EDUCATIONAL TAX CREDITS
Issues and Arguments
A tax credit
reduces an individual's (or business's) total tax burden on a dollar for dollar basis. For
example, if you owe the state $1,500 in income tax, but qualify for a $500 tax credit, you
would pay only $1,000 in taxes.
Tax credits can be
refundable or non-refundable. Non-refundable credits are only good against your actual tax
bill. If, in the previous example, you owed the state only $400, you could claim only a
$400 tax credit. You could not claim a refund for the additional $100 difference between
the size of the credit and the size of your total state tax burden. Refundable credits, as
their name implies, do allow such refunds. Even individuals who paid no taxes could
receive a $500 payment if the aforementioned tax credit was designed to be refundable.
Tax credits have been suggested as an alternative to government-funded scholarship programs. Under education tax credit plans, the credits can be used to defray the cost of tuition or other schooling-related expenses. As with scholarship programs, tax credits are promoted as a way of increasing parental choice and control over their children's education, and of fostering a competitive educational market, thereby encouraging accountability, innovation, and efficiency.
Supporters of educational tax
credits suggest that they have many advantages over government-funded scholarships. One
such claimed advantage is that credits sidestep the church / state entaglement controversy
which has plagued government scholarship (voucher) programs. Because a credit simply
allows the tax-payer to keep more of the money he or she has earned, and is never
collected by the government in the first place, it therefore does not constitute a
government subsidy. This was in fact the reasoning of the Arizona Supreme Court in a
recent decision on that state's education tax credit program (see below). The reader will
note, however, that this description only fits with the non-refundable tax credit.
Refundable credits, when in fact they do produce a refund, behave in very much the same
way as government scholarships, and so the church/state separation advantage is lost. A
more detailed discussion of vouchers vs. tax credits can be found in the two final
chapters of Maket Education: The Unknown History.
Tax Credits at Work and
on the Horizon
Arizona was one of the first states to pass an education tax credit into law that can be used to defray the cost of tuition at kindergarten through twelfth grade non-government schools. Passed in 1997, the law was immediately challenged by state and national teachers' unions. This challenge was rejected by the Arizona Supreme Court on January 26th, 1999, and the Arizona education tax credit was upheld. For a good overview of Arizona's education tax-credits, visit the Goldwater Institute's website.
Articles:
Court Upholds Tuition Tax Credit
The Arizona Supreme Court Decision:
Kotterman v. Killian Note that the Supreme Court of Arizona publishes its decisions on the internet in Portable Document Format (.pdf). While this format has the advantage of retaining a document's formatting, it requires that you have installed the Adobe Acrobat Reader. Fortunately, the reader can be downloaded for free.Campaign for Tax Credits in Michigan
Visit the SchoolChoiceYes! website for information on a proposed tax credit initiative for the state of Michigan. This initiative was developed by the Mackinac Center.
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