School Choice Advocates Should Be Worried About Federalizing School Choice

The Trump campaign promised to direct $20 billion towards school choice. Media reports suggest that this idea is likely to take the form of a tax credit scholarship program, which would direct federal tax revenues to organizations that provide private school scholarships. However, the design of a national tax credit scholarship program would be fraught with difficult questions. To create a feasible school choice policy, lawmakers would likely need to expand federal involvement in private school education.

ednext-blog-march17-blagg-wonkathonTax credit scholarship programs, which currently exist in seventeen states, allow individuals or corporations to receive a proportional or dollar-for-dollar tax credit for contributions to scholarship-granting organizations (SGOs). The SGOs then provide scholarships for eligible students to attend private schools. In most states, participation is limited to students from low-income families, students with disabilities, or those who attend low-performing public schools.

In this post, we set aside the thorny question of whether directing public money to private schools is preferable to other potential uses of the same resources. Instead, we review the key questions that policymakers must address when designing a federal tax credit scholarship program. Our analysis highlights the tradeoffs that Congress would face, and echoes many of the concerns raised by choice supporters about federalizing school choice.

What organization(s) would receive and distribute the funds?

State tax credit scholarship programs designate one or more SGOs to receive funds from taxpayers and then distribute them to eligible students and schools. Creating a federal program requires Congress to specify which organizations can serve this role, either for the nation or individual states.

One option is for Congress to create a process by which the federal government recognizes one or more national SGOs. These SGOs would accept contributions, process student applications, and pay out tuition scholarships to schools. This national approach would immediately expand private school choice in all fifty states. But it would require the federal government to set national standards for student and school eligibility.

An obvious alternative is to delegate the responsibility of designating SGOs to the states. States would then make decisions about which schools and students are eligible, and could adopt regulations based on their context and preferences (e.g., a state could decide to include participating private schools in their test-based accountability system). The primary downside to this approach (from the perspective of choice advocates) is that states may decline to participate, much as many Republican governors refused additional Medicaid funding under the Affordable Care Act.

A state-based approach would also make it more difficult to manage the equitable distribution across states of what would otherwise be federal dollars. If non-profit SGOs don’t collect enough donations, or if there aren’t enough scholarship applicants, then states essentially lose out on federal dollars that were allocated to them. For example, if a state is allocated $100 million dollars, and the SGOs raise just $50 million from donations, then the state loses access to the remaining funds. Likewise, if fewer students take up the program than expected in a state (e.g. due to weak SGO advertising efforts or a small scholarship amount relative to local tuition costs), then state participation is also restricted.

Hybrid approaches include the creation of both state-based and national SGOs, or a national SGO that distributes shares equitably to individual state-level SGOs, which in turn then set eligibility requirements and process applications. But these would involve even more administrative complexity, and entail the creation of entities that are in effect quasi-governmental national charities.

The key point is that any of these options requires significant federal involvement because it is not possible to provide tax credits for contributions to scholarship-granting organizations without defining what such a thing is for federal tax purposes.

How would total donations be capped?

A federal tax credit would be capped so that aggregate credits do not exceed a specified amount (e.g., $20 billion per year). Most states limit their tax credit program by requiring donors to reserve their tax credits in advance. In order to implement a cap, Congress would have to authorize a reservation process so that the Internal Revenue Service (IRS) can credit each donation in the order it was received, either directly to donors or through SGOs, and let potential donors know when the cap has been reached.

Under a purely federal program, Congress could implement a single aggregate cap for the nation. Under a state-level or hybrid system, lawmakers would need to designate a series of state-specific caps aimed at ensuring an equitable distribution across states. They may also want to specify whether and how unused dollars from states that don’t hit their cap can be used in other states.

State-specific caps would need to be set by Congress, and could be tied to overall student enrollment, low-income student enrollment, or some other measure. It would add complexity to the administration of the program, with the degree of complexity depending in part on how funds are collected and distributed. State-specific caps are necessary if Congress wants to avoid arbitrary allocations of credits to states based on factors such as how early in the year they mobilize their taxpayers to reserve credits, and would require coordination between taxpayers, the IRS, and individual state-based SGOs. We presume that this would be administratively feasible but would involve some costs and require significant federal involvement.

How would a federal tax credit program interact with current state programs?

Proponents of a national school choice program presumably view such a program as building on existing choice programs at the state level. But, depending on how it is designed, a federal program would likely either replace existing state funding for school choice with federal money or unfairly penalize states that already have programs in place.

Consider Florida’s program, which has the highest participation rate in the nation. A federal credit that ignores the state program could displace some of Florida’s expenditures on the current program, meaning that part of the new federal spending would not be for expanded school choice but for choice that is already happening. But if the federal program tried to avoid this through some kind of “supplement not supplant” provision, it might encourage a state like Florida to spend more on the program than is necessary (e.g., by increasing the size of the scholarship).

There are a number of additional questions about how federal and state programs would interact. Would families be able to use funds from the federal program to “top up” scholarship funds from an existing state program? Would taxpayers that donate to state SGOs be permitted to “double-dip” and decrease both their federal and state tax liability, or even get the credit twice? State-level tax credit scholarship programs already interact poorly with the federal tax code. A recent report found that ten states have tax-credit scholarship programs that permit federal charitable deduction, which means that some taxpayers can make as much as a 35 percent profit on every dollar “donated” to a scholarship charity.

Federal policymakers face a number of risks, including the possibility of undermining existing state programs and slowing the expansion of these programs.

Choice advocates should be worried

A national tax credit scholarship program has obvious appeal to advocates who have pushed these programs at the state level. But that enthusiasm may wane as policymakers work to build, from scratch, a donation-based system that distributes funds to private schools equitably across the nation, allows states to retain some autonomy in determining eligibility, and interacts with the many school choice policies already in place in states.

Our analysis shows that each of the potential strategies for implementing such a national policy is fraught with drawbacks. Choice advocates may want to reconsider whether a federal tax credit is the best vehicle for their goals, or one that is likely to create more problems than it solves.

—Kristin Blagg and Matthew M. Chingos

Kristin Blagg is a research associate in the Income and Benefits Policy Center at the Urban Institute, focusing on education policy. Matthew M. Chingos is a senior fellow at the Urban Institute.

This post originally appeared on Flypaper as a submission to Fordham’s 2017 Wonkathon. Fordham asked assorted education policy experts to explain how President Trump should structure his highly anticipated $20 billion school choice proposal. Other entries can be found here.

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