Do tax-credit scholarship programs drain money from district schools?

(Guest Post by Marty Lueken)

Perhaps the most-cited criticism of educational choice policies is that they “siphon” resources from district schools. High-quality research reveals numerous benefits stemming from educational choice, including benefits for participants, positive competitive effects, and fostering civic values. Policymakers, however, are concerned about the fiscal impact on district schools. A new report, The Tax-Credit Scholarship Audit, finds that such claims about “siphoning” are unfounded.

This report follows up on an earlier report, The School Voucher Audit, which examined the fiscal impact of school voucher programs. In the report, I estimated the fiscal impact of 10 tax-credit scholarship programs in seven states (AZ, FL, GA, IA, IN, PA, and RI) on state governments, state and local taxpayers, and school districts combined. There are currently 21 tax-credit scholarship programs operating in 17 states. Programs with less than three years of data were not included in the analysis. This sample includes the largest tax-credit scholarship programs in the country. These programs accounted for 93 percent of all scholarships awarded in 2013-14, the final year included in the analysis.

Here’s a summary of the results:

Participation

Since the first tax-credit scholarship program was established in 1997, more than 1.2 million scholarships were awarded to students through 2014. Participation in tax-credit scholarship programs has grown every year since 1997. Participation in these programs grew, on average, by 20 percent each year since 2000.

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Tax-credit scholarship programs require time to establish. Looking at the programs by year in operation, the number of scholarships awarded more than tripled after their fifth year in operation, from 28,000 to more than 95,000.

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Educational choice programs are popular and continue to expand, though not to the detriment of the current district school system, as critics argue. Even in states where eligibility for school choice programs is expansive, we haven’t seen a mass exodus of students from district schools. Moreover, the best evidence on the effects of school choice on district schools shows that district schools improve in response to competition.

Fiscal Impact

Depending on assumptions about the number of students switching from district or charter schools to private schools and the share of students who receive multiple scholarships, I estimated that these 10 tax-credit scholarship programs saved taxpayers between $1.7 billion and $3.4 billion since Arizona enacted the first such program in 1997. That equates to between $1,650 and $3,000 in savings for each scholarship recipient.

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This paints a starkly different picture from the “siphoning” argument that school choice critics like to make. Context is useful when discussing the fiscal impacts of these programs. For all the controversy that sometimes surrounds school choice programs, the fact is that these programs make up a very small share of states’ K-12 revenues. The cost of the taxpayer subsidies for the programs covered in the report range from 0.1 percent each for Rhode Island and Indiana’s programs to 1.5 percent for Arizona’s four programs.

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When critics claim these programs are costly or drain funds, they usually focus on just the cost of the taxpayer subsidy without giving any consideration to savings. But that tells only one part of the story. It’s also true that districts are no longer responsible for educating students that leave via these programs. In the short-run, they incur variable cost savings. My analysis accounts for this and even takes a more conservative approach to estimating variable costs than in other work by economists.

These savings don’t usually show up in budget reports, however, though public officials make choices—whether implicitly or explicitly—about what they do with the savings. As I note in the report:

“When school choice programs are enacted, however, it is usually the case that savings do not automatically materialize as reductions in K–12 expenditures because public officials must actively make decisions to reduce such expenditures. When students leave public schools, officials have more room in their budgets to allocate resources for educating students that remain in those schools.” (pp. 15-16)

Government officials have many options regarding what to do with these savings. They can reinvest them in district schools, which means more resources for the fewer number of students who remain in them, or they can also reallocate those savings to other public services. They can also choose to hold all or some of the funds rather than spend them. They can subsequently lower property taxes or save and invest these funds. Typically, however, it’s not clear how these freed-up resources are used.

It is a worthwhile policy goal to provide and expand quality educational options so that parents can match their children to the education provider that works best for them. Tax-credit scholarship programs offer one way to help achieve this goal by providing avenues for states to attract capital and invest in their state’s education system without harming taxpayers or students.

 

Martin F. Lueken, Ph.D. is the Director of Fiscal Policy and Analysis at EdChoice.

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