Unlike vouchers, personal use tax credits are not government money, so the public policy case for imposing additional regulations is substantially weaker than it is for vouchers.
The Personal Use Credit
The personal use credit should be claimable by any parent with a school-aged child who is not enrolled in a public school. Ideally, there would be no restrictions on how the credited earnings are spent, just as there are no use restrictions imposed by the federal child tax credit (i.e., you can spend the money on anything). Parents could spend their earnings, credited or otherwise, on private school tuition, tutoring services, equipment and supplies for homeschooling, any combination of the preceding options, or any other purpose.
Naturally, political expediency dictates that some restrictions must be imposed on the use of the credit. Given that reality, the best approach is to limit the credit to only education-related expenses, just as is done with the federal Coverdell ESAs. Allowing the credit to be used for any of a wide range of educational expenses is crucial to the effective operation of the market. Narrow use restrictions would stifle specialization and innovation in educational services. We cannot say, in advance, what sorts of services educational entrepreneurs will offer, or which services parents will find most valuable in decades to come, and so we must not narrowly tie the credit to full-day tuition or textbook expenses alone.
Homeschooling expenses should be eligible for credit under a UETC program, for several reasons. Unlike vouchers, personal use tax credits are not government money (see the discussion in the next section), so the public policy case for imposing additional regulations on homeschoolers who claim a credit is substantially weaker than it is for vouchers. Homeschoolers could be expected to be just as thrifty with their tax credited earnings as they are with the rest of their earnings. Though legislators in Oregon apparently threatened to seek stricter controls on homeschooling if an education tax credit passed in that state, it is not clear that there would be any more broad-based legislative support for such a tightening under a credit program than there is without such a program. Oregon happens also to be the home of the Pierce v. Society of Sisters case of 1925 in which the U.S. Supreme Court ruled that parents are entitled to direct their own children’s education. An excessively burdensome homeschool regulation package might well be challenged on the grounds that it impinged the freedoms established by that case.
The personal use tax credit could either be phased out in the highest income brackets or not, and there are reasonable arguments for both options. The argument in favor of phasing out the credit is dictated by the purpose of the program, the desire to minimize negative budgetary impact, and the desire to reduce the threat of regulatory encroachment to an absolute minimum. The purpose of the program is to make the education marketplace universally accessible. If Bill Gates and other wealthy parents already can easily pay for private schooling for their children, the program’s purpose is little advanced by giving them tax credits. If Gates and other wealthy parents are not given a credit, the program’s effect on state revenue generation will also be reduced, making it more appealing politically and fiscally.
The issue of regulatory encroachment is somewhat more complex. The next section of this paper argues that tax credits do the best job of simultaneously making market education universally accessible and minimizing the threat of government interference in that marketplace. That said, even non-refundable personal use credits represent some degree of special treatment for one group of taxpayers (parents with school-aged children). Though a personal use credit may not attract the same level of government interference as would a government subsidy, it nevertheless presents a target for die-hard opponents of market education and for those with an overweening faith in the effectiveness of government regulation. In Florida, for instance, some public officials have called for additional regulations to be imposed on schools whose students benefit from that state’s tax credit program. Given that reality, it may make sense to limit personal use tax-credits to only those families who need them, and thereby minimize the range of schools and families affected by any regulatory burden that could eventually be attached to the credits.
If the personal use credit is to be phased out, this should be done gradually and only at a comparatively high income level. These conditions are necessary to ensure that the only families excluded from claiming the credits would be those who could readily afford private education without them, and to avoid the situation where a small increase in a parent’s salary results in the loss of a substantial tax credit.
The argument for not phasing out the credit for the wealthiest families is one of fairness. On what moral grounds can wealthy parents be excluded from participation in this credit program? This is an enormously difficult question given that the entire enterprise of taxation itself can be questioned on moral grounds. In the end, the percentage of families with school-aged children who earn very high salaries is quite small, since people generally reach their peak earning years after their children are finished elementary and secondary education. The means test described here would therefore not affect large numbers of families, and so its presence or absence would not likely have a decisive impact on the program’s overall operation.
Parents (or guardians) with multiple children should be able to claim a separate credit for the education of each one of their children. Though some might argue that this would create an incentive for larger families, that seems unlikely. Given the costs (including non-financial costs) associated with raising a child, the existence of a per-child education tax credit will not alter the total financial child-rearing equation sufficiently to have a significant impact on parents’ decisions regarding how many children to have.
The Donation Credit
The scholarship donation credit should be claimable by anyone who gives to a Scholarship Granting Organization (SGO) that pays for a child’s education outside the public school sector. SGOs should be allowed to cater to or exclude particular constituencies such as religious schools, homeschoolers, etc., at their own discretion. No additional regulations should be applied to private schools serving scholarship students beyond those already applying to all private schools. There should obviously be no means test for taxpayers wishing to claim donation credits, since it is the wealthiest taxpayers who have the means to help the greatest number of children by making the largest donations.
Since the purpose of the donation credit is specifically to serve those families who benefit insufficiently from personal use credits, eligibility for scholarships awarded by SGOs must be means tested. In other words, only families below a certain income threshold, taking number of children into account, should be eligible for an SGO scholarship. The income eligibility cut-off must be set high enough, however, to ensure that middle income families can participate. This is due to the fact that personal use credits alone may not provide sufficient benefit for middle income families to cover the cost of their children’s educational expenses.
It is difficult to recommend a single universally applicable income cut-off figure because of the significant variation in the cost of private schooling from one state to the next. For the purpose of illustration, however, let’s take an arbitrary figure of $65,000 as our base cut-off for families with one child. That cut-off figure could be raised by $5,000 or $8,000 for each additional child. If we choose the $5,000 increment, then a family with four children could earn up to $80,000 and still be eligible to receive scholarships.
The size of the scholarships awarded to families should be left to the discretion of the SGOs, however, to allow for varying student ages, family incomes, and family circumstances. SGOs would almost certainly give larger per-child scholarships to a family with four children earning $25,000, than they would to a family of the same size earning $80,000. Another obvious example would be that some SGOs might want to offer a higher scholarship for older students, since the tuitions charged by high schools are higher, on average, than those of elementary schools.
Ideally, both the donation and personal-use credits should be introduced simultaneously, to ensure that a critical level of competitive density is achieved as quickly as possible. If that is not possible for political or fiscal reasons, the donation credit could be introduced immediately and the personal-use credit added a few years later. This would make the achievement of revenue neutrality easier and preempt criticisms that the program underserves the neediest families.
To increase competitive density and further help maintain fiscal neutrality, both the personal use and donation credits should be phased in by age group, starting with the youngest children first.
SGOs should be allowed to spend some modest fraction of donations they receive on their own administrative costs. Doing so ensures a healthy population of SGOs, because it is easier to maintain a scholarship organization if it can cover at least part of its operating costs out of donations it receives. Florida, which forbids SGOs from using any fraction of donations to cover overhead, has only 7 SGOs after two years of operation. Arizona, which allows up to 10 percent of donations to be used for overhead has 47 SGOs after six years. Pennsylvania, which allows a perhaps too generous 20 percent of donations to be used for administration, has a whopping 150 scholarship organizations after just two years. A cap in the vicinity of 8 or 10 percent would thus seem to provide the most reasonable balance of program cost to SGO population.
Having a large and diverse group of SGOs benefits both donors and scholarship-receiving families, because it maximizes the chances that both groups will find an SGO with which they are happy to be associated. That increased potential for good matches between SGOs, donors, and recipients will in turn encourage the growth and strength of the program.
Interested tax-payers and education reporters could also refer to the IRS filings that SGOs would have to make under their status as 501(c)(3) non-profit organizations. This information would allow donors to see each SGO’s administrative, fundraising, and program expenses. All other things being equal, taxpayers would probably direct more money to more efficient SGOs.