The original analysis of the impact of the UTTC assumed that the credit was
"refundable," i.e., that a parent who filed an Individual Income tax return
could receive money back from the state even though his or her tax liability was less than
the amount of tuition paid. A refundable tuition tax credit is actually a combination
subsidy and credit; a credit for those who have sufficient tax liability to be offset, and
a subsidy for those who, in some years, do not have sufficient tax liability.100
This is one method commonly used to permit low income families to benefit from a tax
credit.
It is likely that there will be an excess demand for students to which to provide scholarships. Nearly any business would put as much of its tax liability into a scholarship program as it can.
Since a refundable tuition tax credit is basically a combination subsidy and credit, it
suffers from problems similar to those of vouchers as discussed in Section III.
Fortunately, however, the final structure of the UTTC provided such powerful incentives
and mechanisms for individual and business taxpayers to make tuition payments available
for students from low-income and middle-income families, there was no need to make the
credit refundable.
Gary Wolfram, Ph.D., George Munson Professor of Political Economy at Hillsdale college
and former deputy state treasurer for taxation and economic policy, analyzed the dynamics
of the proposal and summarized the refundability issue as follows:
In examining the effect of the Universal Tuition Tax Credit, the model has assumed
parents are the decision-making unit and that they will respond to a change in the
relative price of education at an alternative school. It is assumed that despite the fact
that the credit is non-refundable, even those parents who lack a tax liability against
which to claim the credit also face the change in relative prices associated with the
credit. One might wonder how this assumption and the universality of the credit, that is,
its availability to business and taxpayers who do not have children in school, affect the
analysis. It turns out that the universality of the credit results in the ability to
assume that all parents, even those without a tax liability, will have the full allowable
reduction in the relative price of private education. Thus, the estimates of the model are
applicable to the Universal Tuition Tax Credit as described.
A brief explanation will show why this is so. Since the tax credit is not available to
taxpayers without a tax liability, low-income parents might appear to have no incentive to
move their children to private schools, and thus the model would overestimate the amount
of student migration. However, there is a strong incentive for businesses in Michigan to
provide scholarships for the children in these families in the amount of the tax credit
that would have been available to the parents directly. This is because businesses will
receive a dollar-for-dollar tax credit for the tuition they pay for such children. It is
quite likely that the financial officer of a corporation, when faced with the question of
whether the corporation should send a dollar to Lansing to be spent according to the
priorities of the legislature, or whether it should spend that dollar for scholarships for
low-income children, will recommend the money be used for scholarships.
There are at least three reasons why this will to happen. First, the corporation has
little control over how the dollar of Single Business Tax it pays will be spent, whereas
it will have direct control over how the dollar is spent if it is a scholarship. Second,
the dollar spent on a scholarship may reduce the training costs of the business in the
long run and will reduce training costs for businesses as a group. Third, there is a lot
of company goodwill that can be obtained through a scholarship program for disadvantaged
youth, and there is little goodwill that is gained from simply filing the company’s
taxes with the Department of Treasury.
It is likely that there will be an excess demand for students to which to provide
scholarships. Nearly any business would put as much of its tax liability into a
scholarship program as it can. But the number of students who can receive these
scholarships will be limited. Since the tax credit per student is limited, only those
students whose parents do not use their tax credit fully can receive a scholarship that
can be used as a tax credit by businesses. The number of tax credits available will likely
be far fewer than the tax credits that business would like to claim.
As a result of this two things should be noticed. First, because there is a demand by
business for students to whom to give scholarships, clearing-house type organizations will
develop to match the needy students with corporations. These will probably be nonprofit
organizations, but one might find even profit-making companies that offer the service.101
Alternative schools themselves will have a strong incentive to identify and match
taxpayers with students. In any event, there will be a system to match low-income students
with corporate donors. Second, the low-income parents will receive the same net price
reduction for private schools as do the parents who have a tax liability. The only
difference is that rather than receiving a tax credit for tuition paid, the low-income
parents will receive a scholarship in the amount of the credit. Thus it is appropriate to
ignore the tax refundability issue when modeling student migration and assume all parents
will receive the net price change as if they had received a tax credit.
