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Choosing to Learn: Scholarship Tax Credit Programs in the United States and their Implications for New Hampshire

By Jason Bedrick

March 2012

(Click here to read the full report)

EXECUTIVE SUMMARY

Access to educational opportunities in New Hampshire is primarily determined by zip code and accident of birth. Though New Hampshire has some of the highest-performing public schools in the nation, performance across school districts is uneven. Public school students in wealthier towns like Windham and Bedford perform highly on standardized tests while their low-income peers in Claremont and Stratford lag behind. Moreover, even New Hampshire’s best public schools are not best for every child. Not all children thrive in the traditional classroom environment. Some students need extra support academically, socially or emotionally. Our public schools may work well for most children, but there is no school that is right for all children.

Unfortunately, tens of thousands of New Hampshire students have only one choice of school. While wealthier families can meet their children’s individual needs by moving to communities with higher-performing public schools or paying tuition at an independent school, most low-income families lack the financial capacity to do either.

In recent decades, legislators and policymakers have implemented several innovative policies to expand educational options, including vouchers, charter schools, education savings accounts, and more.  In the last decade, scholarship tax credit (STC) programs have expanded educational opportunities for hundreds of thousands of students in eight states, particularly those from low-income families. In just the last two years, two states have adopted new STC programs while five others expanded their existing STC programs.

Section I: Scholarship Tax Credits

Nationwide, eight states currently operate corporate scholarship tax credit programs. Program design, levels of funding and student participation vary. STC programs are constitutionally sound and receive strong support from parents and the general public.

  • Scholarship tax credit programs are on firm constitutional ground. STC programs have withstood every single legal challenge to date at both the state and federal levels.
  • Parental satisfaction in STC programs is exceptionally high. More than 95 percent of families participating in Florida’s STC program reported that their schools were good or excellent.
  • Nationwide, support for STC programs is more than double the opposition. Support among parents nationwide is even higher at four-to-one in favor.

Section II: Fiscal Impact

The proposed School Choice Scholarship Act (HB 1607) creates a scholarship tax credit program that is designed to save money by reducing state spending more than it reduces tax revenue. Under even the most conservative assumptions, the proposed STC program will affect approximately one tenth of one percent of the current state and local spending on public education. STC programs in several other states have reduced state government expenditures while expanding choices for families.

Section III: Impact on Performance

  • Studies show that school choice program participants perform as well as or better than their public school peers.
  • Participants in school choice programs graduate from high school at higher rates than their public school peers.
  • School choice programs are associated with a positive impact on public school students’ academic performance.

Section IV: Program Design

While broadly similar, STC programs across the country vary significantly in program design, such as means-testing, disbursement requirements, and corporate credits. These differences affect how well the STC programs are able to effectively and efficiently meet the needs of scholarship recipients. Some of the main findings include:

Means-Testing:

  • Means-testing can help target funds to the truly needy, though evidence suggests that SOs target low-income families even without a means-testing requirement.
  • Income caps that are too low reduce the flexibility of SOs to address the needs of families with exigent circumstances (special needs, serious illness, job loss, etc.).

Disbursement Requirement:

  • Scholarship organizations require some level of allowance for administrative costs, especially when starting up. Over time, most spend less than 10 percent on administrative costs.
  • A more liberal administrative cost allowance allows for the creation of more scholarship organizations. Policymakers should consider greater administrative cost allowances (15 to 20 percent) for new scholarship organizations.

Corporate Credits:

  • Most scholarship organizations reported having little to no trouble soliciting donations from businesses when the tax credits were worth 90 percent of the donations.
  • Policymakers should be able to reduce the tax credit percentage somewhat below 90 percent without a significantly negative impact on fundraising. However, it is not clear at what point there would be a negative effect.

When designed and implemented properly, a scholarship tax credit programs is a constitutional, popular and fiscally sound method to increase educational options for low-income families. STC programs can even improve the academic performance of all students, whether they participate in the program or not. Most importantly, a scholarship tax credit program will move New Hampshire from an educational system where access is primarily determined by a student’s zip code and accident of birth toward a system tailored to meet the individual needs of every child.

(Full Report)

(Appendix)

(Sources)

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A Modest Step For Greater Educational Opportunity

Charlie Arlinghaus

March 28, 2012

As originally publish in the New Hampshire Union Leader

The School Choice Scholarship Act being considered in both the New Hampshire House and Senate is a modest step toward providing children of lesser means with the greater educational opportunity long afforded students from high income families.

It is a truism in education that rich people have school choice and poor people don’t. Statistically in New Hampshire, 30% of children from upper income families go to non-public school. At the lower ends of the income spectrum, only 5% do. In addition, higher-income families have greater economic mobility and are more likely to be able to pick a public school district by moving. Those families who can move more easily, who can afford more choices, have more opportunity and often better outcomes because of those choices.

New Hampshire’s public schools, in the aggregate, are among the best in the country. But one single choice assigned on the basis of zip code not educational requirements can not possibly work well for everyone even if it works well for most. Every student is better off if ha or she has more than one choice.

The goal of the school choice movement in New Hampshire is to give more choices to more people. In 2012 the focus of that effort is a means tested, education tax credit based scholarship bill.

First and foremost, the bill is a good idea because it provides scholarships, funded entirely by tax credits and private donations, to students from lower income families that can be used at any approved school, public or non-public, in New Hampshire.

The local school will be a terrific option for many children but not for every child. Now more children will have more opportunity to explore more choices. That’s a good thing.

While opponents have raised some technical concerns, opposition essentially come down to philosophy. Some opponents don’t believe greater educational opportunity should come at nonpublic schools. But I think we presume that the one assigned school isn’t always going to be the right choice, we ought not object to a different provider.

Financially, the bill benefits the state budget. The scholarship amount, and the tax credit for that scholarship, is smaller than the state per pupil aid so each child who moves saves the state budget money. Our calculation at the Josiah Bartlett Center is that the state budget would save between $1.5 and $2.5 million each year.

Local school districts would see less money in total only if they had fewer students. Just as today, if a school has fewer students, its per pupil aid declines. Under this program, a district would have fewer dollars and fewer students but more money per student because the amount lost is less than a third of New Hampshire’s $15,000 per pupil spending.

There are always constitutional questions about school choice. A study my organization did in 2004 found that even a voucher program properly constructed should be constitutional. Nonetheless, what we think a court should do and what they might do aren’t the same thing.

However, a tax credit program is a step removed. Based on jurisprudence across the country dealing with very similar language, tax credit programs will be found constitutional although some opponents think they shouldn’t be.

At the end of the day, this is a modest attempt to provide some children with scholarships. The total size of the program amounts to less than one-quarter of one percent of the $2.7 billion spent in New Hampshire on K-12 education.

The average scholarship is small but critical to opportunity. While $2500 is not full tuition, the sticker price is not what almost any student pays. Every non-public school has some children who pay zero and some children who pay very little based on need.  This program will allow a school to educate more students.

So much of what we talk about in public policy is based on spreadsheets and politics. This program is perhaps the most important proposal the legislature will consider this year. It may not change the dynamic of education in the aggregate but it will make an enormous difference in the lives of thousands of individual students.

A School Choice Scholarship Program is a modest step for the state government to make. But modest steps can be huge leaps for individual students.

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School Choice Scholarship Program Saves $8 million over next two state budgets

Charles M. Arlinghaus

 March 2012

A proposed School Choice Scholarship Act under its proposed configuration would not start during the current budget cycle but would save the state budget $8 million over the next two budgets. This is not the primary consideration in any debate over school choice or a motivating factor for most supporters. But the budgetary impact of any bill is one of the technical considerations in any current debate.

The precise savings to be realized for the state budget of any school choice scholarship program depend on the exact scholarship amounts, take up rates, tax credits, and aggregate amounts available. This analysis takes as its starting point the details put forth by Sen. Jim Forsythe and Sen. Chuck Morse in the amended version of Forsythe’s proposed Senate Bill 327 in the 2012 session. The House version is quite similar but there are slight differences.

At its base, the School Choice Scholarship Act would allow businesses to make deductions to an approved scholarship organization and receive a credit against their BET or BPT obligation[1]. Scholarships would then be given to students in needy families (below 300% of the poverty level) to use at any approved non-public school or at another public school. Scholarships could also be used for some approved home school expenses (textbooks, for example).

The idea behind the proposal is to allow students greater opportunity by giving them more choices. Upper income students generally have multiple educational choices. This bill would extend those opportunities to lower income students.

Because the scholarship amount per student is less than the state aid cost per student, the state would save money for each student. The state budget would save more money if a student elected homeschooling because of the smaller scholarship available. The exception to budget savings would be students moving from one non-public school to another – which is why that group is limited in current proposals[2].

Consider three students and the budgetary impact of each: (1)a student moving from a public school to a nonpublic school, (2)a student moving from a public school to a home school, and (3)a nonpublic school student. For each of the first two categories, the state would save money previously spent on per pupil student aid. The state saves more money for the homeschool student because that scholarship is more limited. For the third category, the state wouldn’t save money because it wasn’t paying aid to begin with.

 

  Public to Nonpublic Public to Home School Nonpublic to Nonpublic
Avg. Scholarship[3] $2500 $725 $2500
Tax Credit Cost[4] $2125 $616 $2125
Budget reduction[5] $4312 $4312 $0
Saving per student $2187 $3696 ($2125)

With at least 70% of students mandated to be in the first two categories and no more than 30% in the third, you can easily see how the state budget saves money.

To estimate the aggregate amount saved, we have to make some assumptions. Of students who currently don’t go to public school, 22% of them opt for homeschooling and 78% go to a nonpublic school. So for a statewide aggregate, I’ve used a more conservative 80/20 split to estimate an average scholarship of $2145.

Finding the total cost and savings each year is a matter of doing the calculations above and applying the different caps on types of students (switching from public school v. already in private school) and size of program. In addition, I’ve added administrative costs both for the state and scholarship organization to the costs as well as a small secondary impact the credit structure causes on the BPT[6].

My calculation and its assumptions are attached for each of the four years of the next two budgets. I haven’t carried out calculations beyond four years because before too long you get into esoteric arguments about whether or not someone is counted as a “switcher” once they’ve been in the program for five or six years. In addition, the percentages and caps are certain to be tweaked once the state has a few years’ experience under its belt.

 

Projected Savings in Current Budget: ZERO (program not yet in effect)

 

Projected Savings in Budget for FY2014-FY2015: $3.96 million

 

Projected Savings in Budget for FY2016-FY2017: $4.33 million

 

Total Four Year Budget Savings: $8.3 million

 

Click here to view the companion spreadsheet

 

Click here to read the full report

 

[1] Both SB 327 and HB 1607 (the similar House version) give business a credit worth 85% of their donation to the scholarship organization

[2] The proposal in SB327 would require 70% of recipients to be coming from a public school. Currently 89% of students attend public school, 9% nonpublic school, and 2% are homeschooled.

[3] Scholarships granted by approved scholarship organizations will average $2500 across non-homeschooling students. Homeschool students are calculated separately and can receive up to $725 for approved expenses.

[4] Although the scholarship is drawn from donated funds, the donor receives a credit for only 85% of the amount donated. So the cost to the state budget of each scholarship is 85% of the average amount.

[5] State per pupil aid for each student includes a number of categories. Because only students at 300% FPL or below are eligible, I’ve included the base amount of $3450 for all students and the additional aid for free and reduced lunch eligible students of $1725 for 50% of students but nothing else.

[6] Because of the format of our tax reporting, the credit will also reduce the size of taxable income for some filers paying the Business Profits Tax. In the spreadsheet analysis, I estimate these filers as about 2/3 of the total credits (in practice it will likely be a smaller number) and calculate the additional lost BPT revenue.

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Scholarship Tax Credit

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In recognition of School Choice Week, we are releasing the study below on Scholarship Tax Credit programs across the country and how they might work here in New Hampshire. The study is authored by Center Research Fellow Jason Bedrick.

 

Scholarship Tax Credit Programs Analysis

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