John Merrifield

University of Texas - SA

COB - Downtown Campus

501 West Durango Blvd.

San Antonio, TX 78207

210-458-2519 (W)

210-458-2515 (FAX)

Jmerrifield@utsa.edu

January 15, 2003

Direct payment plans, vouchers, and refundable tax credits are often criticized for their potential to increase the regulation of private schools. Compulsory attendance laws already give states authority to regulate private schools, but many choice advocates believe that even indirect funding of private schools will create significantly more new regulation than would occur otherwise. That assumption is debatable, but I want to focus on the tax credit proposal developed in response to the regulation concern. It combines a non-refundable tax credit for families with school-age children that don't use public schools with tax credits for contributors to privately funded low-income vouchers. Such programs would generate enough low income voucher funding to fill up existing private schools and prompt some expansions and start-ups. Therefore, it would create a significant escape hatch, but not the substantial reform of the K-12 system promised by its major proponents. The cost reduction some families could realize through a refundable tax credit, plus some low-income voucher use, would not be enough to prompt private sector growth and continuous improvement, or motivate major improvements in the public schools.

A key reason for that conclusion is the modest size of the tax credits that families would receive for opting out of the public schools. The tax credits for families would offset qualifying state [and local?] tax liabilities up to half the per student cost of their local public schools. But how many families directly owe thousands to state or local governments? Hardly any have enough direct tax liability to significantly lower the cost of sending even one child to an average private school. Fifty percent of American households pay almost no Federal income tax, state income tax rates are lower, and some states have no income tax. Even in states with high state income tax rates, even a credit equal to a very large fraction of state income tax liability would not save most families a very large share of private school expenses for even one child. You could provide a credit against property taxes, but many families live in rented housing. And for homeowners, even an unlikely 100% school property tax exemption would not lower most families' K-12 costs very much. For example, I live in Texas. There is no income tax, but property tax rates are high. This year I paid about $3000 in school property tax. Public school revenue per student was $6234 in 1999-2000. Since households without any school age children must pay property tax, it is very unlikely that a decision to not use public schools would earn anyone a full exemption from school property tax. But even if it did, a full exemption would not even exhaust my maximum tax credit for one child (1/2 of $6234). The amount the credit would actually save a household depends heavily on income, which is a major political and economic liability.

The tax credit would not significantly change the precarious financial predicament of private schools that keeps their market share small. It’s very difficult to sell something given away by competitors funded by compulsory taxes. Real competition - the realistic ability to contest every piece of market share - requires non-discrimination by the government. Public funds must support public and private school users equally, and the nonrefundable tax credit would fall far short of achieving that. Public schools would retain the lion’s share of the huge price advantage they have now. Depending upon the program details, including especially tax liabilities to tap in to, it could easily yield a small number of families with small vouchers.

Motivation for public school reform is another area of concern. Unless the credits are funded at public schools expense, taxes must rise or other government programs must shrink, and public schools' incentives to improve could be much diminished. Either way, the proposed credit raises public school funding per child. And since the tax credits received by taxpaying parents - and probably the low income vouchers as well - would be worth no more than half the amount spent per student by public schools, a large number of children will remain in public schools that may be incapable of producing the broad-based, relentless improvement characteristic of markets. Competition is not just a matter of making the private sector a little more affordable. It means eliminating financial advantages that distort school choice decisions.

Note that the proposed nonrefundable tax credit would be very different if it was the only government intervention in K-12 education. Then the credit would address some market weaknesses and increase competition by giving the poor greater access to the K-12 education menu. But the credit is proposed as an addition to the current funding and governance system, and as such only slightly erodes the entry barriers that arise out of the public schools' current public funding monopoly.

Several points are worth repeating. The nonrefundable tax credit - private low-income voucher combination could prompt a tax hike and it does not significantly change the longstanding policy of strongly favoring public school users. The resultant entry barriers that stifle competition and perpetuate maltreatment of the poor would remain. Low income households with little ability to supplement a voucher or tax credit with their own money will have to choose between the public school system that serves them badly, and the cheapest private schools. Private schools that charge tuition about equal to the credit/voucher amount would still be at a huge disadvantage competing for students and resources like teachers.

All of that seems to be a rather high price to pay because sending parents a check or voucher to cover education expenses at a school of their choice might increase private sector regulation more than it would rise otherwise. And the hoped for reduction in private sector risk that results from not sending checks or vouchers to families will carry a hefty price tag. Many more children will have to stay in the heavily regulated government sector. I'm also somewhat disturbed by the implication that a lower risk (if any) of increased regulation really permanently changes the regulation challenge very much. The only antidotes to regulatory risk anywhere are education to reduce the demand and eternal vigilance against assaults on our freedoms. Finally, I want to point out that while I would make some adjustments, I am not against such credits. I'm not against escape hatches as long as their limitations are widely recognized. They must be seen as stop gap measures aimed at minimizing the current system's damages until choice advocates can enact a true reform catalyst.