May 4, 2001

Education Tax Credits Could Help 2.3 Million Students Escape Failing Public Schools

WASHINGTON—A proposal to let Americans subtract $500 from their federal income tax bills if the money goes toward private school tuition would help an estimated 2.3 million children escape failing public schools and save states $14 billion, according to a Cato Institute study.

Education tax credits are emerging as an alternative to vouchers as the best way to give parents a choice over where their children go to school. A coalition of Republican lawmakers is expected to introduce legislation creating a $500 credit soon.

In the new Cato study, "Fiscal Analysis of a $500 Federal Education Tax Credit to Help Millions, Save Billions," researchers Darcy Olsen, Carrie Lips and Dan Lips outline an education tax credit with two components: 1) a parental choice credit allowing a dollar-for-dollar reduction in income taxes of up to $500 per child for money spent on tuition; and 2) a scholarship credit allowing a $500 reduction for money donated to nonprofit scholarship clearinghouses, which pair money with needy children whose parents don't earn enough to pay federal income taxes.

The researchers estimate that the tax credit would "cost" the federal government $9.2 billion in lost revenue but save states $14 billion on public education costs as students transfer from public to private schools. All told, the researchers calculate that the scholarship component would raise enough money to give nearly 3 million students scholarships worth $2,000 each, and the parental choice component would help 330,000 new students attend a school of their parents' choice, in addition to making private schooling more affordable for the millions of families with students currently enrolled in private schools.

The savings to states would be significant, ranging from a high of $250 million in California to a low of $1.1 million in Wyoming. Other state savings: $192 million in New York, $140 million in Pennsylvania, $123 million in Illinois, $112 million in Florida and $92 million in Texas.

The scholarship credit is modeled after a successful experiment in Arizona, where a similar credit led to the creation of 35 scholarship clearinghouses and raised nearly $14 million for scholarships in just one year. Education tax credits or deductions exist in four states, and as many as a dozen state legislatures may consider adopting education tax credits by the end of this year.

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