Will Scholarship Tax Credits Re-emerge in the 2019 Session?

by | Feb 1, 2019

At a rally in Frankfort last week for what was termed “National School Choice Week,” school choice advocates and policymakers called – once again – for Kentucky to adopt scholarship tax credits

Past legislative sessions have seen proposals that would establish tax credits for individuals and businesses donating funds to a qualified scholarship granting organization to provide financial support to families to send students to private schools or to provide services to students with special needs. The estimated cost to the state General Fund of these past proposals has exceeded $200 million  – ranging from $21 to $50 million annually.

While similar legislation has yet to be introduced in the 2019 session, the commentary and speeches last week indicated that proposals are sure in coming. Let’s review some of what we know, and don’t know.

What is a Scholarship Tax Credit?

Not uncommon among states (17 states have scholarship tax credit programs), a scholarship tax credit – like other tax credits – reduces the amount of taxes you would otherwise owe.  In this case, if you donate to a scholarship granting organization you receive a credit against taxes you might owe the state.  The scholarship granting organization then provides financial aid to qualified students to attend private school or receive special services. 

For the donor, this is a direct offset, as opposed to a deduction which reduces the amount of your taxable income.  A tax credit is significantly more generous to the person donating money and more costly to the state than a deduction. (Note: One can already take a deduction for charitable giving, including for scholarships).

These types credits are among items generally termed as “tax expenditures.” Such expenditures effectively reduce the amount of revenue received by the state government.  They are equivalent to a direct expenditure of dollars except it happens through the tax code as opposed to the normal budget process.  As a practical matter, tax expenditures are more permanent and receive less scrutiny than budgeted expenditures. 

As noted in the recent report of the Legislative Research Commission’s “Task Force on Tax Expenditures: Direct expenditures are evaluated during each budget cycle and are approved, adjusted, or rejected during the budget process. State tax expenditures, however, are evaluated and approved primarily at the time of adoption and implementation…There is no process to systematically review or periodically reevaluate tax expenditures in subsequent years.

Is there an Opportunity Cost?

As noted earlier, costs to the state General Fund of past proposal exceeded $200 million – ranging from $21 to $50 million annually.  There is a substantial opportunity cost to enacting such a policy when we already underinvest in the adequacy and equity of our system of public education.  As examples of the opportunity cost to other areas of education, consider:

In addition, Kentucky has yet to resolve how to fund recently enabled charter schools.  And the number one priority of both the House and Senate during this session is school safety that will have demand resources from both the state and local districts.

Do Scholarship Tax Credits Increase Student Achievement?

From a research perspective, it is difficult to answer this question precisely.  First, because of lack of data on students once they enroll in nonpublic schools, and second, due to bias that might exist in how students elect to participate. 

However, some research is available on tax credits and on their policy cousin – school vouchers. 

Reviews of Florida’s tax credit scholarship program, among the largest in the country, do not reveal any silver bullet of learning that comes from participating in the program.  The basic findings conclude that participating students achieve at the same level as students nationally.  So, a mixed review in the sense that students appear to be no better and no worse for having participated, at least compared to a national sample.

Reviews of voucher programs have shown negative impacts on student achievement in across subject matters in Louisiana.  Similar results were found in an evaluation of Indiana’s voucher program, including for students with disabilities, as well as in the District of Columbia.

Past scholarship tax credit proposals in Kentucky have not included any requirement for evaluation as to their effectiveness or impact on student achievement.  Nor have they included requirements that private schools enrolling scholarship-eligible students participate in any part of Kentucky’s school accountability system. 

Now is not the time to consider more tax breaks when Kentucky’s investments in education – from early childhood through postsecondary – lag what is necessary to achieve statewide goals and evidence is lacking that this type of intervention is successful in enhancing academic performance.  We must focus on investing in what is needed for all Kentucky students, in every community, to achieve at the highest levels.

ABOUT THE PRICHARD COMMITTEE

Since 1983, the Prichard Committee has worked to study priority issues, inform the public and policy makers about best practices and engage citizens, business leaders, families, students, and other stakeholders in a shared mission to move Kentucky to the top tier of all states for education excellence and equity for all children, from their earliest years through postsecondary education.

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