Education Tax Credits Benefit Parents, Kids and Schools

Issue Brief

The idea of using tax credits to advance educational opportunity for at-risk children has gained momentum in the states in each of the past several years. Now as the President and 108th Congress turn to adopting a budget for FY 2004, the widespread benefits of education tax credits make them an attractive option for federal policymakers as well.

President Bush’s new budget contains $226 million in refundable tax credits for parents who choose to transfer their children from public schools identified as in need of improvement under the No Child Left Behind Act. These parents would receive a credit of 50 percent of the first $5,000 in tuition, fees, and transportation costs incurred in transfer to a private school or another public school. The credit would be refundable, offering a direct pay-out to parents who owe no taxes because of their low income.

No Child Left Behind requires public school districts to facilitate choice for families stuck with low-performing schools, although the system has met with difficulty as more school districts have contended that better options do not exist. For parents in districts with failing schools, the Bush tax credit plan represents a logical and powerful next step beyond last year’s landmark law.

Meanwhile a proposal in the House of Representatives seeks to build on the principle of scholarship tax credits pioneered in recent years in Arizona, Florida, and Pennsylvania. The plan’s lead sponsor is Representative Peter Hoekstra (R-MI), joined by Representatives Mark Souder (R-IN) and Tom Tancredo (R-CO). It allows individuals to claim a 50 percent tax credit, not to exceed $250 ($500 for joint returns) for cash contributions either to “education investment organizations” or to any public or private school providing K-12 education. Corporations could claim a credit not to exceed $50,000 for such contributions. The scholarship organizations themselves, which have grown by the hundreds in recent years, are non-profit organizations that assist needy children in being able to afford better schools.

Several states’ experiences with education tax credits have shown them to be a powerful way to direct new money toward schools — credits instituted in Arizona in 1997 and Florida and Pennsylvania in 2001 already have generated more than 60,000 school-choice scholarships. They also help reduce class sizes and crowding in public schools, with added benefits where districts with growing enrollments struggle with school construction or expansion costs.

Just as important, tax credits help provide greater equity in educational opportunity for all children. Families who do not utilize the credits can still see daily benefits as their public schools improve to keep up with the healthy new competition. And unlike many of the school reforms available to federal policymakers, the benefits of educational freedom are not prone to dissolving incrementally within each layer of bureaucracy between budget and child.