Voucher and Tax Credit Programs

Published February 1, 2003

As new and returning state legislators reassemble in the nation’s more than four-score “laboratories of democracy,” many will be seeking ways to improve K-12 education and will want to know more about school choice options such as vouchers and tax credits. There now are 10 states to which they can turn for learning about the various forms such legislation can take–and use these as a basis for crafting legislation that would work best for their state.

Of the 10 states that currently offer some variety of educational tax credit, tax deduction, or voucher:

  • Five provide some form of K-12 vouchers for a limited and designated segment of the population.
  • Four allow individuals a tax credit for selected educational expenses incurred in the education of their children in grades K-12.
  • Three allow individual or corporate tax credits for donations to public schools or to school tuition organizations (STOs). STOs may provide scholarships not only for private secular and religious school tuition but also for transportation to out-of-district public schools.

Minnesota is the only state that provides a tax deduction for K-12 educational expenses and tuition for all families residing in the state with students in grades K-12.

What Are School Vouchers?

School vouchers are publicly funded education scholarships or grants that may be applied toward full or partial payment of tuition or fees at the participating public or private K-12 school of the parents’ choice. Vouchers are similar to the G.I. Bill and Pell Grants, which are scholarships funded by the government and given to post-secondary students for use in the religious or nonreligious school of their choice.

What Are Tax Credits?

While tax deductions reduce the amount of taxable income before the tax liability is calculated, tax credits directly reduce the tax liability. Tax credits may be for individuals or for corporations; they may be applied to educational expenses or donations to educational entities; and they may be computed on a dollar-for-dollar basis or as a percentage of the amount involved. A nonrefundable tax credit permits refunds only up to the amount of the tax liability for the tax year. A refundable tax credit allows the taxpayer to receive a refund for the tax credit even if no taxes are owed or if the credit exceeds the tax liability.

For example, take a taxpayer who owes $200 in taxes and has a tax credit worth $250. A taxpayer living in a state with a nonrefundable tax credit would have the $200 tax liability cancelled. However, a taxpayer living in a state with a refundable tax credit would have the $200 tax liability cancelled and also receive a check for $50 from the state. Some states allow unused credit to be carried forward to the next tax year.

A state-by-state summary of the voucher and tax credit programs currently available is provided on the opposite page. In reviewing each state’s programs, it should be noted that their specific features are not necessarily end points to be cloned but rather starting points on which to build new programs with added or different features.

Marya DeGrow is the research assistant to the Independent Institute’s Education Policy Center in Golden, Colorado. Her email address is [email protected].