A diversified approach to federal investment in school choice in a bull market

Nat Malkus

Editor's note: This post is a submission to Fordham's 2017 Wonkathon. We asked assorted education policy experts to explain how President Trump should structure his highly anticipated $20 billion school choice proposal. Other entries can be found here.

School choice advocates have long faced a bear market. For a couple of decades, their investments have shown slow and steady growth, but for confident investors it has been a tough grind waiting for an expected windfall. This year, the bear market looks to be turning, and with Trump’s promise of a $20 billion investment in school choice, the school choice bulls are ready to run.

However, any good investment advisor will advise diversifying because going big on any one push can end in disaster. The question for advocates should not be how to make fast gains on a $20 billion investment in school choice, but how to structure that investment to pay off in the long run.

First, some preliminaries.

1.) Let’s stipulate that a big federal push is coming. It is clear that Trump’s eye-popping campaign promise to spend $20 billion on school choice was not a thoroughly vetted proposal. But elections have consequences, one being that this forum is not about whether, but how best, to do a $20 billion federal school choice initiative.

2.) This proposal has to be lean. If it’s only politically feasible riding a budget reconciliation that can pass with fifty-one Senate votes, that would substantially limit legislative language and preclude the substantial detail that typically accompanies major proposals of this kind.

3.) It’s safe to assume the bulk of this funding would go to targeted private school choice. Even doubling the $330 million in federal charter school support wouldn’t make a dent in $20 billion, violating preliminary #1. Issuing directives to states to adopt programs like ESAs and vouchers would require legislative detail that would violate preliminary #2. And expanding 529 savings plans wouldn’t effectively help low-income families, which Trump made a priority in his recent joint address to Congress. That leaves federal tax-credit scholarships as the most plausible vehicle.

4.) Let’s not ignore the naysayers. Numerous commentators have argued that going big on school choice has more downside risks than potential benefits. The specifics of school choice programs depend on local contexts, and trying to get eligibility definitions, regulatory approaches, scholarship amounts, and other program specifics right from Washington is foolhardy. Stipulating to the first preliminary (for this exercise) should not prevent that logic from shaping the design of the assumed Trump effort. The risks of “going big” and failing can be avoided with a diversified approach.

So, then, what is the best way for Trump to spend $20 billion on tax-credit scholarships with limited legislative detail without risking backlash that would threaten the long-term political viability of school choice? He should go small to go big, refusing to put the burden on Uncle Sam and instead backing the kind of state-led efforts that have successfully spread school choice for decades.

The budget resolution could include federal tax credits for individual and corporate donations to non-profit scholarship-granting organizations (SGOs) operating within taxpayers’ state of residence or operation. Residents could only qualify for the credit if their state runs or creates a school choice program that receives state credits or funding, and only state residents would receive scholarships. These participation limits would ensure states have skin in the game and vested interests in developing program specifics that make sense for their local contexts. For state tax-credit scholarship programs, this would include regulating SGOs, establishing scholarship amounts, and defining eligibility. States could conceivably arrange the scholarships to benefit other state private school choice programs, topping off education savings accounts or vouchers that are too often minimally funded. Keeping to a supplemental role would preclude the need for a new federally sponsored program or SGO and prevent undue federal influence over state programs. It would also require states to incorporate the federal supplement responsibly, preventing double-dipping by contributors while maximizing an integrated program’s intended benefits.

Twenty billion dollars should be the offer, but not necessarily the full federal liability, and states should only receive a proportional share. Spreading the investment to $2 billion annually over ten years could maximize the likelihood of passage and the sustainability of the endeavor over time. The amount each state would receive should be proportional to census estimates of its percentage of the nation’s school-aged low-income residents. For instance, if Ohio had 5% of the nation’s low-income children, their maximum federal credit limit would be $100 million ($2 billion x 5%).

The state would be responsible for keeping the federal tax liability to its proportional share. States could manage this by reserving credits, as some do with their own tax credit scholarships, or by establishing state-specific limits for federal credits. States could be held responsible through fines, penalties or loss of future eligibility for federal credits claimed that exceed their proportion. If Ohio mismanaged its limit and received $102 million in credits, the feds could reclaim the excess $2 million. Significant accountability penalties are warranted given the significant federal benefits and the flexibility states would be granted.

This plan has a lot for bullish school choice advocates to like. It would extend choice in multiple ways. It would bolster existing state programs and prevent undue federal interference. More states would develop school choice programs. They would also develop more different programs, with different degrees of success, which would let states learn from each other. It would also encourage states to cultivate the supply side of the school choice equation—the stock of private schools—which is frequently overlooked in these discussions. State influence on the supply side may seem limited, but creating clear rules for participation, sustainable programs, and constituencies to defend them when political winds change are essential to building the private investments, philanthropic interest, and entrepreneurial confidence that can make or break the supply of private schools.

Other aspects of this plan may frustrate the bulls, namely that this structure would not provide a fifty-state solution. Some states will not be willing to create choice programs, no matter the federal incentives. Therefore, the plan wouldn’t really spend $20 billion, which could feel like a lost opportunity.

Despite those concerns, it’s critical to avoid the risks of going big on school choice. Going big too quickly significantly increases the prospects of opposition. That opposition may fail in the near term, but will succeed when political winds shift. Going big also requires major federal involvement, which is easily dismantled, and if it fails it could be a single proof point that effectively undermines decades of hard fought gains. A failed federal school choice effort could ensure a bear market for choice long after the age of Trump. Advocates should diversify their investments and play for a long-term, bottom-up strategy that can benefit students far after the bull market of 2017.

Nat Malkus is a research fellow in education policy studies at the American Enterprise Institute, where he specializes in K12 education.