Executive Summary

Parental choice in education—whereby parents have the freedom to choose the school their children attend—is seeing explosive growth in popularity and implementation. Instead of sending children to an assigned school based on residence, Michigan parents have asked for and received the ability to send their children to public schools outside their home district and to create new charter schools to meet special needs and interests.

This study from the Mackinac Center for Public Policy presents a path-breaking approach to expanding parental choice in Michigan education. It embodies a proposal to amend the Michigan Constitution and establish a Universal Tuition Tax Credit (UTTC). In addition to improving public education, the UTTC will save the state $3.4 billion in education expenses in the first ten years of implementation and over $500 million each year thereafter. These savings could be used to support additional educational programs, address other budget priorities, or reduce taxes on Michigan citizens or businesses.

Section I reviews why parental choice is the most important systemic education reform and evaluates various ways to expand it. In spite of the fact that parents are entrusted to make vital decisions in nearly every area of their children’s lives, most Michigan parents are unable to make true choices about education, one of the most important aspects of their children’s development. Most children are sent to a government-mandated, government-assigned school.

Choice is the engine for a market economy in all goods and services. The foundation of basic economic theory is the ability of individual consumers to choose one good over another based on their own preferences. Parents prefer good schools over poor schools for their children. Assigning children to schools, based on where students live, deprives parents of the freedom to apply their own values and priorities to selecting a school, and it deprives schools of valuable marketplace incentives that drive continuous quality improvement.

Today, 12 percent of Michigan children—over 220,000—attend alternative schools which charge tuition. Alternative schools include both private schools and public schools; the latter may charge tuition when parents choose a public school outside the home district and the home district superintendent refuses to release funding. The best way to expand parental choice is to eliminate the penalty for parents who must pay twice for alternative schools: once through tuition and then through taxes.

Section II examines Michigan’s constitutional prohibition on including nonpublic schools in an open system of parental choice.

Section III reviews several methods of expanding parental choice. The study concludes that, although both tuition vouchers and traditional tuition tax credits could be used to eliminate the problem of double payment, both have disadvantages. Vouchers, for example, are subject to allegations that they drain funds from public schools, permit state funds to be used to support religious schools, will spawn a new type of entitlement program, and invite overregulation of private schools. Traditional tuition tax credits—whereby only parents are allowed to receive a tax credit—address some of the problems with vouchers, but fail to help low-income and many middle-income families who lack enough tax liability to benefit.

Section III sets forth the details of the UTTC plan. Although both vouchers and traditional tax credits would be an improvement over the current system, the UTTC is designed to capitalize on the strengths and minimize the weaknesses of each. The UTTC has the following features and benefits:

  • It gradually phases in a tax credit for tuition paid to any Michigan elementary or secondary school—public or private. It is a direct dollar-for-dollar credit against taxes owed, not simply a deduction.

  • The tax credit may be claimed by any taxpayer—individual or corporate. This includes a student’s parents as well as relatives, friends, neighbors or businesses. A large company, for example, could pay $2,000 tuition for each of 1,000 low-income children and receive a $2,000,000 tax credit.

  • The tax credit applies to three major state taxes: the Individual Income tax, the Single Business Tax, and the 6-mill state education property tax. These taxes represent state revenue of approximately $7.5 billion.

  • It is a per-child tax credit, allowing the full credit to be applied to each child in a family.

  • The amount of the credit is limited to the lesser of

  • Fifty percent of the amount Michigan public schools receive to educate each child. This percentage begins at 10 percent and increases to the 50 percent maximum over 9 years.

  • Eighty percent of the actual tuition paid. This produces incentives for schools to keep tuition rates reasonable, since not all of the payment will offset tax liability. If the student is from a family whose income is below the federal poverty level the credit is 100 percent of actual tuition paid. This makes it easier for low-income students to benefit.

  • It does not affect city, county, or township finances.

The UTTC produces significant savings to the state. Since the UTTC will make alternative schools more affordable, more parents will transfer their children from traditional public schools to alternative schools. With the maximum credit limited to 50 percent of per-pupil public school revenues, every student who transfers to an alternative school produces a net savings of at least half of per-pupil revenues. For example, in the 1996-97 school year, the average per-pupil public school revenue is approximately $5,600. The maximum tax credit would therefore be $2,800. If a student transfers to an alternative school, the state must no longer spend the $5,600 and at most loses $2,800 through the tax credit, producing a minimum net savings of $2,800.

Since the average tuition at private schools—which constitute the vast majority of alternative schools—is roughly half of public school per-pupil revenue, the amount of the tax credit provides enough incentive for parents to consider the alternative school option.

Section IV and Appendix I present a comprehensive analysis of the impact of the UTTC on student enrollment and state finances over a 10-year period.

The report includes detailed guidelines and analysis, including:

  • The complete text of a proposed UTTC constitutional amendment (Section III).

  • Key elements of the implementing legislation, including sample forms and procedures (Section III).

  • Answers to commonly asked questions regarding the UTTC (Appendix II)