The Risks Exceed the Rewards: A Nationwide Federal Tax Credit Scholarship Program

Education choice is of utmost importance to children around the country. Every parent wants to give their student the chance to succeed.

But pursuing parent choice on a nationwide scale with a federal tax credit scholarship poses significant risks, both to existing state options and ongoing conservative efforts to keep Washington within its proper scope of authority.

Sen. Ted Cruz (R-TX), and Rep. Bradley Byrne (R-AL), with the support of the Department of Education, have introduced a proposal that allows for up to $5 billion in federal tax credits to be allocated to individuals and corporations that contribute to state-based scholarship-granting organizations. The Cruz version would also supply those credits, which are dollar-for-dollar – to workforce development organizations, allowing up to $10 billion annually.

On the EdNext Podcast, Marty West interviewed Assistant Secretary Jim Blew about the proposal, and Mr. Blew conceded that “it is a new role for the federal government and we appreciate that…the tax code is often used to promote policy.”

A new role for the federal government is precisely why proponents of parent choice in education should carefully weigh the implications of a federal tax credit scholarship program. As Senator Cruz stated during the launch event for the tax credit proposal at the Department of Education last week, this proposal represents “$100 billion over 10 years going to expand educational options…even in Washington, that’s a lot of money.”

It’s a lot of money that would represent an expansion of federal spending when Washington’s balance sheet remains out of control.

As we have previously written, the administration’s support of school choice is praiseworthy, but a federal tax credit scholarship program poses a threat to education choice in the states and undermines conservative efforts to streamline the federal tax code.

The federal government does not have the constitutional authority to establish a nationwide scholarship program, even if accomplished through changes to the tax code. It is federal efforts such as this that have riddled the tax code with carve-outs and create favored constituencies. The proposal fundamentally goes in the wrong direction by expanding – rather than shrinking – federal intervention in K-12 education.

Although these concerns may be viewed as mere talking points, they are a re-articulation of the principles underpinning the appropriate federal role in K-12 education.

Mr. Blew said in the podcast that Heritage doesn’t want Washington involved in education at all, but this concern should be dismissed because “that train has left the station.”

Yet a major goal of the Trump administration has been removing regulations promulgated during the Obama administration. Reducing the size of government has been a goal of the Trump White House, as evidenced by Education Secretary Betsy DeVos’s decisions to rescind Obama-era policies, such as its deeply flawed school discipline directives, and her move to restore due process in Title IX cases on college campuses.

Mr. Blew also notes that Heritage scholars are worried about the rules that a future administration might levy on private schools. If we stewed about the future, he suggests, we would never do anything. Yet it is precisely this type of thinking that gave us No Child Left Behind and Common Core. The hardest thing for any Administration is to wind down federal intervention.

Count us in the Calvin Coolidge camp that it is better to stop bad proposals than pass new ones. In the country’s formative years, the Founders knew the risks to individual liberty involved in creating a constitutional republic, so they designed the Constitution as a limiting document.

Finally, Mr. Blew suggests that we should be more concerned about what states might do to regulate parental choice in education than what this or future administrations might do. But we know the rules states may consider—from required testing to private school admittance requirements. These are the reasons why we should be concerned about a federal program. The same rules will apply everywhere, not just to one state.

As for the concerns with tax policy, a ten-year $100 billion federal tax credit would move funding from state to federal balance sheets and crowd out state-level programs, with potentially devastating long-run effects. Shifting individuals from state credits to federal credits would further institutionalize the federal system of funding scholarship-granting organizations. When federal regulations are imposed on these organizations, states will not be able simply to opt out by creating non-federal programs. The federal systems will have supplanted the state alternatives.

Unlike the 100 percent proposed federal credit, most states offer less than full reimbursement for donations. A new, more generous, federal program will shift these donations to the federal credit and away from the state systems. Similarly, individual taxpayers who are denied a federal deduction for state-level donations will shift their donations to the federal credit, even if the state credit is dollar-for-dollar. Under proposed rules, taxpayers who do not max out the new $10,000 SALT deduction will face an increase in their state-level donation costs, rising from zero to as much as 37 percent of the donation amount.

Finally, businesses and individuals must apply for these credits before they can be claimed. There will be additional complexity in having to apply for both state and federal credits, understanding the interactions between the 50 plus systems, and maximizing donations. Administrative complexity lowers uptake for programs that have direct financial benefits in other areas of the tax code. The education tax credits offer no direct benefits to the donor, so additional complexity may have pronounced effects of taxpayers abandoning state program in favor of the single federal system. This interaction may even diminish overall contributions, as any donor denied a federal credit may not also want to go through the hassle of re-applying for the various state credits, which are often not dollar-for-dollar.

The new incentive structure clearly favors the federal program over existing state options. The Secretary of Education may not want to regulate state authority to define eligible expenses, but she is creating an architecture for a future administration or Congress to more easily dictate federal priorities to previously independent state programs.

Secretary DeVos deserves credit for shining a bright light on the importance of school choice. Continuing to use the bully pulpit and working to advance school choice policies that are under the purview of the federal government, such as options for children of military families, would pay dividends for education choice in the long-run while also restraining Washington’s tendency to meddle in issues outside their scope of authority.

Lindsey M. Burke researches and writes on federal and state education issues as the Will Skillman fellow in education policy at The Heritage Foundation. Adam N. Michel focuses on tax policy and the federal budget as a Senior Policy Analyst in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation. Jonathan Butcher is a senior policy analyst in the Center for Education Policy at The Heritage Foundation.

Last Updated

NEWSLETTER

Notify Me When Education Next

Posts a Big Story

Business + Editorial Office

Program on Education Policy and Governance
Harvard Kennedy School
79 JFK Street, Cambridge, MA 02138
Phone (617) 496-5488
Fax (617) 496-4428
Email Education_Next@hks.harvard.edu

For subscription service to the printed journal
Phone (617) 496-5488
Email subscriptions@educationnext.org

Copyright © 2024 President & Fellows of Harvard College