Neo-Vouchers: The New Corporate Tax Subsidy

From Citizens for Tax Justice (http://www.ctj.org):

Posted at http://www.ctj.org/taxjusticedigest/archive/2012/06/neo-vouchers_the_new_corporate.php

June 14, 2012 10:33 AM

NOTE: Pennsylvania has been doing this for a number of years. It’s called the “Educational Improvement Tax Credit.” A description of the program is at http://www.newpa.com/find-and-apply-for-funding/funding-and-program-finder/educational-improvement-tax-credit-program-eitc.

School vouchers are always controversial, but a front-page story in the New York Times describes how at least eight states have embarked on a quiet strategy of back-door vouchers which divert taxpayer money through tax rebates to private donors. While two states allow individuals to exploit this tax break, most are structured as corporate tax breaks.  So they are like conventional vouchers, except minus the accountability, and offering a special tax shelter for corporate profits.

You’d think you can’t make this stuff up, but somebody did.

Sometimes called “ neo-vouchers,” (PDF) the system involves corporate tax credits being doled out to businesses that contribute money to private-school scholarship funds. At their worst, they allow profitable corporations to actually make money from these contributions (they also get a write-off for charitable contributions on top of the dollar-for-dollar tax break match), reducing their income taxes by more than they actually contributed to schools.  And of course, this funnels needed public school funds (and those are taxpayer dollars) to private schools that often aren’t even subject to the same educational standards as a state’s public schools.

This trend is especially troubling now because elementary and secondary school funding already faces a perfect storm: the bursting of the home-value bubble is depressing property tax collections nationwide, and the end of stimulus-related federal aid to states has further constrained education funding. And as the Times documents, these tax credits cum vouchers are often poorly designed and subject to little oversight: some states don’t require the private schools receiving these scholarships to administer the same achievement tests as public schools, while others have no mechanism for directing scholarships to needy families. In fact, there is anecdotal evidence that some students benefitting from the scholarships would have attended these private schools anyway—which means their parents are being paid, by other taxpayers in their state, to do what they were planning to do anyway.

Why, at a time when adequately funding K-12 education has been so difficult for states, are lawmakers in these states so cheerful about directly siphoning tax revenue away from cash-starved public schools through these “neo-vouchers?” Maybe because they think that tax breaks aren’t the same thing as direct government spending? One source tells the Times, “there are private dollars coming from a private individual and going to a private foundation. It drives the N.E.A. completely off the wall because they can’t say this is government funding.”   Another piece similarly argues that “[v]ouchers and tax-credits vary in important ways. Both programs enable students to attend public or private schools of their parents’ choice, but unlike tax-credit scholarships, vouchers are publicly funded, paid for with government appropriations.”

But these statements are both ludicrous.  When a state government provides tax breaks for corporate contributions to private schools, the effect on state budgets is exactly the same as if the government had spent the money directly. It’s “government funding” either way. The critical difference is that tax breaks typically involve less oversight and public debate than direct spending, even as they divert public resources away from families still enrolled in underfunded public schools.

Some advocates of these tax giveaways have argued that this approach actually saves money, because the per-pupil cost of educating children in the private schools receiving the scholarships is lower than the per-pupil cost of public schools. Yet as a helpful new analysis from the National Education Policy Center shows, this claim assumes that the credit allows parents to move their children from public schools to private schools—and there is no evidence that it is having that effect.

And on top of all this, neo-vouchers are an actual money-maker for corporations. Remember, the system offers not only dollar-for-dollar state tax credits for contributions, but the ability of corporations to write off charitable contributions on their federal tax forms.  Companies can actually make a profit from these tax giveaways, collecting more in federal and state tax breaks than they actually spent on the contribution! And Florida’s credit, which was expanded by lawmakers earlier this year, is now the single most expensive (PDF) corporate tax credit allowed by the state, at $72 million a year.

So far, despite growing scrutiny of these perverse tax breaks in Georgia (PDF) and other states, lawmakers in New Jersey and North Carolina ( details) appear undeterred and are poised to enact similar plans.

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