GENERAL ASSEMBLY OF NORTH CAROLINA
Session 2007
FISCAL ANALYSIS MEMORANDUM
This confidential fiscal memorandum is a fiscal analysis of a draft bill, amendment, committee substitute, or conference committee report that has not been formally introduced or adopted on the chamber floor or in committee. This is not an official fiscal note. If upon introduction of the bill you determine that a formal fiscal note is needed, please make a fiscal note request to the Fiscal Research Division, and one will be provided under the rules of the House and the Senate.
DATE: TO: FROM: RE:
June 24, 2008 Rep. Paul Stam Kristopher Nordstrom Fiscal Research Division House Bill 388 PCS
FISCAL IMPACT Yes (X) FY 2008-09
GENERAL FUND REVENUES EXPENDITURES NET STATE SAVINGS LOCAL GOVERNMENTS REVENUES EXPENDITURES NET LOCAL SAVINGS POSITIONS N/A ($2.8) $2.8 N/A N/A ($5.9) $5.9 N/A N/A ($6.2) $6.2 N/A N/A ($6.5) $6.5 N/A N/A ($6.8) $6.8 N/A ($8.7) ($11.8) $3.0 ($17.8) ($24.7) $7.0
No ( ) FY 2009-10
No Estimate Available ( ) FY 2010-11 ($ in millions)
($18.1) ($25.9) $7.9 ($18.4) ($27.2) $8.8 ($18.7) ($28.6) $9.9
FY 2011-12
FY 2012-13
PRINCIPAL DEPARTMENT(S) & PROGRAM(S) AFFECTED: North Carolina Department of Revenue, North Carolina Department of Public Instruction, Local Education Agencies. EFFECTIVE DATE: The act would become effective for taxable years beginning on or after January 1, 2008, and would apply to semesters beginning on or after July 1, 2008. The act would expire on December 31, 2013.
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BILL SUMMARY: House Bill 388 would allow an individual income tax credit for up to $3,000 per semester for tuition and special education and related services expenses for a taxpayer's eligible dependent child with a disability who attends a nonpublic school or a public school where tuition is charged for the eligible dependent child's enrollment (a maximum of $6,000 for a full academic year). To qualify a student must be determined, based on an evaluation conducted by the appropriate public school system, to be a child with special needs who requires special instructional or therapeutic services outside of the regular classroom on at least at daily basis. In addition, the child must have attended a public school for at least two semesters in one year. For the initial eligibility for the tax credit, the eligible dependent child shall have been enrolled in and attended at least two semesters in a public school in the immediately preceding taxable year. The taxpayer must be able to claim a personal exemption for the child in order to claim the credit. The credit is refundable. The bill would require the Department of Revenue to report to the Revenue Laws Study Committee on the administration of the education expenses credit and on the number and amount of education expenses credits taken. The PCS makes the following changes: Requires that the eligible dependent child be enrolled in and attending public school for more than 80 days during the semester rather than 3 months of the semester; Removes Section 3 and 4 of the original bill that allowed the board of county commissioners discretion to appropriate funds; Clarifies that home schools are not eligible for the tax credit for tuition expenses; Adds a reporting requirement to the Joint Legislative Education Oversight Committee; and Places a five year sunset on the bill
ASSUMPTIONS AND METHODOLOGY: The fiscal impact of this bill will arise from taxpayers whose children are currently enrolled in public school but who transfer their children to private schools after passage of the bill. When these students leave public schools, there is a decrease in State expenditures of about $8,000. At the same time, there is a loss of State revenue equal to the size of the tax credit of $6,000. The net effect is that the State saves about $2,000 for each eligible child who leaves public schools, as the reduction in State expenditures for students with special needs is greater than the maximum size of the tax credit. The tax credit might entice some parents of children with special needs to transfer their children out of the public school system and into a private school. Unfortunately, no data exists on price elasticity of demand for private school education specifically for children with special needs. The only data from which some inferences might be drawn comes from Florida’s McKay Scholarship Program for Students with Disabilities. This program gives parents a voucher for any special needs student in the Florida public schools to shift out of the public system to a private school, or to transfer to a different public school. During the 2006-07 school year voucher amounts ranged from $5,039 to $21,907, with an average payment of $7,206, depending on the child’s disability. Program data suggests that approximately 5% of eligible students participate in the program. While there are differences between this program and the tax credit proposed by H388 (level of support, application process, etc.), this experience provides the best available estimate of the likely
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usage of the tax credit proposed by this bill. Therefore, this analysis assumes that 5% of eligible students in public schools would participate in the tax credits offered under this bill. DPI indicates that for the 2007-08 school year, 194,182 children are identified as having special educational needs that warrant an Individualized Educational Program (IEP).1 Of that number of students, DPI estimates that approximately 30% require special instructional and/or therapeutic services outside the regular classroom at least daily. Applying these percentages to the 194,182 students with IEPs produces an estimated pool of 2,913 students who would be eligible for the $3,000 per semester credit should their parents transfer them to private school settings.2 While each transfer would cost the State revenue (in the form of the tax credit), it would also reduce State and local expenditures, as State and local school systems would no longer be financially responsible for educating the child for which the credit was granted. In order to calculate the reduction in State expenditures, one must first estimate the per child expenditures for eligible children. The FY 2007-08 State average transfer of appropriation to charter schools of $4,741 per child serves as a reasonable proxy for the total avoided annual State operational expenditure for a student who transfers out of a typical public school. The per child supplemental appropriation of $3,350.81 for each child with special needs (for up to 12.5% of a school system’s population) serves as a reasonable proxy for the additional State average expenditure for a child with special needs. A total of $8,091.80 is therefore used as a proxy for the average operational savings to the State that results from a student with an IEP transferring (i.e., withdrawing) from the public schools. The State average local expenditure per child for operational expenses is $1,934.05. The lost revenue is simply the size of the tax credit. For simplicity’s sake, this fiscal analysis estimates that all taxpayers will receive the maximum credit amount of $6,000. Projecting the fiscal impact in subsequent years requires estimating the growth of the number of students with special needs, as well as estimating of future expenditures on children with special needs. Over the past 10 years, the students with special needs headcount has increased at an average rate of 1.7% per year. Over that same period, expenditures on children with special needs have increased at an average rate of 3.2% per year. Applying these growth rates to the numbers above allows us to make the following projections for the fiscal impact of this bill.
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An IEP is a written plan for the special education and/or related services that will be provided to a particular child. An IEP must be developed before special education and related services are provided to a child. The school is required to hold meetings at least once a year or more often if necessary, to review each child's IEP and to revise the IEP when needed. 2 For the sake of simplicity, the analysis assumes that any child in the count of children with IEPs in 2007-08 will have spent two semesters attending public schools in the 2007 tax year in order to be considered eligible for tax year 2008.
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Total students with special needs in public schools Students with daily service requirement (30%) Public students transferring to private schools (5%) State spending per CWD student State operational savings Cost of tax credit (lost State revenue) Net State Operational Savings
2008-09 2009-10 2010-11 2011-12 2012-13 194,182 197,483 200,840 204,255 207,727 58,255 59,245 60,252 61,276 62,318 2,913 2,962 3,013 3,064 3,116 $8,092 $8,348 $8,613 $8,886 $9,168 $11,784,614 $24,729,752 $25,947,417 $27,225,040 $28,565,571 ($8,738,190) ($17,773,478) ($18,075,628) ($18,382,913) ($18,695,423) $3,046,424* $6,956,273 $7,871,790 $8,842,126 $9,870,148
Total students with special needs in public schools Students with daily service requirement (30%) Public students transferring to private schools (5%) Local spending per CWD student Local operational savings Net Local Operational Savings
2008-09 194,182 58,255 2,913 $1,934 $2,816,683 $2,816,683*
2009-10 197,483 59,245 2,962 $1,995 $5,910,746 $5,910,746
2010-11 200,840 60,252 3,013 $2,059 $6,201,785 $6,201,785
2011-12 204,255 61,276 3,064 $2,124 $6,507,154 $6,507,154
2012-13 207,727 62,318 3,116 $2,191 $6,827,559 $6,827,559
* Note that savings in FY 2008-09 are reduced by half because they are based only on one semester's worth of savings (fall 2008 only).
OTHER FACTORS THAT COULD AFFECT THE FISCAL IMPACT Evaluations The bill requires that, in order to be eligible for the credit, a child be determined through evaluation by the public schools to need an IEP that requires special instructional and/or therapeutic services for the child outside the regular classroom on at least a daily basis. If one assumes that the tax credit created by the bill is a sufficient incentive for some number of parents of current public school students to seek evaluation in order to obtain eligibility for the tax credit, one must assume that the number of evaluations conducted by the public schools will increase. No data exists, however, on which to base an estimate of such additional evaluations. Given an average cost to the public schools of $1,500 per evaluation, the cost of additional evaluations could be significant. The analysis does not account for this potential cost. If evaluations do increase substantially as a result of the bill, this analysis would overstate savings created by the bill. Tuition Costs Not all private school tuitions are greater than $6,000 per year. It is possible that there would be a number of tax credit recipients for whom the tuition and other educational and therapeutic expenses would be less than $6,000 per year, however there is no available data from which to derive an estimate. Therefore, this fiscal analysis assumes that all recipients receive the full $6,000 per year. If there is a significant number of eligible students for whom tuition and therapeutic expenses would be less than $6,000 per year, this analysis would understate the savings created by the bill. Gaming the System It is possible that some parents of potentially eligible children who have never attended public schools would enroll their children in public schools for the required two semesters in order to then be able to receive the credit in a subsequent year. It seems unlikely, however, that a significant number of parents who have already made a decision not to send their children to public schools would make this choice, even in the face of potential financial gain. The analysis therefore
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assumes that any costs associated with this group of children will be negligible. To the extent that this assumption is incorrect, the analysis will overstate total savings created by the bill. Administrative Costs In order to claim the education expenses tax credit, the taxpayer would have to provide additional information to the Secretary of the Department of Revenue. Depending on the usage of the program, the Department of Revenue would likely require additional personnel to administer the program. The McKay Scholarship Program in Florida, for example, employs one program director and three program specialists. It is unclear, however, whether such positions would be necessary for this program. As such, this fiscal analysis does not take these potential costs into account. Other Technical Concerns One must also consider the distribution of transfer students across school systems and across schools within a given system would affect what savings would be realized, and the timing of any savings realized, by the schools or the State as a result of the transfers. Both operational and capital expenditures are less sensitive to marginal changes in numbers of students served than the “dollars per student” simplifications used in the analysis imply. SOURCES OF DATA: North Carolina Department of Public Instruction (DPI), Florida’s McKay Scholarship Program. TECHNICAL CONSIDERATIONS: None
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