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Soundings

Brian C. Anderson
If Not Vouchers?
Why scholarship tax credits may be the way to go for the school-choice movement.
Spring 2004

The Supreme Court’s February ruling in Locke v. Davey that Washington State could deny state scholarship funds to a ministry student based solely on his choice of religious study was a big setback for school vouchers. By implication, the court’s decision means that so-called Blaine Amendments—state provisions, named after anti-Catholic nineteenth-century congressman James Blaine, barring any state aid to religious institutions—aren’t unconstitutionally discriminatory, as school-choice proponents had tried to argue. Dozens of state constitutions include these amendments, putting the kibosh on any voucher programs in those states that seek to include religious schools—those most likely to participate in urban voucher initiatives. Dauntingly, school-choice proponents must now fight the Blaine Amendments on a state-by-state basis.

Small wonder that some school-choice supporters are touting scholarship tax-credit programs—in effect, a privately funded, though publicly subsidized, voucher system—as a more feasible alternative. Three states—Arizona, Florida, and Pennsylvania—have recently set up such programs, and lots of other states have been considering them. In Arizona, since 1998, individual taxpayers have been able to get a dollar-for-dollar refund of up to $500 ($625 for married joint filers) for contributions to state-approved charitable organizations, which bundle the money together to provide scholarships worth up to 80 percent of private school tuition to needy kids. These organizations handed out nearly 20,000 scholarships last year. By 2015, the tax credits will generate more than $58 million per year, funding up to 61,000 scholarships, a Cato Institute report projects.

In Florida and Pennsylvania, it’s businesses, not individuals, that receive the tax credits. Florida firms can get a dollar-for-dollar tax credit off their corporate income tax if they contribute to state-sanctioned scholarship-funding organizations. These bodies gave out approximately 15,000 scholarships to low-income students in 2002–03, worth up to $3,500 each and usable at any school enrolled in the program, including religious schools. No firm can give more than $5 million to any particular scholarship-granting group in a given year. And there’s a total cap on the program of $88 million per year.

Pennsylvania’s initiative, enacted in 2001, gives corporations a tax credit worth 75 percent of their contribution (up to $200,000) to state-approved scholarship-granting groups. The credit increases to 90 percent if the firm gives for two consecutive years, and the scholarships have a yearly cap of approximately $27 million. In addition, firms can donate to innovative initiatives within the public schools, a program capped at $13.3 million per year. More than 20,000 low-income kids won scholarships through the program this school year.

Scholarship tax credits have several advantages over vouchers. Above all, they’re less subject to legal challenge, including on Blaine Amendment grounds. The Arizona Supreme Court explained why in upholding Arizona’s tax-credit law: “No money ever enters the state’s control as a result of this tax credit. . . . Thus, under any common understanding of the words, we are not here dealing with ‘public money.’ ” Similarly, it’s harder for meddling regulators to put strings on the scholarship funds.

Tax credits are also an easier sell to the American people, who tell pollsters they favor them at a level eight to 14 percentage points higher than they support vouchers. Pennsylvania school-choice backers, who had pushed vainly for vouchers for years, found passing the tax-credit law a comparitive breeze, and it is extremely popular with scholarship families, firms, and voters. Of course, teachers’ unions and their allies have trained most of their fire on vouchers so far.

The downside is that families seeking scholarships—often low-income families, with parents of limited educational backgrounds—can have a hard time figuring out the system. And the money needs raising from private donors every year. But in pushing for greater educational choices for poor American families, the school-choice movement should seek victories wherever it can find them. Right now, tax credits may be where it should look.

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