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.
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 companys 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.