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The Public Education Tax Credit, Cato Policy Analysis No. 605

The Public Education Tax Credit, Cato Policy Analysis No. 605

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Published by Cato Institute
Public education is an end, not a means. For a
democratic nation to thrive, its schools must prepare
children not only for success in private life but
for participation in public life. It must foster harmonious
social relations among the disparate
groups in our pluralistic society and ensure universal
access to a quality education. Unfortunately, the
American school system has long fallen short as a
means of fulfilling these purposes.

This paper offers a more effective way of delivering
on the promise of public education, by ensuring
that all families have the means to choose their
children's schools from a diverse market of education
providers. All education providers
Public education is an end, not a means. For a
democratic nation to thrive, its schools must prepare
children not only for success in private life but
for participation in public life. It must foster harmonious
social relations among the disparate
groups in our pluralistic society and ensure universal
access to a quality education. Unfortunately, the
American school system has long fallen short as a
means of fulfilling these purposes.

This paper offers a more effective way of delivering
on the promise of public education, by ensuring
that all families have the means to choose their
children's schools from a diverse market of education
providers. All education providers

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Published by: Cato Institute on Mar 27, 2009
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Public education is an end, not a means. For a democratic nation to thrive, its schools must pre-pare children not only for success in private life butfor participation in public life. It must foster har-monious social relations among the disparategroups in our pluralistic society and ensure univer-sal access to a quality education. Unfortunately, the American school system has long fallen short as a means of fulfilling these purposes.This paper offers a more effective way of deliv-ering on the promise of public education, by ensur-ing that all families have the means to choose theirchildren’s schools from a diverse market of educa-tion providers. All education providers—govern-ment, religious, and secular—can contribute topublic education because all can serve the public by educating children.Educational freedom can most effectively be real-ized through nonrefundable education tax credits—for both parents’ education costs for their own chil-dren and taxpayer donations to nonprofit scholar-ship funds. This paper argues that tax credits enjoy practical, legal, and political advantages over school vouchers. These advantages are even more impor-tant for choice programs that target low-incomechildren, as tax credits mitigate some disadvantagesinherent to targeted programs. It also contends thatbroad-based programs are superior to narrowly tar-geted ones, even when the goal is specifically to servedisadvantaged students. Targeted programs are fun-damentally inferior—in both practical and strategicterms—to broad-based programs that include the voting middle class. Finally, accountability in educa-tion means accountability to parents and taxpayers.Education tax credits afford this accountability without the need for intrusive government regula-tions that create political and market liabilities forschool choice policies.To date, school choice policy has spread andgrown only slowly, in part because of inadequate leg-islation. Existing school choice laws fall short interms of both market principles and political con-siderations. Pursuing a policy that follows moreclosely what works economically and politically should increase the likelihood of long-term legisla-tive success, program success, program survival, andprogram expansion.Model legislation derived from the policy andpolitical principles detailed below is presented in Appendix B of this paper, and real-world examplesof how the legislation would work are given in Appendix A.
The Public Education Tax Credit 
by Adam B. Schaeffer
_____________________________________________________________________________________________________
 Adam Schaeffer is a policy analyst with the Cato Institute’s Center for Educational Freedom.
Executive Summary 
No. 605December 5, 2007
� 
 
Introduction
Formidable obstacles to spreading educa-tional freedom abound. Powerful teachers’unions and a huge government educationindustry want to preserve their prerogatives;and a broad range of middle-class parents areeager for reform but anxious about majorchanges to a system they often believe per-forms adequately in their own communities.
1
These are daunting hurdles for any policy toclear, but most school choice reform efforts todate have taken forms that put them at a dis-advantage to these status-quo forces.Policy elites play a large role in setting theagenda: they produce the articles, papers,arguments, and ideas that legislators draw onwhen writing legislation. Long before any model legislation is drawn up, policy researchers produce the ideas and strategiesthat legislators read or talk about with mem-bers of the policy elites. Considering the lim-ited time legislators have for exploring policy alternatives, those who go looking for a school choice proposal will likely be influ-enced by the dominant policy discussion.Therefore, the school choice policy discus-sion must reflect the best ideas available.
2
School choice efforts will more likely suc-ceed if greater attention is paid to principles of good policy and politics in the design of legis-lation.
3
More than 50 years have passed sincethe birth of the modern school choice idea in America. Serious political efforts have beenunder way for over a quarter century. And forperhaps 15 years America has enjoyed what canproperly be called an organized and activeschool choice movement. School choice policy during this period has been driven by certainimplicit preferences that are, on closer exami-nation, inimical to effective educational choicereform. Specifically, the pursuit of highly regu-lated and targeted voucher programs impedesthe rise of a competitive education industry and creates unnecessary political disadvan-tages for school choice supporters. A new approach that rests on timeless principles,empirical research, and polling data can movethe school choice movement into a new andmore successful phase.This study begins with a detailed analysis of the two most powerful kinds of school choicereform: education vouchers and tax credits.The national discussion on private schoolchoice is dominated by talk of vouchers.However, tax credits have clear advantages over vouchers on many levels. Tax credits are morepopular with the public and politicians, lesslikely to be challenged in court, and more like-ly to survive most court challenges. They createpowerful, positive political dynamics thatstrengthen the policy over time and makedefense and expansion more likely.The school choice movement’s focus ontargeted programs is not a helpful short- orlong-term strategy, regardless of whether thegoal is specifically to serve disadvantaged chil-dren or children from all families. Broad-basedprograms are more likely to lead to long-termlegislative success, program success, programsurvival, and program expansion.
4
 And yet, tar-geted programs dominate the discussion andlegislative agenda. Also, under targeted pro-grams, special regulations are often imposedon schools that accept students supportedthrough school choice programs. Such regula-tions limit those programs’ effectiveness indelivering choice and increased studentachievement, and sideline many of the mostnatural allies of school choice reform. Nonethe-less they are a common feature of legislation.The discussion that follows explains these pol-icy issues in detail as well as the considerationsthat underpin the structure of the model legisla-tion presented in this paper. No existing modellegislation is structured in a way that addresses allof these concerns. The Public Education TaxCredit model legislation embodies the principlesof good policy and good politics described here.Toward that end, this paper
Explains why nonrefundable personaluse and donation education tax creditsare preferable to vouchers;
Explains the importance of passingbroad based rather than narrowly tar-geted school choice programs;
2
The pursuit of highly regulatedand targetedprograms impedesthe rise of acompetitiveeducationindustry.
 
Illustrates why education providers, inaddition to parents and children, needto be free of burdensome regulations;
Summarizes the model tax credit legis-lation presented in Appendix B inaccessible, layman’s terms, and givesexamples in Appendix A of how itwould work in the real world; and
Presents model tax credit legislationthat provides for educational freedomby funding choice through personaluse and donation tax credits on stateindividual and corporate income taxes,state sales taxes, and property taxes.
Why Tax Credits ArePreferable to Vouchers
Supporters of educational freedom, per-haps not surprisingly, sometimes disagreeabout what constitutes the ideal school choicepolicy. The late Milton Friedman, amongmany others, viewed his original proposal for a  voucher system as the best practical reform forthe public education system. Other supportersof educational freedom prefer education taxcredits. Most school choice supporters have lit-tle or no preference between these alternatives.
5
They see any expansion of public-private edu-cational choice as a good thing. However, while vouchers and tax credits are both improve-ments on the status quo, each has particularstrengths and weaknesses.This section explains why education taxcredits are preferable to vouchers for bothpractical and political reasons. This does notmean the current system is preferable to a  voucher system—quite the contrary. Butschool choice reformers face a tremendously difficult task, which can be eased by focusingon the policy with the greatest advantages.
6
This discussion considers personal use anddonation tax credits as two sides of the samecoin; personal use credits are helpful to higher-income taxpayers with children who can usethem to offset their tax liability, while donationcredits create a pool of funds that lower-income families can access for the education of their children. Together, these personal useand donation tax credits can create the mostsuccessful system of educational freedom cur-rently possible. This discussion focuses on theinherent advantages of tax credits relative to vouchers, not on the relative limitations oradvantages of existing voucher and tax creditprograms. All existing voucher and tax creditprograms are seriously compromised and lim-ited. Vouchers and tax credits are, however, very different mechanisms for delivering schoolchoice and it is those differences that will beanalyzed below. The analysis reveals that taxcredits are inherently preferable to vouchersacross at least five dimensions.
Legal Considerations
One of the most important advantages taxcredits have over vouchers is a legal distinctionof great consequence. Courts do not considertax credits to be government money, whereas vouchers are considered government money.
7
This legal issue has a number of political rami-fications. Political concerns, however, are diffi-cult to separate from purely legal ones becausethe interpretation of the law is often driven by the political dispositions of judges and thelegal profession as a whole.
8
The fact that the courts and the public gen-erally regard vouchers as government fundsand tax credits as private funds has a numberof important consequences. It means that taxcredits are less likely to be challenged in court,less likely to be overturned by a court, less like-ly to come with burdensome regulations, andless likely to accumulate regulations over time.The most important implication is this: taxcredits are a viable option in many states whereeffective voucher programs are likely to bestruck down on state constitutional grounds.State courts have repeatedly ruled that vouchers are government funds.
9
The dis-bursement of government funds to religiousschools is expressly prohibited in most statesby turn-of-the-century anti-Catholic “Blaine”amendments that were meant to keep publicfunding in Protestant-influenced publicschools and away from Catholic parochialschools. Many states also have what are called
3
Tax credits areless likely to bechallenged incourt, less likely to be overturnedby a court, lesslikely to comewith burdensomeregulations, andless likely toaccumulateregulations overtime.

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