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August 04, 2009
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The justification behind tax credits is straightforward – to stimulate investment in a particular area by providing incentives that reduce the tax liability of individuals and/or corporations. Traditionally, tax credits have played a valuable role in industries that lack market momentum (think, the Ohio Historic Preservation Tax Credit, or the Film Tax Credit for Ohio), often receiving bipartisan support and flying below the radar. Let’s face it: fixing historical buildings and promoting the film industry are not rife with contention.
But some tax credit advocates argue for their use in K-12 education as a tool to help families exercise school choice and save taxpayer dollars. There is no doubt that applying tax credits to K-12 education in the Buckeye State would create a stir (especially if it were to cost $120 million or $30 million, as Ohio’s Historic Preservation or Film Tax Credits cost, respectively). But considering the current condition of the state’s K-12 budget, the role played by tax credits – to spur much-need investment – is one that increasingly is worth examining.
With the Ohio Supreme Court ruling that Gov. Strickland’s slot machine plan is subject to voter approval, his school funding plan is short nearly $1 billion. Strickland has admitted his exasperation with the situation, telling the Dayton Daily News, “I’m hoping we can find [another] option. If you think of one overnight, write it down.”
Gov. Strickland isn’t the only one doing a double-take at the state’s balance sheets. Even before the billion-dollar hole crystallized, Ohio school districts and charter schools were facing excruciating cuts and had opted to lay off staff, cut busing services, and – as South-Western Schools have done – cancel all extracurricular programming for middle- and high-school students. Enter the concept of education tax credits.
In Arizona, individuals may claim a credit for donating money to public schools for extracurricular programs. At minimum, this version of a tax credit program could ameliorate some Ohio districts’ pain. For those more sympathetic to funding private schools, now’s the time for that, too. Ohio’s new budget bill cuts $59 million from “auxiliary services” for children attending nonpublic schools. The families of these 190,000 children would presumably support a tax credit program that could compensate for these brutal funding cuts.
Several states, including Arizona, Florida, and Pennsylvania, have implemented tax credit scholarship programs. Other states combine tax credit programs with opportunities for personal tax deductions (Minnesota, Iowa, and Georgia) and many others have considered variations of these programs. Given the growing popularity of tax credits as school choice vehicle, and their potential to save Ohio taxpayers money (see here for a report examining the fiscal effects of tax credit programs), it’s worthwhile to review educational tax credits and deductions, and some political arguments for them.
An educational tax credit is a “direct reduction in tax liability for educational expenditures such as tutoring, books, computers, and, in some states, private school tuition. State legislation determines the amount of credit and which educational expenses qualify.
In some states, families with no tax liability may receive a refund for some or all of the amount spent on qualifying educational expenses” (to learn more, see here ). States can allow individuals and/or corporations to receive tax credits (for example, Arizona’s program allows individuals to receive a dollar-for-dollar credit of up to $625 for donations; Florida’s enables corporations to contribute up to 75 percent of the amount of their tax). Donations are maintained through a school tuition organization (also known as a scholarship granting organization), which uses its own criteria for distributing scholarship funds to eligible students.
An educational tax deduction “allows for certain educational expenses to be deducted from taxable income prior to the calculation of tax liability. A tax deduction offsets a portion of the cost of qualifying educational expenses, depending on the percentage tax bracket an individual is in. A family with no tax liability will receive no benefits from this type of program” (to learn more, see here ). For example, Illinois gives families a tax break of up to $500 to cover education expenses for public or private school.
Proponents of education tax programs realize they have several advantages over vouchers. Because they are funded privately rather than through government coffers, such programs are less likely to be challenged in court, less susceptible to burdensome regulation, and more popular among the general public and politicians (to read a full argument for public education tax credits, see here).
In fact, a May 2009 survey by the Friedman Foundation for Educational Choice found that a majority of respondents (54 percent) favored tax credits for individuals and businesses funding private school scholarships. This is twice the number of those who prefer charter schools (27 percent), and nearly the same amount favoring vouchers (55 percent). For a full version of the Friedman survey, “Ohio’s Opinion on K-12 Education and School Choice,” see here.
Should Ohio explore tax credits as a vehicle for school choice, choice opponents will certainly find reasons to attack it. But with Ohio schools facing severe fiscal pain, education tax credit programs are worth a serious debate.