Tax Credits Would Boost Private Schooling in New Jersey

Published June 1, 2001

Total private school enrollment in New Jersey would increase by 40 percent, and the state treasury would realize net annual savings of almost a half billion dollars, if the Garden State legislature enacted two proposed tuition tax credit plans, according to a new study from The Heartland Institute.

The two plans–a tuition tax credit and a scholarship tax credit–would significantly enlarge the menu of choices available to parents for the education of their children outside of the public schools.

While illustrating the promise of the proposed measures, the Heartland study also identifies limitations that hamper tax credits. For example, the state income tax liability for most families is much less than the cost of tuition at private schools. In addition, the scholarship credit as proposed would most likely not raise sufficient funds to pay the tuition of every child who wants to attend a private school.

The two tuition tax credit bills were introduced by New Jersey Assemblyman Guy Gregg, working with Jersey City mayor and gubernatorial candidate Brett Schundler. One bill is the Parental Control and Involvement Act (PCIA); the other, the Educational Options Act (EOA).

The PCIA is a parental tax credit proposal that would give parents credits against their state income tax liability equal to 50 percent of qualified educational expenses, up to a maximum total credit of $500 per dependent child. All parents of school-age children also would be eligible to receive a 100 percent tax credit for up to $150 per household for spending on computer hardware and software related to curriculum or instruction.

The EOA is a scholarship tax credit proposal that would give individuals and corporations tax credits of 75 percent of the amount they contribute to nonprofit organizations that give scholarships to children attending non-public schools. For individuals, estates, and trusts, the credit is limited to $10,000; for companies, it is limited to 10 percent of the company’s annual corporate income tax liability.

The supporters of the family tax credit bill, the EOA, assert in its preamble: “It is possible for low-income children to attend privately managed schools while simultaneously saving State taxpayers many hundreds of millions of dollars annually.” The Heartland Institute analysis cautiously confirms that assertion.

“The New Jersey tax credit proposals are well-designed, will help tens of thousands of children find a better education, and would save taxpayers hundreds of millions of dollars to boot,” commented Heartland President Joseph L. Bast, author of the April 19, 2001 study, “Fiscal Impact of Proposed Tuition Tax Credits for the State of New Jersey.”

Bast also noted, however, that the plans would encourage only 7 percent of students currently enrolled in public schools to shift to private schools: “hardly the kind of sweeping privatization hoped for by many market advocates.”

According to Bast’s analysis, the plans together would reduce the after-tax price of private school tuition by between 32 percent and 95 percent, depending on family income, grade level, and choice of school. That would have the effect of increasing the demand for private schools; economists estimate a 10 percent decrease in the price of private schooling increases the probability of a family choosing a private school by 4.8 percent. Overall, the lowered price of tuition would likely increase total private school enrollment by 40 percent, or from 207,275 students currently to 290,958.

The tax credits would lower state tax revenues by some $585 million. However, the transfer of 83,683 students from public to private schools would generate avoided costs of $1.065 billion. Net annual savings to the state treasury would be $480 million.

Limitations of Tax Credits

Although the parental tax credit, PCIA, allows tax credits of up to $500 a year, many families wouldn’t qualify for the entire amount. For example, families earning less than $40,000 a year would “zero out” their entire state income tax liability before reaching the cap for just one child. A family earning $20,000 a year pays only $210 in New Jersey state income taxes. Because the tax credit for education-related computer hardware and software would be 100 percent of expenses up to $150, many parents would apply for that credit before or instead of applying for the 50 percent tax credit against tuition and other expenses.

Running different scenarios with less-restrictive tax credit rules produces relatively few additional student transfers out of public school, which seems to indicate an inherent limitation in the tax credit approach. For example, Bast told School Reform News that doubling the parental tax credit benefit to 100 percent and increasing the dollar cap ten-fold to $5,000 would increase the total percentage of public school students switching to private school from 7 percent to just 7.6 percent.

Could the proposed scholarship tax credit generate sufficient funds to make a significant difference? Using what appear to be reasonable assumptions about participation in the program, Bast’s study suggests the EOA measure would raise between $340 million and $530 million a year, enough to provide scholarships to between 57 percent and 89 percent of students wishing to attend private schools. While a half-billion dollars in charitable donations appears impressive, it pales against the $15.6 billion New Jersey state and local governments spend each year on K-12 public schooling.

The scholarship-granting entities created under the EOA measure would fund up to 226,414 full-tuition scholarships or 259,344 partial-tuition scholarships. Those numbers appear impressive until it is recognized that 207,000 students already attend private schools. Thus, under the assumptions used in the study, the scholarship measure would generate only 19,414 to 52,344 new private school students.

The New Jersey tax credits, like other tax credit plans, do not defund public schools. A dollar donated to a scholarship-granting entity, or deducted from one’s personal income taxes, does not result in a dollar less being spent on public schools. There is no provision for returning to taxpayers any of the $480 million in savings that the tax credit plan makes possible.

According to Bast, “It is difficult to see, in this philanthropy-driven model, where any pressure would arise to force governments to spend less on public schools as their enrollments decline. By leaving tax collars in the public school system each time a parent chooses private schools, tax credits reward public sector incompetence and make the status quo even harder to change.

“In light of the limited impact of even ambitious tax credit programs,” Bast concludes, “advocates of privatization who think they have found an approach superior to vouchers would do well to reconsider.”