Cajun Choice

April 23, 2008

(Guest post by Greg Forster)

On a much more serious note (see below), the news that America got a new school choice program last month seems to have slipped by under the radar.

On March 24, Louisiana Governor Bobby Jindal signed SB5, providing a deduction off parents’ personal income taxes for qualified education expenses, including private school tuition. The deduction is worth 50% of the total amount spent on qualifying expenses, up to a maximum deduction of $5,000. For more details on the program see here.

The tax deduction became effective as soon as it was signed, so we now have 22 school choice programs in 14 states plus D.C. All eyes are now on Georgia to see if a tax-credit scholarship program passed by the legislature becomes America’s 23rd school choice program; Governor Sonny Perdue has until May 14 to sign it, veto it, or allow it to become law without his signature.

Personal tax credits and deductions for educational expenses are an unusual way to do school choice; Louisiana’s program is only the fourth of this type. But it’s an approach with a long history. Minnesota enacted a tax deduction for educational expenses in 1955; Iowa enacted a tax credit in 1987; Minnesota added a tax credit on top of its deduction in 1997 (the credit excludes tuition but includes other expenses like books and fees – it’s the only program of this type not to include tuition); and Illinois enacted a credit in 1999.

Personal tax credit/deduction programs tend to be broad in scope but miniscule in magnitude. Only the Minnesota program has an income restriction, so the number of people eligible to participate in these programs is typically very large. Almost 650,000 families benefit from the Iowa, Illinois, and Minnesota programs. On the other hand, the Iowa and Illinois programs provide maximum credits of only $250 and $500 respectively. The Minnesota program is slightly more generous, providing a maximum credit of $1,000 and a maximum deduction of $1,625 in grades K-6 and $2,500 in grades 7-12. And the maximum deduction in Louisiana is $5,000. I don’t know what that works out to in tax savings, but since state tax rates are lower than the federal rate it can’t be that much. Moreover, in most cases the taxpayer does not get a dollar-for-dollar credit or deduction for the money he or she spends; for example, in Louisiana you only get 50 cents on the dollar.

One idea behind these programs is to cut out the middleman and provide school choice as directly as possible. For example, the most important drawback of tax-credit scholarships is that they don’t create a parental entitlement to school choice. The scholarship granting organizations act as gatekeepers, generally favoring low-income parents and thus exacerbating the problem of “targeting” in school choice programs. (Of course, a corresponding advantage is that scholarship granting organizations have flexibility in the distribution of resources; one thing I discovered when I did the research behind this report is that scholarship granting organizations will often step up to provide full-ride scholarships to students facing personal crises such as the death of a parent.) By contrast, both vouchers and personal tax credits/deductions create a parental entitlement to school choice.

I have heard some argue that personal tax credits/deductions are better than vouchers because they cut out the middleman even more completely; supposedly it would be harder to add unnecessary regulations restricting the private schools. But I’ve never been able to understand why this is the case. In both voucher and personal tax credit/deduction programs, the legislature defines which private schools are eligible, and in both cases that’s where the unnecessary regulations get inserted. Why is it harder to do in one case than in the other? Is there some political reason why such restrictions are less likely to be written into the tax code than into other laws? That doesn’t strike me as plausible, but I’d be open to correction if somebody could make a case for it.

The major drawback to these programs is in the structure of state income taxes. Until some state enacts a refundable credit,** the benefit families get from these programs is limited to their total state income tax bill. That’s not a lot of money. And fewer dollars means less choice, as this report helpfully reminds us. Of course, you could in theory pass a refundable credit, but the political obstacles to that would be formidable.

For the record, the Friedman Foundation for Educational Choice, where your humble servant is employed, has no position on whether vouchers, tax-credit scholarships, or personal tax credits/deductions are preferable. Our only goal is to provide a full choice to all students, and in theory all three types of programs can do that. They each have their advantages and disadvantages, but we evaluate each program based on how much choice it provides, not its funding mechanism.

That said, until we achieve universal choice, we’re stuck with limited programs, and in that context each of the three types has its own advantages and disadvantages.

Louisiana is a lot better off for having this program as opposed to no program. It will help a substantial number of families send their children to the school of their choice more easily, and it’s a universal program, establishing the important principle that school choice is good for all, not just for some.

That, and the passage of yet another school choice program is further proof, if further proof were necessary, that school choice is politically stronger than ever.

**CORRECTION: George Clowes has reminded me that the Minnesota tax credit is in fact refundable. That doesn’t really affect my point much, since the Minnesota credit doesn’t include tuition (only other education expenses like books and fees) and this is an even bigger limitation than the “unrefundability” (to use a totally real and not-made-up word) of the credits in other states. Tax credits for private school families won’t provide much choice until we get one that 1) is refundable, 2) isn’t restricted to a small amount of money, and 3) includes tution. Nonetheless, I apologize for the error, and I thank George for bringing it to my attention.