equal to 50 percent of qualified educational expenses, up to a maximum credit of $500 per dependent child.

Making what I believe are reasonable assumptions about the rate of participation and average gift sizes, I forecast the tax credits would reduce private school tuition for one child per household by between 32 percent and 95 percent, depending on grade level, household income, and type of school selected. The lower tuition would cause total private school enrollment to increase 40 percent. Some 37 percent of the new students (30,518 out of 83,683) would be from “poor” families, many of them escaping some of the nation’s worst public schools.

Two Democratic state senators asked the OLS to critique my study, and its findings were released in September. The OLS claims only 3 to 6 percent of the state’s wealthiest 1 percent would donate enough to qualify for the maximum tax credit, that the number of taxpayers who itemize expenses on their federal tax forms (and therefore qualify for the tax credits) would not change despite passage and promotion of the tax credits, and that New Jersey-based corporations would contribute only 1 to 2 percent of their tax liabilities to scholarship-granting foundations.

Unsurprisingly, these assumptions lead to a much lower estimate of funds raised and fewer students transferring to private schools. I believe any objective reader would find OLS’s assumptions overly pessimistic.

My analysis found that the tax credits would cause an annual revenue loss to the state treasury of $584 million, but this would be offset by savings to state as well as local governments made possible by falling public school enrollment. Annual avoided costs could total approximately $1 billion, for a net savings to the state’s taxpayers of $480 million a year.

Because it assumes few taxpayers would use the tax credits, OLS finds public school enrollments would fall too little to allow spending to decline at all. Correcting OLS’s false assumptions makes this disagreement disappear.

For critics of the tax credits to insist that spending cannot be reduced as enrollment declines shows surprising ignorance of what happens in the private school marketplace all the time. What these critics are really saying is that they would refuse to approve the spending cuts necessary to make tax relief possible, even though such spending cuts would not reduce per-pupil spending by a single penny.

My analysis found that only 7 percent of students would shift from public to private schools during the first three or four years of the program. This is hardly a “mass exodus,” as one critic has characterized my forecast. One can only wonder what concerns the anti-tax credit forces most: that too few parents would choose private schools, making the program cost too much; or that too many parents would make such choices, leading to a “mass exodus” that would endanger public education. Well, which is it?

In the final analysis, I found the New Jersey tax credit proposals to be well designed, likely to benefit tens of thousands of children, and capable of making large tax cuts possible. Tuition tax credits are not the silver bullet that privatization advocates seek and defenders of the status quo fear. They are a surprisingly modest reform that, by any objective standard, deserves a try.

Joseph L. Bast is president of The Heartland Institute, a: nonprofit research organization based in Chicago. He can be reached at [email protected].