Tuition Tax Credits Could Save Utah $Millions, Even $Billions

Published December 1, 2004

A tuition tax credit (TTC) proposed earlier this year by Utah State Rep. Jim Ferrin (R-Orem) could save the state between $343 million and $1.9 billion in K-12 education costs over the next 14 years, according to a newly released Utah State University (USU) study by a team of economists from USU and Southern Utah University.

The study was commissioned by the Utah state legislature in June when it was faced with studies of the TTC program that came to diametrically opposed conclusions. While the nonpartisan Legislative Fiscal Analyst estimated the bill would save the state money, the Utah State Office of Education estimated it would cost the state money after the first year. The legislature has considered at least one parental choice bill every year for the past five years.

Under Utah’s constitution, all of the state’s personal and business income taxes must go to education. Ferrin’s HB 271 proposed two tuition tax credits against those taxes, the first allowing parents to take a nickel in credit for every dime paid as direct tuition. Although capped at $2,000 per student, the credit would be refundable, so taxpayers without a tax liability could take advantage of it.

HB 271 also provided a dollar-for-dollar, non-refundable tax credit for donations by individuals or corporations to nonprofit organizations that distribute the donations as scholarships to low-income families.

Monte Carlo

While educational choice has been proposed elsewhere to address public school performance problems or enhance parental freedom, in Utah it has emerged as a way to help cope with an expected 25 percent jump in school-age population over the coming decade–more than 100,000 additional students. The USU study found the 2002-03 cost of educating each additional Utah public school student–what economists call the marginal cost–ranged from $7,700 to $10,350, with an average of $8,675. That is far higher than even the 2003-04 average cost of $6,000 for each student currently in Utah’s public schools.

“It is a testament to the worthiness of our schools that they invest so much in each additional student,” note the study’s principal investigators, Roberta Q. Hertzberg and Chris Fawson, both of USU. “But, this is then also the value that the state and local districts can be expected to save from public school appropriations if a single student leaves a publicly funded school.”

Private School Capacity

Legislators and others have questioned just how many students Utah’s private schools could absorb, especially since the state’s private schools currently enroll only 2.8 percent of K-12 students, much lower than the national average of about 12 percent.

After conducting the most comprehensive survey of Utah private schools to date, the USU study found those concerns to be unwarranted. The state’s private schools could accommodate one-third higher enrollment–some 6,000 students–within their current facilities, and more than 70 percent of the schools were open to expansion if demand increased. While the historical pattern indicates a market decidedly skewed towards upper-income families, the emerging trend is for new, small schools catering to middle- and lower-income families.

“There seems little doubt that if the legislature passes TTC legislation, student access to private school classrooms will not be a problem,” the study concludes. “Even in the face of stagnant enrollments over the last few years, the private school market has experienced continuing expansion with many new schools opening.”

The swift expansion of capacity in Utah’s charter school market also suggests educational supply can adjust very quickly to new demand and sources of revenue.

Switching Schools

Even with a tax credit and an available seat in a private school, the most important question in the analysis is: What percentage of students will switch from public to private schools? That depends on how parents increase their demand for private schools in response to the reduced cost brought about by the tax credit.

To capture a range of assumptions, the researchers developed low switch rate and high switch rate scenarios, with the low rate assuming demand for private schools would increase by .5 percent for every 1 percent reduction in price. The higher rate assumed a 2 percent increase in demand for every 1 percent drop in price.

“It is likely given the results of our focus group analysis of Utah parents that the actual demand parameter falls somewhere between these two estimates,” they note.

Using a Monte Carlo Simulation model (see Figure 1) to sequence and process the various assumptions and estimates, the researchers estimated TTC’s revenue effects by districts and for the state from 2005 to 2018. Based on their analysis, they predict “a net positive gain from the policy relative to predicted spending in the absence of TTC,” with cumulative savings over 14 years ranging from $343 million to $1.9 billion.

Over the past decade, two trends have dominated Utah’s K-12 spending. First, enrollment grew by just 5 percent. Second, the booming economy allowed the legislature to nearly double per-student spending. Thus, for every new student entering Utah classrooms over the past decade, schools added an average of $43,000 in new spending on maintenance, operations, and capital.

Those two trends appear to have run their course, however, and over the coming decade, economic growth is expected to be relatively flat while Utah’s K-12 student population is anticipated to grow a quarter larger.

M. Royce Van Tassell ([email protected]) is executive director of Education Excellence Utah.

For more information …

The November 1, 2004 study from Utah State University, “Estimating Demand and Supply Response to Tuition Tax Credits for Private School Tuition in Utah,” is available online at