Research & Commentary: Education Tax Credits

Published May 13, 2014

As education options have expanded and states have tried different kinds of laws, research and experience are showing even states currently offering some forms of school choice can benefit by improving and expanding their offerings. This is true for every state, whether it offers no school choice, only some forms of public school choice such as charters, or even multiple public and private education options.

The most popular form of private school choice is education tax credits, usually in the form of a tax-credit scholarship. These give individuals, businesses, or both the ability to deduct from their tax bills donations to private nonprofit organizations that use the money to help kids attend schools outside their assigned district school. Currently, 13 states offer tax-credit scholarships, and four offer individual education tax deductions.

This form of school choice differs from others in primarily two ways. First, because the money tax-credit scholarships use is entirely private, the programs avoid state or federal prohibitions against sending money to religious institutions or establishing a religion. Second, these programs offer the “cleanest” school choice option, meaning the one with the least burdensome government regulations, because they are not funded by tax collections.

Proponents of education tax credits tout these benefits over other choice programs such as vouchers or charter schools, noting the latter two are still so constrained by stifling regulations that many private schools will not participate and some charter operators will not enter a particular state. Offering more kinds of choice expands the opportunities for families to find a good education that matches their children’s needs. Tax-credit scholarships especially foster a healthy diversity in education by typically not forcing private schools to administer state tests that pressure them to offer public-school-style curricula rather than more-effective alternatives. Because no public money is used, participating private schools retain their natural accountability to parents and local communities.

School choice opponents criticize education tax credits for the same reasons they criticize vouchers. They say giving families more options will take students and therefore money from public schools, and it’s not fair or beneficial that private schools don’t have to follow all the same rules as government schools. They also claim school choice does not improve students’ academic achievement.

Gold-standard and other high-quality studies contradict these claims, however, concluding private school choice does indeed improve academic achievement, as well as racial integration, social harmony, tolerance for people who think differently, college entrance and graduation rates, and more. They also find school choice programs universally save taxpayers money while offering higher-quality education to more children.

The following documents offer more information about tax-credit scholarships and similar programs.


Private Schools Should Pass ‘Mary McLeod Bethune Test’ 

The Florida Legislature has considered a tax-credit scholarship program to help financially challenged families. Some senators insist that for the proposal to pass, private schools must administer the same standardized tests as public schools. This will override the missions of alternative schools and promote failed, one-size-fits-all education strategies. Private businesses, not taxpayers, are funding these schools, and thus the schools do not have to be held accountable to taxpayers. Private schools are inherently held accountable because they have to earn parents’ trust and businesses’ donationss.

Giving School Choice the Milton Friedman Test

Economist Milton Friedman said, “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” We must consider the long-term effects of various forms of school choice and determine the best options to counter government-controlled public schooling, which has failed nationally. School choice is still in its early stages and should be thoroughly researched to determine how to obtain the best long-term results.

The Common Coring of Private Schools

The Thomas B. Fordham Institute suggests private schools should administer state standardized tests and expel consistently “underperforming” schools from choice programs. The proposal would restrict innovation and diversity in private schools. Common Core already has regulated public schools, and if these standards find their way into private schools, there will be no viable alternative education systems.

Donating the Voucher: An Alternative Tax Treatment of Private School Enrollment

Paying out of pocket for a child to attend a private school creates a “positive externality” for society, in economic terms. Families that make this choice reduce the burden on taxpayers, who otherwise would have to pay for these children’s education. These parents are essentially donating a voucher for their children’s education back to the government, a charitable gift from parents who choose to send their children to private schools. Therefore, governments should institute a “tax deduction for parents who send their children to private schools, in the amount of the per pupil expenditure in their local public schools,” writes Andrew Samwick of Dartmouth College.

Do Vouchers and Tax Credits Increase Private School Regulation?

School voucher and education tax-credit programs have proliferated in the United States over the past two decades. Advocates argue they will enable families to become active consumers in a free and competitive education marketplace, but some fear these programs will bring with them a heavy regulatory burden that could stifle market forces and innovation. This paper aims to shed light on the issue by quantifying the regulations imposed on private schools both within and outside school choice programs, and then analyzing them with descriptive statistics and regression analyses. The results are tested for robustness to alternative ways of quantifying private school regulation, and to alternative regression models, and the question of causality is addressed. The study concludes vouchers, but not tax credits, impose a substantial and statistically significant additional regulatory burden on participating private schools.

The Fiscal Impact of a Large-Scale Education Tax Credit Program

Andrew Coulson of the Cato Institute estimates the budgetary impact of the Cato Institute’s public education tax credit (PETC) model legislation on five states and presents a generalized spreadsheet tool (“the fiscal impact calculator”) that can estimate the program’s effect on any other state for which the necessary input data are supplied. It is estimated that, in its first 10 years of operation, savings from the PETC program would range from $1.1 billion for South Carolina to $15.9 billion for Texas. Illinois, Wisconsin, and New York are estimated to enjoy 10-year savings within that range.

Continuing the School Choice March: Policies to Promote Family K–12 Education Investment

The Heritage Foundation concludes school choice is the best way to provide quality education. The study considers tax laws that can be strengthened to “ensure that parents have the great­est opportunity to direct their own money to provide a quality education for their children.” Two specific recommendations are to lift the cap on Coverdell accounts and expand 529 accounts to include K–12 education expenses. By doing so, a child’s ZIP code will no longer determine the quality of his or her education and parents will be encouraged to choose the best option for their children within the free market.

Expanding Education Choices: From Vouchers and Tax Credits to Savings Accounts

This Heritage Foundation report presents three ways in which states can refine their existing school choice programs, transforming voucher and tax-credit programs into flexible education savings accounts. It builds on what states have learned from experimenting with school choice, and it responds to the rising demand for school choice programs from families and voters. The research includes lessons from longstanding school choice programs such as the Milwaukee Parental Choice Program, the D.C. Opportunity Scholarship Program, and private school scholarship options in Florida and Pennsylvania, among others. The next generation of educational choice must offer more than school choice, the authors argue: Parents should have the flexibility to choose among schools, online courses, tutors, and other education services through education savings accounts.

Model Legislation for Scholarship Tax Credits

This model legislation for tax-credit scholarships from the Cato Institute incorporates updates to current state policies, most notably giving parents the ability to divide their scholarship money for various uses, instead of just to cover tuition at one school. That gives these tax-credit scholarships the flexibility of an education savings account program, which introduces even more creative market forces into education by helping parents be cost-conscious and to tailor education to their children more specifically than buying an entire school program through one institution.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the School Reform News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland education policy research fellow Joy Pullmann at 312/377-4000 or [email protected].