Making Education Tax Credits Work at the Federal Level
Remarks to the National Conference of State Legislatures Assembly on Federal Issues
May 10, 2002
By Don Soifer
Good afternoon. It is a real pleasure to have this opportunity to address an esteemed panel of
state legislators here to talk about education policy.
I have been asked to address you today on how tuition tax credits might work on the federal
level. This is a particularly timely topic because there is a prominent new federal education tax
credit proposal sponsored by Congressman Bob Schaffer, Republican from Colorado, that is
currently being fine-tuned for introduction in the House of Representatives.
Today, six states have education tax credits in place: Arizona, Florida, Iowa, Illinois, Minnesota
and Pennsylvania. A federal tax credit would be a powerful way to infuse new dollars into
education, dollars that parents could control. And with a tax credit, each dollar gets a dollar‟s
worth of services, without first having nickels, dimes and quarters siphoned away by
bureaucracies at the federal, state and school district level.
Representative Schaffer‟s bill is modeled predominantly on Arizona‟s state tax credit law, the
nation‟s first scholarship tax credit, passed in 1997. It would be imprudent to try to conduct an
informed discussion about federal education tax credits without putting it in context of what is
going on around the country, so I would first like to focus on the system in place in Arizona, and
on the lessons can that be derived from that experience.
The Arizona law allows individuals to receive dollar-for-dollar tax credits for up to $500 against
their state income tax for contributions to recognized scholarship organizations. The limit for
married couples is $625. The law also provides for $200 tax credits for contributions to public
schools for extracurricular activities. The Arizona law does not provide for corporate tax credits.
A recent study of the Arizona scholarships by the Cato Institute found that in just the first three
years the credit was available, over $32 million was given to scholarship organizations, resulting
in over 19,000 scholarships being awarded.
Some critics of the Arizona plan have suggested that it does not benefit poor families – that
because the scholarships often do not cover the full cost of tuition, the tax credits are nothing
more than subsidies for families that already enroll their children in private school anyway. We
have seen that 75 percent of Arizona‟s scholarships went to students already enrolled in public
schools, and 25 percent helped parents transfer their children out of government schools into
private ones. But this does not mean that the scholarships went to wealthy families. The Cato
study found that more than 80 percent of the Arizona scholarships are granted on the basis of
It also found that by 1999, enough students had transferred from public schools to private
schools that the resulting cost savings to the state had made the tax credit revenue neutral.
Opponents of parental choice never seem to tire from insisting that tax credits drain money from
public schools. But with the new money that tax credits bring to public and private education,
public education spending in Arizona has increased significantly since the tax credit law was
In fact, the Arizona Department of Taxation reports that more tax credit dollars are claimed for
public school donations than for donations to scholarship organizations. In 2000, the Arizona tax
credit raised $15.8 million for scholarship organizations and $17.5 million for public schools.
Tuition tax credits bring added benefits to states with growing public school enrollments. A
recent study by the Goldwater Institute projected that Arizona will face increased elementary and
secondary school enrollments of 85,000 students between 2000 and 2010, creating the need for
3,400 additional classrooms. The study advocates expanding Arizona‟s tuition tax credit to
include dollar-for-dollar credits against the state‟s corporate income tax. Goldwater projects that
this would result in an estimated 22,000 students moving from government to private schools, in
addition to a similar number of new students directly entering private schools. That would
reduce the need for costly new school construction and further increase savings. Official public
school per-pupil expenditures generally do not include major expense items like school
construction, repairs and modernization.
Besides, experience shows that when it comes to school construction, private schools, and even
charter schools, frequently build more cheaply and more effectively than public schools, who are
subject to regulations like the federal Davis-Bacon super-minimum wage requirements as well as
the inherent inefficiencies to which most public school bureaucracies are subject.
Arizona, while the first, is no longer the only state offering tuition tax credits. Last year,
Pennsylvania approved a corporate tax credit for contributions to scholarship organizations. The
credit is capped at $100,000 per business and is worth 75 cents on the dollar for a one-year
donation and 90 cents on the dollar for a two-year commitment. To date, more than 900
businesses have pledged approximately $19 million, and the program is expected to provide
some 10,000 scholarships to this year. Florida also passed corporate tax credits for contributions
to scholarship organizations last year.
Illinois, Iowa and Minnesota offer income tax credits for individuals or families for K-12
education expenses, including tuition, in public or private schools.
Education tax credits have demonstrated a strong track record when challenged in court. Six
consecutive court challenges have ended in tax credits being upheld. In 1999, the Arizona
Supreme Court ruled that its tax credit law violated neither the Arizona nor the U.S.
Constitution. Because it is a tax credit, the court concluded that the money in question is not
„public money,‟ because it has not entered the state‟s control. This same reasoning formed the
basis for the 7th Judicial Circuit Court‟s 2000 ruling on the Illinois tax credit. “Money is not
public until it belongs to the state,” ruled Circuit Judge Thomas Appleton. “As taxes unpaid by
taxpayers cannot be found to be money rightfully belonging to the state, any of that money
which is used to pay for a child‟s parochial education is not public money, hence public support
does not exist.”
When that case was appealed to the Illinois Supreme Court by the Illinois Education Association,
their ruling went even further in affirming the law. The court held that the tax credit would still
be constitutional under both the state and federal constitutions even if the money were
considered to be public money.
The Schaffer plan, as it is currently designed, would adopt the structure of Arizona‟s education
tax credit, allowing for 50 percent income tax credits for contributions to scholarship
organizations, with credits capped at $250 for individuals, or $500 for married couples.
Although corporate tax credits would also be allowed.
Last year, another Cato Institute study projected that a federal tax credit offering an individual
and family tax credit component of the same size as that currently contained in Representative
Schaffer‟s plan, would raise enough money for nearly 3 million student scholarships worth
$2,000 apiece. If 2 million of those scholarships were used to move low-income students from
public to private schools, the Cato researchers projected taxpayers would save approximately
Last year saw two unprecedented advances for parental choice in education at the federal level.
First, education savings accounts, allowing parents to invest up to $2,000 annually in tax-free
savings accounts for K-12 or college expenses, were signed into law. Second, a provision in
President Bush‟s “No Child Left Behind” law allowed parents of children in failing schools to
use their entire share of Title I aid – approximately $500 to $1,000 per child – to purchase
private tutoring services to help boost their achievement. Tuition tax credits at the federal level
would be a logical, and powerful, next step.
I look forward to hearing your comments and questions. Thank you.