Dan Lips

The Arizona Scholarship Tax Credit: A Model for Federal Reform

Posted on August 01, 2002 | Type: Policy Report | Author: Dan Lips
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EXECUTIVE SUMMARY

Advocates of limited government in Congress face a dilemma. For two decades, conservatives have sought to devolve federal power over education back to state and local governments. In 1981, Ronald Reagan entered office pledging to abolish the fledgling Department of Education. Since then hundreds of billions of federal taxpayer dollars have been spent in an effort to improve local educational services, but there has been no corresponding improvement in student performance on major national exams.

The current Republican administration has ushered in the largest expansion of the Department of Education since its creation, increasing K-12 education spending by 27 percent and arming Department of Education officials with a mandatory national test. With a Republican administration embracing increased federal control over local education, what positive steps can advocates of limited government take to devolve federal power and increase parental choice and local control?

The answer lies in a promising education reform movement that is sweeping the nation: education tax credits. Since 1997 Arizona has allowed state taxpayers to take a dollar-for-dollar tax credit for charitable donations made to nonprofit groups that help students afford private school tuition. During the past four years, the scholarship program generated more than $56 million, funding nearly 36,000 scholarships. Lawmakers in Florida and Pennsylvania have enacted education tax credit programs based on the Arizona model, and more than 20 state legislatures considered education tax credits in 2001. Education tax credit bills based on the successful Arizona model have been introduced in the U.S. Senate and House of Representatives as well.

This study examines the likely fiscal impact of a $500 federal scholarship tax credit for public school students qualifying for the free and reduced school lunch program. According to moderate projections, such a program could help 1.6 million disadvantaged children transfer out of public schools. Although the program would result in a $3 billion revenue loss for the federal government, state and local governments could realize fiscal savings of $11 billion annually by forgoing the cost of educating 1.6 million public school students. For state lawmakers in Arizona, the federal scholarship tax credit could result in 14,000 scholarship transfers, which would save the state more than $66 million per year. If the number of teachers in public schools were maintained by reinvesting a portion of the fiscal savings into public education, student transfers would reduce class size by 3.5 percent across the nation.

The time has come for serious education reform. A recent national exam found that more than one in three fourth-graders could not read. Research suggests that market-based reforms that give parents control of education spending benefit both the children who participate and those who remain in public schools.

By helping 1.6 million children leave the public school system, a $500 federal scholarship tax credit program would restore hope to disadvantaged families and introduce competition into the public school system. The scholarship tax credit may ultimately provide the answer for conservatives wishing to devolve federal education spending to parents and local governments by building a coalition of supporters of market-based education reforms.

Click here to read The Arizona Scholarship Tax Credit.

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