The Fiscal Impact of LB 14, the ebraska Elementary and Secondary Educational Opportunity Act

February, 2013

PolEcon Research 51 Atkinson Street Dover, New Hampshire 03820 603 749-4677 603 988-9779

Table of Contents
Introduction............................................................................................................................... 3 Key Factors That Will Determine the Net Fiscal Impacts of LB 14 ........................................ 3 The Sensitivity of Fiscal Impact Estimates............................................................................... 7 The Range of LB 14’s Fiscal Impacts....................................................................................... 8 Conclusions............................................................................................................................. 14

2

Introduction
This summary report updates prior analyses1 of the fiscal impacts of proposed tax-credit funded scholarships programs in Nebraska. The study projects the impact that tax-credit funded tuition scholarships will have on the distribution of students between public and private schools in Nebraska. It estimates the demand for private schooling among public school students in response to changes in the price of private school at different average scholarship values, the likely number of students who will move from public to private schools depending on the average dollar value of scholarships, and the percentage of scholarships that are awarded to students currently or already planning on attending private schools We use these estimates to construct a model to determine the impact that tuition tax-credits will have on state education aid payments and to calculate the “breakeven” number of public school students that would have to switch from public to private schools in response to the scholarship program in order to make the tax-credit fiscally neutral or result in fiscal benefits from the perspective of Nebraska state government. The largest tuition tax-credit scholarship program in the country is operated in the State of Florida. A December 2008 analysis of Florida’s tuition tax-credit scholarship program conducted by that state’s Office of Program Policy Analysis & Government Accountability2, found that the program saved the state just under $39 million in state education aid payments in the 2007-08 school years. At that time, tax-credits were capped at $80 million and provided scholarships to just over 20,000 students. An updated 2010 analysis found the state saved just over $36 million in the 2008-09 school year. These documented fiscal benefits, in part, have resulted in the program’s expansion to its current size of $229 in taxcredits funding over 50,000 scholarships at an average value of $3,664 in the 2012-13 school year. That study and analyses of other state tax-credit programs informed this research on LB 14.

Key Factors That Will Determine the Net Fiscal Impacts of LB 14
Tax-credit funded scholarships will save money for the State of Nebraska to the extent that they induce students to transfer from public to private schools at a cost, in the form of foregone tax revenue (the tax-credits that fund scholarships), that is lower than the cost to Nebraska of the per-student education aid that the state would have to fund if the students entered or remained in the public schools. Any tax-credit funded scholarship program can be structured in a manner that assures net fiscal benefits to the state. The design of the scholarship program in the Elementary and Secondary Educational Opportunity Act (ESEOA), as outlined in LB14, increases the probability that the cost of tax-credits to the state will be lower than the cost of state education aid per student, and thus the state will receive a net fiscal benefit as a result of passage of LB 14. These design factors are noted below and their impact on fiscal impacts is documented in subsequent sections of this report. The key factors that determine the fiscal impact of this or any tax-credit scholarship proposal include: 3

The value of tax-credits. By providing a credit of 60 percent of the value of contributions to scholarship granting organizations LB 14 allows the state to provide a dollar’s worth of scholarships (or educational services) at a cost of just 60 cents to the state. For $10,000,000 in tax-credits to be awarded, a total of $16.67 million in contributions to scholarship granting organizations must be made. This allows more scholarship funds per dollar of tax-credits to be awarded than if tax-credits were valued at 100 percent of contributions. Another way to consider the importance of this feature is to consider a scholarship that has a value of $3,295 (the estimated amount of state aid per student that varies with changes in enrollment). Because contributions for scholarships receive a 60% tax-credit, the cost to the state, in foregone revenue, for a scholarship with a value of $3,295 is just $1,978. If the scholarship goes to a student transferring from a public to a private school the savings to the state is the difference between the state education aid associated with the student who is transferring to a private school and the tax-credit cost of the scholarship. In the current example, a scholarship with a value equal to the amount of state education associated with the student ($3,295) would only have a cost to the state of $1,978 in tax-credits, for a savings of aid $1,317. As long as the tax cost of the average value of scholarships3 (60% of scholarship value) does not exceed the average amount of state education aid per student, tax-credit funded scholarships awarded to students transferring from a public to a private school will result in a savings for the State of Nebraska. The 60% value for credits allows the program to absorb the costs associated with administration of the scholarships (5%) as well as a percentage of scholarships being awarded to students already planning on or currently attending private schools (where the state receives no savings in state education aid) and still produce fiscal benefits for the state. The percentage of scholarships awarded to public and private school students. This is perhaps the most important factors affecting overall fiscal impacts. Adding this variable to the fiscal equation suggests that the percentage of scholarships that go to students in the public schools must be high enough, and at a cost low enough (average value of scholarship times the forgone tax revenue cost of the scholarship), to generate state aid savings for the State of Nebraska that can offset the cost of any scholarships going to students who generate no savings for the state (those currently or planning on attending private schools). The state receives no fiscal benefit when a scholarship is awarded to a student who would otherwise be attending a private school in the absence of the scholarship program, but the state incurs the cost of the tax-credits that fund it. There are many fewer private school students in Nebraska who will be eligible for scholarships than there are public school students who will be eligible, but most can be expected to apply for a scholarship if eligible. In addition to income restrictions on scholarship eligibility, LB 14 reduces the chances that current private school students will receive scholarships by limiting applicants from current private school students to those students entering kindergarten and those entering ninth grade. In general, fiscal savings will occur as long as about 70 percent of scholarships are awarded to public school students transferring to private schools, but the total savings also depend on scholarship values and the number of scholarships provided. In a few combinations, these variables could conceivably produce no fiscal benefits for the state. The average value of scholarships. Higher value scholarships generate more demand for scholarships, especially among lower income families, but they also reduce the number 4

of available scholarships. Very low-value scholarships reduce participation among lower-income families and, for programs with a large volume of scholarship funds, may risk not generating enough demand among public school families for the program to generate savings for the state. A balance between awarding high-value scholarships (which does the most to assure that the children from the lowest income households can use the scholarships to attend private schools) and the need to award enough scholarships to assure a sufficient number of scholarships are awarded to students transferring from public to private schools is a key to maximizing fiscal benefits. This analysis of LB 14 suggests that in the first year, the breakeven rate (or the number of scholarships that must go to students transferring from public to private schools for the state to “breakeven” or generate fiscal savings) must be just under 3,000 scholarships for a program that awards $10 million in tax-credits. Assuming at least 70 percent of the scholarships awarded go to students transferring from public to private schools, and assuming the most conservative price elasticity of demand for public schooling (meaning we assume that scholarships will not be as strong an inducement for students to transfer to a private schools than if a higher price elasticity of demand was used), the breakeven number of scholarships over 10 years will be achieved at all scholarship values of $1,500 or above. If 80 percent of scholarships go to public school students transferring to private schools then the program breaks even or produces net fiscal benefits at scholarship value above $1,250.
Figure 1

Demand Among Public School Families For Scholarships Increases With The Scholarship Value, But The Supply Of Scholarships Decreases
18,000 16,000 14,000 12,000
S tudents

Scholarship Demand Demand From Public School Students Price Lower Elasticity (-.50) Demand From Public School Students Price Moderate Elasticity (-.75) Supply of Scholarships

Unmet Demand

10,000 8,000 Exc ess Supply 6,000 4,000 2,000 0 $1,250 $1,500 $1,750 $2,000 $2,250 $2,500 $2,750 $3,000 $3,250 $3,500 $3,750 $4,000 $4,250 Ave rage Value of S cholarship

The interaction between scholarship values and the percentage of scholarships awarded to public school students is critical to determining fiscal impacts. This is a difficult point to articulate but an important one to grasp in understanding the fiscal impacts of the program. When scholarship values are lower, more scholarships are available and the ability of the program to provide enough scholarships to public school students in order to reach the ‘breakeven” number of migrating students is easier to achieve, even if a lower percentage of scholarships are awarded to public school students. As noted above, just under 3,000 scholarships (2,942) would have to go to public school students 5

in order for the state to breakeven on the program in the first year. If the average scholarship value is $2,250, then 7,037 scholarships can be awarded with a $10 million tax-credit program that makes $15.83 million in scholarships available ($16.67 million in contributions results in $10 million in tax-credits, times 95% going to scholarships equals $15.83 million). Thus about 42 percent of the 7,037 scholarships would need to go to public school students for the program to breakeven. If the average scholarship value is $3,500, however, only 4,524 scholarships will be available and in order for the state to breakeven on the program, 65 percent of scholarships would have to go to current public school students. • The income eligibility for scholarships. Demand for scholarships and participation increases dramatically as income eligibility restrictions are relaxed. Low scholarship values generate less demand for scholarships because low scholarship values may not reduce the price of private schooling enough to get many families to transfer to private schools. Limiting means testing (raising income eligibility requirements) produces the greatest fiscal benefits because more public school students will be eligible for scholarships and eligibility is increased among groups with a high propensity to transfer from public to private schools. Demand for scholarships among public school students is increased at lower scholarship value levels if income eligibility requirements allow for more families to participate. Raising the income eligibility limits for scholarships will always increase net fiscal benefits but it may also alter the composition of scholarship applicants. By changing the income eligibility to three times the income level that qualifies a student for the federal free and reduced lunch program, LB 14 increases the number of public school students eligible for scholarships and thus the probability that it will generate enough demand at lower scholarship values to assure net fiscal benefits to the state. The price elasticity of demand for private schooling. Tax-credit funded scholarships will reduce, but not eliminate, the cost for some students of attending a private school in Nebraska. Reducing the cost of attending private schools will increase the demand or number of students seeking to attend private schools in Nebraska. For Nebraska families, a scholarship with a value of $2,000 would represent a 33 percent reduction in the estimated average 2012-13 private school tuition of about $6,000. If the price elasticity of demand for private schooling in Nebraska is -.50, then we can expect an increase in demand for private schooling of about 16.5 percent. Currently about 11 percent of Nebraska children attend private schools and an increase in demand of 16.5 percent could translate into an additional 1.5 to 2 percent of Nebraska students attending private schools if the price of attending could be cut by 33 percent and if all who wanted a scholarship could receive one. Because demand for scholarships is likely to be greater than the supply of scholarship funds, the actual increase in private school attendance will be lower than the increase in demand resulting from the scholarship program. Higher scholarship values would lower the cost of private school even more and create more demand, while lower scholarship values would lower the cost of private school less and create less additional demand. This report demonstrates how the fiscal impacts of LB 14 are affected by different price elasticity assumptions.

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The Sensitivity of Fiscal Impact Estimates
To estimate the fiscal impact to the State of Nebraska of the Elementary and Secondary Education Opportunity Acts (LB 14) we developed a model that incorporates and allows for the manipulation of the key variables that will affect program costs and benefits, including: • • • • • • • The income-eligibility requirements for program participation. The average dollar value of tuition scholarships. The expected price elasticity of demand for private schooling according to income level. The percentage of scholarships that go to public school students versus students currently enrolled in private schools. The value of tax-credits (the percentage of contributions to scholarship organizations for which donors receive a tax-credit). The cost of private schooling in Nebraska and expected increases over time. The average amount state education aid per student that the state will save for every student that receives a scholarship and transfers from a public to a private school and expected increases in that amount over time.

Each of the variables above allows user-defined values to be entered in order to create a near infinite number of scenarios based on different assumptions and combinations of variable values. This allows for detailed analyses to determine the sensitivity of fiscal impacts to different assumptions and different program design elements. This report can only provide a sampling, but not all, of the possible combinations of variables and program design elements along with their associated state fiscal impacts. Instead, we have chosen a baseline set of assumptions to assess fiscal impacts and we show how some variations in those assumptions affect fiscal impacts. Our baseline scenario includes conservative assumptions about the willingness of public school students to transfer to private schools in the presence of scholarships (a conservative price elasticity of demand for private schooling), as well as conservative assumptions about the percentage of scholarships that will go to public school students, and the amount of state per student education aid that the state saves for every public school student that transfers to a private school. Among the baseline assumptions are: • • A price elasticity of demand for private schooling of -.50. This is at the low end of estimates found in national and international research. We assume 70 percent of scholarships will go to public school students who will transfer to private schools and 30 percent will go to students currently enrolled or already planning to enroll in private schools (even without a scholarship). We assume that only a portion of overall per pupil state education aid is avoided when a student leaves the public schools.4 For the next school year (2013-14) we assume this amount will be $3,395. It should be noted however, that for the state’s largest school district (Omaha) the figure is higher and to the extent that this district accounts for a larger share of student transfers from public to private schools, the $3,395 figure will understate the state’s education aid savings. There is a wide range of private school tuition costs in the State of Nebraska. In general, sectarian schools have a lower cost of attendance than do non-sectarian schools. Secondary schools tuition costs are more than elementary schools and urban, suburban, and rural schools have varying tuition costs. Nevertheless for 7

this analysis we have estimated an “average” tuition cost of private schooling in Nebraska of $6,148 in 2014, and rising each year at a rate of 3.5 percent.5 We assume the state will incur a one-time start up cost of $150,000 in the first year of the program and annual costs associated with a one-half time employee ($20,000 initially and rising by 3.5% annually).

Along with these baseline assumptions we employ a range of other assumptions to provide a range of estimated impacts and to provide readers with a greater understanding of how impacts are affected by changes in key variables. To estimate program participation, we calculate the reduction in price that scholarships of various dollar values will have on the average price of tuition and apply different price elasticities of demand to the distribution of school-age children in public and private schools according to their family income and demonstrated pattern of private and public school attendance in Nebraska.

The Range of LB 14’s Fiscal Impacts
The most important factor in determining the fiscal impact of a scholarship program is the degree to which scholarships induce students attending or planning to attend Nebraska’s public schools to transfer to private schools, and at what expense to the state. Scholarships will save money for the state to the extent that they induce students to transfer from public to private schools at a low enough cost (less than the $3,395 in the variable portion of per pupil state aid the state will provide for each student in the 2013-14 school year) in foregone tax revenue to generate savings in state per-student education aid. The fiscal analysis is also complicated any administrative costs of the program at the state or scholarship granting organization and by the need to consider the costs associated with providing scholarships, at a cost of forgone tax revenue (tax-credits), to students currently in or planning to attend private schools. These are students for whom the state does not realize a saving in state education aid when they participate in a scholarship program, despite the cost of providing them tax-credit funded scholarship. Adding this variable to the fiscal equation suggests that the percentage of scholarships that go to students in the public schools must be high enough, and at a cost low enough, to generate state aid savings for the State of Nebraska to offset the cost of scholarships going to students who generate no savings for the state. Figure 2 shows the number of students who would have to transfer from public to private schools in order for the State of Nebraska to “breakeven” or not see a net cost increase associated with a scholarship program capped at $10 million in annual tax-credits. The chart shows that in school year 2013-2014, a total of 2,946 students would have to transfer from public to private schools, at an average saving of $3,395 in state education aid, for the program to “breakeven” ($3,395 x 2,946 = $10,001,670). Figure 2 also shows that the number of students that need to transfer from public to private schools for the state to save money declines each year because the program is capped at $10 million in tax-credits and state aid per pupil is expected to rise annually (we use 3% for this graphic), producing greater savings to the state for each student who leaves the public schools.

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Figure 2

Because Per Student State Aid Rises Over Time, the Number of Scholarships that Must Go to Students “Switching” From Public to Private Schools in Order for a $10 Million Program to “Breakeven” Declines Over Time. If More Public School Students Receive Scholarships, the Program Creates a Fiscal Gain for the State
4,500 4,000 3,500
# of Public School Studen ts

1 .5 % Number of Public School Stu dents Needing to Transfer for the State to "Breakeven" on LB 1 4 % of Public School Students 1 .4 % 1 .3 %
% of Public School Studen ts

1 .2 % 1 .1 %

3,000
2,946 2,860

2,500
0.99% 0.96%

2,777

2,696

2,617

2,541

1 .0 %
2,467 2,395 2,325 2,258

2,000 1,500 1,000 500
2014 2015

0.94%

0.91%

0 .9 % 0 .8 %

0.88%

0.86%

0.84%

0.81%

0.79%

0.77%

0 .7 % 0 .6 % 0 .5 %

2016

2017

2018

2019

2020

2021

2022

2023

The umber of and Composition of Students Eligible for Scholarships Using an scholarship eligibility criterion set at family income of no more than 300 percent of federal free and reduced lunch program eligibility (up to 185% of federal poverty guidelines) means that over 80 percent (about 264,000) of public schools students will be eligible for the program. For private school students, only those in pre-school (those who will be entering kindergarten) or those entering ninth grade are eligible and applying the same income guidelines as applied to public school students implies that only about 13 percent of current private school students (4,797) would be eligible for scholarships. Thus the pool of students eligible for scholarships is comprised of 98 percent public school students and 2 percent private school students. The pool of eligible students is not equivalent to the demand for private schooling among those eligible for scholarships. Demand for private schooling is, in part, a function of price and the price elasticity of demand for private schooling in Nebraska. Figure 3 shows the estimated demand for private schooling among public school students at different scholarship values. In addition, because eligible private school students have already made the decision to attend a private school, we expect all would apply for scholarships and the final makeup of those applying for scholarships will be determined by the actual percentage of public school students that apply.

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Figure 3

The Demand for Scholarships Increases With the Value of the Scholarship and as the Estimated Price Elasticity of Demand Increases
25,000 22,500 20,000 17,500 15,000
S tudents Demand From Current P rivate School Families (Below 300% of F ree/Reduced Lunch & Entering 21,802 Kindergarten or 9th Grade) Demand From P ublic School Families - .5 Price Elasticity 20,520 19,494 Demand From P ublic School Families - .75 Price Elasticity 17,955 16,672 Demand From P ublic School Families - 1.0 Price Elasticity 16,3 52 15,390 15,390 14, 620 14,107 13, 466 12,825 12,504 11,542 11, 54 2 11,991 10, 581 10,260 11,286 9,619 10,722 8,977 9,875 8,657 9,170 7,695 7, 695 8,464 6,733 7,759 6,412 7,054 5,771 6,348 4, 809 4,232 4,938 5,643 3,527 4,796 4,796 4,796 4,796 4,796 4,796 4,796 4,796 4,796 4,796 4,796 4,796 4,796

12,500 10,000 7,500 5,000 2,500 0

$1,250 $1,500 $1,750 $2,000 $2,250 $2,500 $2,750 $3,000 $3,250 $3,500 $3,750 $4,000 $4,250 Average Value of Sc holarship

Table 1 highlights a baseline fiscal impact scenario where: • • • • The state realizes a reduction in education spending of $3,395 for each public school student who leaves. A total of $10 million in tax-credit scholarships are available yielding available scholarship funds of $15.83 million. 70 percent of the scholarships are awarded to public school students and 30 percent are awarded to private school students. The price elasticity of demand for private schooling is conservatively estimated at -.50.

Table 1 et Fiscal Impact Of Scholarship Program By Year and Average Value Of Scholarship (70% of Scholarships are Awarded to Public School Students) Value 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total $1,250 ($1.9) ($2.0) ($2.0) ($2.1) ($2.1) ($2.2) ($2.2) ($2.3) ($2.3) ($2.4) ($21.7) $1,500 ($0.3) ($0.4) ($0.4) ($0.5) ($0.6) ($0.6) ($0.7) ($0.8) ($0.8) ($0.9) ($6.0) $1,750 $1.3 $1.2 $1.2 $1.1 $1.0 $0.9 $0.9 $0.8 $0.7 $0.7 $9.7 $2,000 $2.9 $2.8 $2.7 $2.7 $2.6 $2.5 $2.4 $2.3 $2.3 $2.2 $25.5 $2,250 $4.5 $4.4 $4.3 $4.3 $4.2 $4.1 $4.0 $3.9 $3.8 $3.7 $41.2 $2,500 $5.0 $5.5 $5.9 $5.8 $5.7 $5.6 $5.5 $5.4 $5.3 $5.2 $55.2 $2,750 $3.7 $4.1 $4.5 $4.9 $5.4 $5.8 $6.3 $6.8 $6.9 $6.8 $55.1 $3,000 $2.5 $2.9 $3.3 $3.7 $4.1 $4.5 $5.0 $5.4 $5.9 $6.3 $43.6 $3,250 $1.6 $1.9 $2.3 $2.6 $3.0 $3.4 $3.8 $4.2 $4.6 $5.1 $32.5 $3,500 $0.7 $1.1 $1.4 $1.7 $2.1 $2.4 $2.8 $3.2 $3.6 $4.0 $23.0 $3,750 $0.0 $0.3 $0.6 $0.9 $1.3 $1.6 $2.0 $2.3 $2.7 $3.1 $14.8 $4,000 ($0.6) ($0.3) ($0.0) $0.3 $0.6 $0.9 $1.2 $1.5 $1.9 $2.2 $7.6 $4,250 ($1.2) ($0.9) ($0.6) ($0.3) ($0.1) $0.2 $0.5 $0.9 $1.2 $1.5 $1.3 Note: 2014 estimates include a state cost of $150,000 for implementations. Subsequent years include cost of staff (1/2 person) with cost inflated annually.

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Under this scenario the state receives fiscal benefits of as much as $6.8 million in a year and as much as $55 million over 10 years. At lower average scholarship values the state may incur a net cost because of insufficient demand for scholarships among public school students. At high average scholarship values net costs can be incurred because high scholarship values reduce the number of scholarships available and thus restrict the potential number of students who could transfer from public to private schools, saving the cost of state education aid. Although the table suggests a net fiscal loss at lower scholarship values, this is likely to occur in theory only. Because the low price elasticity estimate used in the baseline scenario produces demand that is too low among public school students to use all scholarship funds, credits would be awarded for which there is no offsetting fiscal benefit. In that case, more scholarships could go to students currently enrolled in private schools in which case the state would see fewer savings in state education aid payments. On the other hand, if the demand is low scholarship organizations may increase the average value of scholarship awards in which case demand would increase and net fiscal benefits would be realized. Another possibility is that scholarship funds are simply “rolled over” and uses in subsequent years to award scholarship to public school students. In that case tax-credits may be lower than $10 million in some years but the timing of costs and benefits could result in temporary net negative impacts that would produce net fiscal benefits in subsequent years. To demonstrate the sensitivity of fiscal impacts to changes in the percentage of scholarships awarded to public school students we present two figures. Figure 4 uses the same scenario as presented in Table 1 except that it assumes different percentages of scholarships will go to public school students.

Figure 4

Scholarships that Can Induce Public School Students to Switch to Private Schools, at Avg. Scholarship Values that Also Allow for Many Scholarships to b e Awarded, Produce the Largest Net Fiscal Benefits
One-Year Fiscal Impacts by % of Scholarships Awarded to Public School Students & Avg Scholarship Value
$ 7 .2 $ 6 .6

$8.0

50%
$ 5 .6

60% 80%

$6.0 et State Fiscal Impac t ($ Millions)
$ 4 .8 $ 5 .0 $ 4 .5

70%
$ 4 .3

$4.0
$2 . 9 $ 2 .9

$ 3 .7 $ 3 .2 $ 2 .5 $ 1 .6

$2.90

$ 2 .3 $ 1. 4 $ 0 .7 $ 0 .7 $ 0. 0 $0 . 1 ($ 0. 6)

$2.0

$2.50
$ 1 .1 $1 . 3

$1.70 $1.10$ 0 .4
$ 0 .7 ($ 0 .2 )

$0.70 ($0.10)
($ 1 .1 ) ($ 1. 8) ($ 2 .3 )

$0.0

($ 0 .3 ) ($0 . 8) ($1 . 9) ($ ($0.30) 0. 8 ) ($ 1 .9 )

($0.80) ($1.40)

($ 1 .2 )

($2.0)

($1.70)

$1,250 $1,500 $1,750 $2,000 $2,250 $2,500 $2,750 $3,000 $3,250 $3,500 $3,750 $4,000 $4,250 ($2 .9 ) ($2.40) ($ 3 .1 )
($3.10)
($ 3. 3) ($ 3 .7 ) ($4 . 2)

($2.00)

($4.0)

Average Scholarship Value ($6.0)

Figure 4 shows that as long as about 70% of scholarships go to public school students transferring to private schools, the state will realize a net fiscal benefit at most average scholarship values. Figure 5 depicts the ten year net fiscal impacts of the same scenarios. If 11

80 percent of scholarships go to public school students the state would realize net fiscal benefits of over $77 million after 10 years, compared to just a maximum of just $11 million if only 50 percent of scholarships go to public school students. Moreover, when just 50 percent of scholarships go to public school students, the possibility that the state would incur a net cost as a result of LB 14 is increased dramatically. The scenarios above include a conservative price elasticity of demand for private schooling of -.50. If public school students show a stronger demand for scholarships and willingness to transfer to a private school after obtaining scholarships at lower values, then the net benefits to the state increase significantly.

Figure 5

In Most Scenarios, the Cumulative Ten Year Fiscal Benefits to Nebraska Exceed the Cumulative Cost of the Scholarship Tax Credits (Plus Administrative Costs) as Long as at Least 50% of Scholarships are Awarded to Students “Switching” From Public to Private Schools
$100 80% ofS cholarship to Public School "Switchers"

10 Yr. Fisca l Impacts
$80 Million s $77.4 $61.4 $55.2 et Sta te Fis ca l Impa ct $40 $25.5 $20 $7.5 $0 ($10.5) ($20) ($21.7) ($6.0) ($19.4) ($6.0) ($10.5) $0.8 $9.7 $7.5 $43.4 $25.5 $41.2 $33.0 $21.0 $10.8 $10.7 $2.5 $32.9 $23.0 $55.1 $43.6 $77.3 $64.1

70% ofS cholarship to Public School "Switchers" 60% ofS cholarship to Public School "Switchers" 50% ofS cholarship to Public School "Switchers"

$60

$51.5 $40.6 $32.5 $23.0 $13.5 $5.4 ($1.6) ($5.4) ($12.2) ($7.8) ($13.2) $14.8 $7.6 $1.3 $31.2 $23.0 $15.8

($18.1) $1,250 $1,500 $1,750 $2,000 $2,250 $2,500 $2,750 $3,000 $3,250 $3,500 $3,750 $4,000 $4,250 ($21.7) ($23.2) ($32.9) ($27.7) ($32.9) ($40) ($44.1) ($60)

Average Sc holarship Value

Based on the Experience of Other State Tax-credit Programs, The Price Elasticity of Demand for Private Schooling May Be Greater Than Some Prior Research Estimates A review of other state tax-credit scholarship programs suggests that even relatively low scholarship values can generate a large amount of demand for scholarships and students transferring from public to private schools.6 If the price elasticity of demand for private schooling is -.75 rather than -.50 used to calculate the net fiscal impacts in Table 1, then net fiscal benefits increase at lower scholarship values, but not at higher average scholarship values (because at higher scholarship values demand will exceed supply at low or higher price elasticities). Table 2 shows that rather than the maximum net 10 year fiscal benefits of $55 million estimated in Table 1, a higher price elasticity of demand would result in greater program usage at lower scholarship values and generate large potential fiscal benefits of as much as $83 million if at least 70 percent of scholarships are awarded to public school students.

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Table 2 et Fiscal Impact Of Scholarship Program By Year and Average Value Of Scholarship (70% of Scholarships are Awarded to Public School Students & Price Elasticity of Demand for Private Schooling of -.75) Value 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total $1,250 $1.0 $0.9 $0.9 $0.8 $0.7 $0.7 $0.6 $0.5 $0.4 $0.4 $6.9 $1,500 $3.2 $3.1 $3.0 $3.0 $2.9 $2.8 $2.7 $2.6 $2.5 $2.5 $28.3 $1,750 $5.4 $5.3 $5.2 $5.1 $5.0 $4.9 $4.8 $4.7 $4.6 $4.5 $49.7 $2,000 $7.6 $7.5 $7.4 $7.3 $7.2 $7.1 $6.9 $6.8 $6.7 $6.6 $71.2 $2,250 $6.7 $7.2 $7.7 $8.3 $8.8 $9.2 $9.1 $8.9 $8.8 $8.7 $83.4 $2,500 $5.0 $5.5 $5.9 $6.4 $6.9 $7.4 $7.9 $8.5 $9.0 $9.6 $72.3 $2,750 $3.7 $4.1 $4.5 $4.9 $5.4 $5.8 $6.3 $6.8 $7.3 $7.8 $56.6 $3,000 $2.5 $2.9 $3.3 $3.7 $4.1 $4.5 $5.0 $5.4 $5.9 $6.3 $43.6 $3,250 $1.6 $1.9 $2.3 $2.6 $3.0 $3.4 $3.8 $4.2 $4.6 $5.1 $32.5 $3,500 $0.7 $1.1 $1.4 $1.7 $2.1 $2.4 $2.8 $3.2 $3.6 $4.0 $23.0 $3,750 $0.0 $0.3 $0.6 $0.9 $1.3 $1.6 $2.0 $2.3 $2.7 $3.1 $14.8 $4,000 ($0.6) ($0.3) ($0.0) $0.3 $0.6 $0.9 $1.2 $1.5 $1.9 $2.2 $7.6 $4,250 ($1.2) ($0.9) ($0.6) ($0.3) ($0.1) $0.2 $0.5 $0.9 $1.2 $1.5 $1.3 Note: 2014 estimates include a state cost of $150,000 for implementations. Subsequent years include cost of staff (1/2 person) with cost inflated annually.

Figure 6 presents a graphical depiction of the sensitivity of net fiscal impacts to assumptions about the price elasticity of demand for private schooling. Opponents of tax-credit scholarship programs often argue that reducing the cost of attending private school by 20,30 or 40 or more percent will be of little help to lower-income students wanting to attend private schools, but the evidence from other states and numerous research studies indicate otherwise.
Figure 6

The “Price Elasticity of Demand” for Private Schooling is Important in Estimating the Impact that Tax Credit Funded Scholarships Will Have on Public School Students Willingness to “Switch” to P rivate Schools. Our Base Analysis Uses a Very Conservative Elasticity (-.50) that Minimizes Fiscal Benefits, a Higher Price Elasticity Would Assure Greater F iscal Benefits at Lower Scholarship Values
$120

10 Yr. F iscal Impacts
$110.9 $99.7 $91.5

70% ofS cholarships to Public School "Switchers" & -.50 "Price Elasticity of Demand for Private Schooling 70% ofS cholarships to Public School "Switchers" & -.75 "Price Elasticity of Demand for Private Schooling 70% ofS cholarships to Public School "Switchers" & -1.0 "Price Elasticity of Demand for Private Schooling $72.3 $55.2 $55.1 $56.6 $43.6 $32.5

$100

et S tate Fiscal I mpact (Millions )

$80 $71.2 $60 $42.6 $49.7 $25.5 $9.7 $0 $6.9 ($6.0) $71.2

$83.4

$40

$41.2

$20

$28.3

$23.0 $14.8 $7.6 At higher average scholarship values demand will exceed the supply of ava ilable sc hola rships at any price elasticity of de mand $1.3

($20)

$1,250 $1,500 $1,750 $2,000 $2,250 $2,500 $2,750 $3,000 $3,250 $3,500 $3,750 $4,000 $4,250
($40)

($21.7)

Average Sc holarship Value

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Conclusions
Our analysis indicates that a number of variables will affect the fiscal impacts of a taxcredit scholarship program and under all but the most unrealistic scenarios, the Elementary and Secondary Education Opportunity Act as proposed in LB 14 will yield fiscal benefits for the State of Nebraska. Using a conservative estimate of the price elasticity of demand for private schooling in Nebraska, and a conservative estimate of the percentage of tax-credit funded scholarships that will go to public school students, we estimate that a tuition scholarship program will produce as much as $55 million in net benefits to the state over 10 years. If less conservative assumptions are used (but still not optimistic assumptions) a larger percentage of scholarship will go to public school students, and the demand for attending private schools will be greater than anticipated in response to the availability of scholarships, potential net fiscal benefits could easily exceed $80 million over 10 years. The potential for net fiscal costs under the most adverse scenario (a low percentage of scholarships going to public school students, low price elasticity of demand, and a high per scholarship cost) are unlikely to occur, and have a probability of occurring of no more than 6-8 percent. Our analysis suggests that the fiscal interests of the state and the desire to increase educational opportunities for those most in need can easily be accommodated within the structure of LB 14. .
More detail on methodology and background can be found in this document: Brian Gottlob, Tax-Credit Scholarships in #ebraska: Forecasting the Fiscal Impact, Friedman Foundation for Educational Choice, June 2010 2 Available online at http://www.oppaga.state.fl.us/Summary.aspx?reportNum=08-68 3 Individual scholarship may exceed this value but the average value of all scholarships must meet this criteria for fiscal neutrality or fiscal benefits to be realized. 4 See Gottlob, 2010 for a description of the methods used to estimate this. 5 See Gottlob, 2010 for a full description of the methodology used to estimate this. 6 See The Foundation for Education Choice’s report: The ABCs of School Choice for data on state tax credit programs. Available here: http://www.edchoice.org/Foundation-Services/Publications/2013-ABCs-of-SchoolChoice.aspx.
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