Tax credits are designed to provide parents with tax relief linked to expenses incurred in selecting an alternative government or private school for their children. A tax credit is a dollar-for-dollar reduction in taxes owed, whereas a tax deduction is merely a reduction in taxable income. For example, if a taxpayer has a pre-credit tax liability of $2,000 and a tuition tax credit of $1,500, the taxpayer would pay a tax of only $500.
Tax credits are typically applied against only state and/or federal income taxes, but property tax credits have been proposed as well. For the purposes of school choice, tax credits might be allowed for any or all out-of-pocket educational expenses incurred by an individual, from tuition to textbooks to transportation to extracurricular feesthough tuition is the most common expense allowed in practice. Private schools usually charge tuition and/or fees, and government schools often charge tuition to non-resident students and fees for extracurricular activities. These expenditures are also creditable items under many tax credit proposals.
Many proponents of educational tax credits prefer them to vouchers on the grounds that they entail less government regulation of private schools and less risk of entanglement between church and state because of their indirect nature (credits, unlike vouchers, do not transfer any money from the state to a school or taxpayer). A strong case can be made that tax credits remove governmental interference in education by allowing families to retain enough of their personal income to afford to choose safer and better schools for their children.
Opponents of educational tax credits, including some egalitarian-inclined supporters of vouchers, argue that they provide little help to low-income families who pay little if any income tax. The best tax credit plan will provide low-income families with the same opportunity vouchers offer, while simultaneously giving back to parents the primary responsibility for the education of their children. One way this can be accomplished is by making tuition payments refundable for those with a tax liability that is less than their education expenditures. Another way to overcome this objection to tax credits is the universal tuition tax credit.