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OUR CHALLENGE TO YOUOur research adheres to the highest standards of scientific rigor. We
know that one reason the school choice movement has achieved such
great success is because the empirical evidence really does show that
school choice works. More and more people are dropping their oppo-
sition to school choice as they become familiar with the large body
of high-quality scientific studies that supports it. Having racked up a
steady record of success through good science, why would we sabotage
our credibility with junk science?
This is our answer to those who say we can’t produce credible research
because we aren’t neutral about school choice. Some people think that
good science can only be produced by researchers who have no opin-
ions about the things they study. Like robots, these neutral researchers
are supposed to carry out their analyses without actually thinking or
caring about the subjects they study.
But what’s the point of doing science in the first place if we’re never al-
lowed to come to any conclusions? Why would we want to stay neutral
when some policies are solidly proven to work, and others are proven
to fail?
That’s why it’s foolish to dismiss all the studies showing that school
choice works on grounds that they were conducted by researchers who
think that school choice works. If we take that approach, we would
have to dismiss all the studies showing that smoking causes cancer,
because all of them were conducted by researchers who think that
smoking causes cancer. We would end up rejecting all science across
the board.
The sensible approach is to accept studies that follow sound scientific
methods, and reject those that don’t. Science produces reliable empiri-
cal information, not because scientists are devoid of opinions and mo-
tives, but because the rigorous procedural rules of science prevent the
researchers’ opinions and motives from determining their results. If
research adheres to scientific standards, its results can be relied upon
no matter who conducted it. If not, then the biases of the researcher
do become relevant, because lack of scientific rigor opens the door for
those biases to affect the results.
So if you’re skeptical about our research on school choice, this is our
challenge to you: prove us wrong. Judge our work by scientific stan-
dards and see how it measures up. If you can find anything in our work
that doesn’t follow sound empirical methods, by all means say so. We
welcome any and all scientific critique of our work. But if you can’t find
anything scientifically wrong with it, don’t complain that our findings
can’t be true just because we’re not neutral. That may make a good
sound bite, but what lurks behind it is a flat rejection of science.
The Fiscal Impact of the Kentucky Education Tax
Credit Program
Prepared By:
Brian J. GottlobSenior Fellow
Milton and Rose D. Friedman Foundation
June 2006
Executive Summary
IntroductionThe Rise of Individual Tax Credits and Scholarship Tax CreditsThe Kentucky Education Tax Credit Program
Individual Tax Credits for Qualified Education Expenditures
Business Contributions to Scholarship Organizations
Combined Demands for Kentucky Education Tax Credits
Demographics of Kentucky’s School Age ChildrenCharacteristics of Public and Private-School Children in Kentucky
Demand for Scholarships in KentuckyTuition Prices Strongly Influence the Demand for Private SchoolsFamily Income is a Key Determinant of DemandCombining Scholarship Supply and Demand Models to Estimate the Number of ScholarshipsFiscal Consideration of the Payment-in-Full ProvisionEstimated Demand
Fiscal Impact of the Scholarship Program
Conclusions
Endnotes
7
99
10
12
15
16
1718
212122242425
26
28
29
About the Author
About the Milton and Rose D. Friedman FoundationThe Milton and Rose D. Friedman Foundation, dubbed “the nation’s leading voucheradvocates” by the Wall Street Journal, is a non-profit organization established in 1996. The ori-gins of the foundation lie in the Friedmans’ long-standing concern about the serious deficiencies in America’s elementary and secondary public schools. The best way to improve the quality of education, they believe, is to enable all parents with the freedom to choose the schools that their children attend. The Friedman Foundation builds upon this vision, clarifies its meaning to the public and amplifies the national call for true education reform through school choice.
Brian J. Gottlob ([email protected]) is the Principal of PolEcon Research. For 17 years Brian has analyzed economic, demographic, labor market industry and public policy trends for private sector, government and not-for-profit organizations. He has extensive experience in developing econometric models and has completed studies on range of economic, tax policy, energy, education, and health care issues in the States of New Hampshire, Virginia, Ohio, New Mexico, New York, Texas, Oregon, Michigan, Georgia, Mississippi, West Virginia and Illinois. Brian is a Senior Fellow at the Milton and Rose D. Friedman Foundation. He has been an instructor at the Whittemore School of Business and Economics at the University New Hampshire, a member of the Advisory Board of the New England Economic Partnership (NEEP) and a member of the National Association of Business Economics. Prior to founding PolEcon, Brian was a Vice President for Fiscal and Economic Policy at the Business and Industry Association of New Hamp-shire. He has an undergraduate degree in economics from the State University of New York and a graduate degree in public policy analysis from the University of New Hampshire.
Table of Contents
The Fiscal Impact of the Kentucky Education Tax Credit Program
�June 2006
Executive Summary
ThisstudyexaminesthefiscalimpactofKentuckyHouseBill231,introducedinthe2006regularlegislativesession. This billwould establish theKentuckyEducationTaxCreditProgram,whichwould create twonew taxprovisions:ataxcreditforindividualtaxpayers,applicabletotheirfamily’sowneducationalexpensesandworthupto$500;andascholarshiptaxcreditforcorporatetaxpayerswhocontributetoorganizationsthatprovideprivate-schoolscholarships.Bothprogramswouldbelimitedtostudentsfromlow-incomeandmoderate-incomefamilies.Takingtheexperienceofotherstateswithsimilarprogramsasamodel,weuseddataonstudentdemographicsandschoolfinanceinKentuckytopredictthefiscaleffectsoftheseprogramsonthestatebudget.
Keyfindings:
Under the individual taxcredit component, familiescanbeexpected toclaimabout $23.2million in taxcreditsforqualifiededucationalexpenditures.However,becausethetaxcreditwilllowerthecostofprivate-schooltuitionbyupto$500perfamily,itwillinduceasmallpercentageofpublic-schoolstudents(about3,000)tomigratefrompublictoprivateschools.ThismigrationwouldsaveKentuckyabout$11.8millioninstateeducationspending.Thus,thenetcostofthetaxcreditwouldbeabout$11.4million–lessthanhalfthenominaldollarsizeoftheprogram.
Underthescholarshiptaxcreditcomponent,weanticipatethatKentuckybusinesseswillcontributethefull$60millionpermittedduringitsfirstyear,becauseoftheadvantagestodonatingbusinessesandbasedontheexperienceofotherstateswithsimilartaxcreditprograms.However,aswiththeindividualtaxcredit,thefiscalimpactofthescholarshiptaxcreditprogramwillbemitigatedbythenumberofstudentswhomigratefrompublicschooltoprivateschoolasaresultofthescholarships.Althoughthisprogramgivesbusinesses$60millionintaxcredits,theactualnetcostintheprogram’sfirstyearwouldonlybebetween$2to$17million,dependingonfactorssuchasthedollarvalueofthescholarshipsoffered.
Theprogram’sfiscalimpactwillsubstantiallyimproveinfutureyears,astheamountspentperstudentinKentuckypublicschoolsgrowsfasterthanthecostoftax-creditscholarships.Dependingonthesizeofthescholarships,theprogramcouldbegintosavethestatemoney;attheveryleast,itwillcostlesswitheachpassingyear.Inthetenthyearofoperation,theprogram’sfiscalimpactonthestatewouldbebetweenanetsavingsof$14millionandanetcostof$14million.
The Fiscal Impact of the Kentucky Education Tax Credit Program
� June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
�June 2006
Introduction
Proposalstoincreaseeducationalopportunitiesandchoicesforstudentsofdifferentbackgrounds,abilities,needsandeconomiccircumstancesareincreasingthroughoutthecountry.Inpart,thisreflectsgrowingsupportamongthepublicfortheconceptofschoolchoice;amajorityofU.S.citizensnowsupportit,accordingtodatareportedbytheU.S.DepartmentofEducation.1Proposalstoestablishcharterschools,vouchers,scholarshipsandtaxcreditsseektoincreasethechoicesparentshavefortheirchildren’seducation.Eachismotivatedbycorebeliefsthatinclude:
Parentalinvolvementiscriticaltotheeducationalachievementofchildren.
Allparents,regardlessofmeans,shouldhaveasayinhowandwheretheirchildrenareeducated.
Parentalchoiceshouldextendbeyondthepublicschoolsbecausepublicschoolscannotrealisticallyprovidethevarietyofeducationalexperiencesneededtomeettheuniqueeducationalneedsofeverychild.
Increasingly,however,school-choiceinitiativesarebeingconsideredinresponsetoconcernsabouttheeconomicsofpubliceducation.Theseinclude:
Educationexpendituresthatarerisingmuchfasterthaninflation.
Measurableacademicoutcomesofpubliceducation thathavenot increaseddespitedramatic increases inexpenditures.
Theabsenceofwidespreadalternativestopubliceducation,broadlyavailabletofamiliesandchildrenofallmeansthatmaybeproducingapubliceducationsystemwithlittleornoincentivetoimproveitsperformanceand/orlimitexpenditureincreases.
Increases in the school-agepopulation in rapidlygrowingregions thatcreate school spaceneedsandaddsignificantcapitalcoststoschooldistrictbudgets.
The Rise of Individual Tax Credits and Scholarship Tax Credits
Individualtaxcreditsandscholarshiptaxcreditsaremethodsofintroducingparentalchoiceineducationthathavearisen,inpart,inresponsetotheconcernsabove.Sixstates–Minnesota,Iowa,Illinois,Florida,PennsylvaniaandArizona–havesomeformoftaxreliefforindividualsorcorporationsthatprovidefundsforchildrentoattendprivateschools.
Individualtaxcreditsandtaxdeductions,offeredinIllinois,IowaandMinnesota,allowparentswhosendtheirchildrentoprivateschools(and,insomeproposals,thosewhohome-schooltheirchildren)todeductaportionoftheirtuitionoreducationalexpensesfromtheirindividualstateincometax.Parentspaytuitiontoprivateschoolsandthenreducetheirstateincometaxliabilitybyanamountequaltothevalueofthetaxcreditordeduction.
Scholarshiptaxcreditsallowtaxpayerstoreceiveataxcreditforcontributionstonon-profitorganizationsthatinturngivescholarshipstostudentstoattendprivateschools.Pennsylvania,ArizonaandFloridahaveestablishedscholarshiptaxcreditprograms.Thispolicyallowsindividualsorbusinesses,orboth,tospecificallydirecttheuseoftheirtaxdollarstoeducationbymakingcontributionstoscholarshiporganizations.Withtheseprograms,thestateisnotinvolvedingivingscholarshipstostudents;ratheritprovidesacreditfordonationstonon-profitscholarshiporganizations.
The Fiscal Impact of the Kentucky Education Tax Credit Program
10 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
11June 2006
The Kentucky Education Tax Credit Program
TheKentuckyEducationTaxCreditProgramproposedbyHouseBill231wouldcreatebothanindividualtaxcredit,applicabletoeachfamily’sowneducationalexpenses,andascholarshiptaxcreditforbusinessesthatcontributetoorganizationsthatgrantprivate-schoolscholarships.Thisanalysiswillconsidertheproposalstogether,assumingthereissomeinteractionbetweenthetwoprogramsasparentsmakechoicesaboutwhereandhowtoeducatetheirchildren.
Businesses inKentuckywouldbealloweda taxcredit forcontributionsmade toorganizations thatprovidescholarshipstofamilieswhowanttoattendaprivateschoolorapublicschooloutsidetheirassignedschooldistrict.Businessescouldclaimacreditagainsttheircorporatetaxesatarateof75percentto90percentforeverydollarcontributed toa scholarship-grantingorganization,up to $200,000or themaximumamountof their tax liability,whicheverislower.Totaltaxcreditsavailabletocorporatecontributionstoscholarshiporganizationswouldbecappedat$60millioninthefirstyearandrise5percentannually.
Theindividualtaxcreditcomponentoftheproposalwouldallowataxcreditofupto$500perfamilyforeducationalexpensessuchastuition,books,supplies,enrichmentandtutoring.Thiscreditcouldbeappliedtoeducationalexpensesregardlessofwhetherthefamilychoosespublic,privateorhomeschooling.
TheKentuckyEducationTaxCreditProgramhasadditionalkeyfeatures:
Bothcomponentswouldbeopentostudentsinallgrades.
Participatingfamilieswouldhavetomeetincome-eligibilityrequirements;theirtotalhouseholdincomecouldnotexceed2.5timestheincomethresholdusedtodetermineeligibilityforthefederalfreeorreduced-priceschoollunchprogram.
Thevalueofscholarshipawardstoaprivateschoolcouldnotexceedtheamountofper-pupilaidprovidedto thestudent’sschooldistrictbythecommonwealth’sschool-fundingformula,calledSupportEducationExcellenceinKentuckyorSEEK.
Aprivateschoolwouldhavetoacceptthescholarshipforaneligiblestudentasfullpaymentfortuitionandnotrequireadditionaltuitionpaymentfromtheeligiblestudent’sfamily.
ThisstudyexaminesthefiscalimpactoftheproposedKentuckyEducationTaxCreditProgram.Theprogram’sfiscalimpactwouldfirstdependonthevolumeofcontributionsandthevalueofthetaxcreditsclaimedbycorporationstofundscholarshiporganizations.Second,itwoulddependonthevolumeofindividualtaxpayercreditsclaimedforqualifiededucationalexpenditures.
Theproposalcallsforamaximumof$60millionincorporatetaxcreditsavailableforbusinesses.Underthiscomponent,businessescouldreducetheirtaxburdenanddirectfundstoorganizationsthatprovidescholarships.Theexperienceofotherstatessuggestsmanybusinesseswillcontributetotheprogram.
Theproposaldoesnotcapthetotalamountofindividualtaxcreditsthatcanbeclaimedstatewide,butitdoesestablishincomerestrictionsonclaimingthem.Underthiscomponent,Kentuckywouldincreaseinvestmentsintheeducationofitslower-incomechildren.Ratherthandecidehowtheadditionaleducationaldollarswillbeallocatedandtowhom,thestatewouldallowlower-incomeparentstodecidehowtoallocateadditionaleducationalexpenditures.Thestate’srolewouldbetosetbroadexpenditureguidelines;toseteligibilitycriteriasothatcreditswereavailable
onlytotaxpayerswhoseannualfamilyincomewasbelow2.5timestheincomethresholdtodetermineeligibilityforfederalfreeandreduced-priceschoollunches;andtoprovidethetaxcreditthatwouldleavemoneyinthehandsoftheselower-incomeparentstouseforeducation.
Sixstatesoffersometypeoftaxcreditordeductiontoassistfamilieswhowanttosendtheirchildrentoprivateschools.Minnesota,IowaandIllinoisofferadirecttaxcreditordeductiontoparentssendingtheirchildrentoprivateschools.Arizona,FloridaandPennsylvaniaoffercreditstoindividualsorcorporationsthatcontributetoorganizationsthatprovidescholarshipstolower-incomestudents.TheexperienceofthesestatesisdirectlyrelevanttotheKentuckyproposal.
InArizona,FloridaandPennsylvania,theopportunitytomakecontributionstoscholarshipprogramsinlieuofpayingtaxeshasproventobeapowerfulincentiveforbusinessestocontribute.Ineachofthetwostates(FloridaandPennsylvania)whereacapwassetonthetotalsizeoftheprogram,theinitialcapswerereachedinthefirstyear.Bothstatessubsequentlyincreasedthetotalallowabletaxcredits.
The Fiscal Impact of the Kentucky Education Tax Credit Program
12 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
13June 2006
Individual Tax Credits for Qualified Education Expenditures
Theindividualtaxpayerportionoftheproposedprogramwouldaffectlower-incometaxpayerswhoearnupto2.5timestheannualincomethresholdforthefreeandreduced-pricedlunchprogram.In2006,afamilyoffourwithanincomeof$37,000orlowerwouldqualifyforfreeorreduced-priceschoollunches.Anincomelimitof2.5timesthatlevelwouldmakeboththescholarshipportionandtheindividualtaxpayerportionoftheproposedtaxcreditprogramavailabletoafamilyoffourwithanannualincomeofupto$92,500.PovertythresholdsandmaximumfamilyincometobeeligiblefortheKentuckytaxcreditprogramarepresentedinTable1.
Table 1
ToestimatethevolumeofindividualtaxcreditsthatwouldbeclaimedweexaminedtheexperienceofotherstatesthatprovideeithertaxcreditsortaxdeductionsforqualifiedK-12educationalexpenditures.Wethenappliedthatinformationtoincome,demographicandtaxdatafromKentucky.Specificallywe:
EstimatedthepercentageoftaxpayerswhowouldclaimataxcreditbasedonthepercentageoftaxpayersinMinnesotawhoclaimedeitherataxcreditortaxdeductionforeducationalexpenditures.WeadjustedtheMinnesotaexperiencetoaccountforprogramdifferences,incomeguidelinesandthecharacteristicsofKentuckyfamiliesandchildren.
DevelopedamodelthatusestheInternalRevenueService’sStatisticsofIncome,U.S.BureauoftheCensusdemographicdata,andtheexperienceofotherstateeducationtaxcreditprogramstoestimatethepercentageofeligiblechildrenandfamiliesandthenumberandvolumeofcreditsthatwouldbeclaimed.
WechoseMinnesotabecausethetaxcreditsofferedinIowaandIllinoisarenotmeans-tested,soparticipation
levelswillnotbeassimilartowhatweshouldexpectfromtheproposedKentuckypolicy,whilethetaxcreditofferedinMinnesotaismeans-tested(althoughMinnesota’staxdeductionisnot).Minnesotahas10years’experiencewithtaxcreditsforeducationanddecadesofexperiencewithtaxdeductions.In2004,
2006 Poverty and Free or Reduced-Price Lunch Income GuidelinesApplied to Kentucky Tax Credit Program Eligibility
People in Family or Household
2
3
4
5
6
$13,200
$16,600
$20,000
$23,400
$26,800
$24,420
$30,710
$37,000
$43,290
$49,580
$61,050
$76,775
$92,500
$108,225
$123,950
Poverty Threshold 48 Contiguous States and
D.C.
Free/Reduced Income
Eligibility at 185% Poverty
Kentucky Scholarship & Tax Credit Income
Eligibilty at 250% Free/Reduced Lunch
Eligibility
Source: Federal Register, Vol. 71, No. 15, & PolEcon Calculations
Fewerthan10percent(220,000)ofalltaxpayersinMinnesotaclaimedataxdeductionforqualifiededucationalexpenditures,butweestimatethatabout28percentoftaxpayerswithchildrenclaimeddeductionsthatreducedrevenuesinMinnesotabyabout$15million.BecausethisdeductionisavailabletotaxpayersofallincomelevelsinMinnesota,weanticipateasmallerpercentageoftaxpayerswillclaimthecreditinKentucky.WeadjusteddownwardthepercentageoflikelytaxpayersinKentuckywhowillclaimacredittoreflectthefactthatlower-incometaxpayersgenerallyclaimfewerdeductionsandforgenerallysmalleramountsthanhigher-incometaxpayers.Inaddition,datafromtheU.S.BureauofLaborStatisticsConsumerExpenditureSurveyrevealthatasmallerpercentageoflower-incometaxpayersreporteducationalexpendituresandatalowerlevelthandohigher-incometaxpayers.Onlyabout58,000or4percentofincome-eligibletaxpayersandabout13percentofeligibletaxpayerswithchildrenclaimedataxcreditforqualifiededucationalexpenditures.In2004,approximately$15millionintaxcreditswereclaimedinMinnesota,astatewithabout30percentmoretaxpayersthanKentucky,andwithaneducationtaxcreditprogramthatallowscreditsupto$1,000foreacheligiblechildinafamily.TheKentuckyproposalwouldcapthecreditat$500totalforafamily.
InKentucky, familieswithchildren inpublic schoolswouldbeallowed toclaimacredit forexpendituresoneducationalenhancementssuchastutors,otherout-of-schoolenrichments,materialsandbooks.Familieswithchildreninprivateschoolscouldclaimataxcreditfortuitionpaymentsupto$500regardlessofthenumberofchildrentheyhaveinprivateschools.Ourbasicprocessforestimatingthevolumeoftaxcreditsclaimedbyindividualsisasfollows:
WeusedU.S.CensusBureauMicrodatafiles toestimate thenumberofKentuckyschoolchildren inbothprivateandpublicschoolsbyhouseholdincome,andbythepercentageofthefederalpovertythresholdthattheirfamilyincomerepresents.
Becausemostfamiliesofprivate-schoolchildreninKentuckyhavesignificanteducationalexpenditures,weassumedthat80percentofallincome-eligiblestudentsenrolledinprivateschoolsinKentuckywouldclaimataxcredit.Thislikelyoverstatesthenumberwhowillclaimthecredit,especiallyamonglower-income,private-schoolstudents.
Weassumedthat17percentoffamilieswithpublic-schoolchildrenwillclaimataxcredit.
Whencombined,ourestimatesof80percentofprivate-schoolfamiliesand17percentofpublic-schoolfamilieswhowillclaimataxcreditproduceanoverallrateofclaimsofabout24percent.Thisseemstobeareasonableestimateasitfallsbetweenourestimateof28percentofclaimantsforMinnesota’staxdeduction(whichisavailabletohigher-incomeresidentsthantheKentuckyproposal)andourestimateof12percentofclaimantsforMinnesota’seducationtaxcredit(whichisopentofamiliesuptoabout200percentofthefederalpovertythreshold).
Weassumeanaveragecreditclaimof$356,basedonadjustments to theMinnesota taxcreditexperience.Familiespayingtuitionlikelywillclaimthemaximumamountof$500,butalargerpercentageofclaimswillcomefromfamiliesofpublic-schoolchildren,who,basedonConsumerExpenditureSurveydata,willnotclaimtheentirevalueofthecredit.
Finally,becausefamilieswouldbeabletoclaimamaximumof$500incredits,andthemajorityoffamilieswithchildrenhavemorethanonechildinschool,weassumethat,onaverage,eachhouseholdwithachildwillhavetwochildren.Theeffectofthisassumptionistohalvethenumberofchildreneligibleforthe$500taxcredit,eventhoughthenumberofeligiblefamiliesdoesnotchange.
The Fiscal Impact of the Kentucky Education Tax Credit Program
14 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
15June 2006
TheseproceduresresultinestimatedtaxcreditsthatarepresentedinTable2.Thetableshowsthat,if24percentoffamiliesclaimthecredit,asweestimated,totalcostofcreditswouldbeapproximately$23.2million.Thetablealsoshowsthenumberofeligiblechildrenatvariouspovertythresholds;anestimateofthepercentageoffamiliesclaimingcreditsateachlevel;andthetotalestimatedcostofcreditsateachlevel.Thetableindicatesthat,asthepovertythresholdforeligibilityisincreased,thenumberoffamilieseligibleobviouslygrows,butthepercentageofeligiblefamiliesclaimingcreditsalsorises.Asincomecapsincrease,moreprivate-schoolstudentsbecomeeligible.Weestimatethat80percentofthosefamilieswouldclaimacreditcomparedtothe17percentofpublic-schoolfamilies.
TheshadedareainTable2highlightsestimatesundercurrentprovisionsoftheproposedtaxcredit.AlthoughTable2presentsour“bestestimate”ofcredituseandcosts,inrealitythereisarangeoflikelyoutcomesfortheproposedcreditwithacostthatlikelyfallsbetween$15millionand$30million.
Table 2
Theestimateof$23.2millioninfamilyeducationtaxcreditsrepresentsareductionoflessthan1percentinKentucky’stotalindividualincometaxcollectionsof$2.79billionin2004.
Inadditiontobeingusedtooffsetthecostofeducationalenrichments,servicesandmaterials,theproposedtaxcreditcanbeusedtolowerthepriceofprivate-schooltuitionby$500.Thiscouldbeexpectedtoinduceasmallnumber
ofpublic-schoolstudentstomigratetoprivateschools.Laterinthisreport,weconsidertheimpactthatscholarshipsofvariousdollarvalueswouldhaveonthedemandforprivateschoolsinKentucky.The$500taxcredit,althoughnotascholarship,hasthesameneteffectofloweringthepriceofprivate-schooltuitionforparents.Alargertaxcreditoralargerdollar-valuescholarshipthatlowersthepriceofprivate-schooltuitionsignificantlycouldbeexpectedtoinducemanyfamiliestomigratetheirchildrenfromthepublictoprivateschools.
Basedonthedemandmodelpresentedlaterinthisstudy,weestimatethatonlyabout3,053ofthe549,486taxcredit-eligiblepublic-schoolstudentsinKentuckywouldmigratetoaprivateschoolinresponsetothelowerpriceoftuitionresultingfroma$500taxcredit.Althoughthisisasmallnumberofstudents,itrepresentsasavingstoKentuckyof$11.75millioninstateeducationaid,basedonaprojectedaverageperpupilSEEKpaymentof$3,849.
Business Contributions to Scholarship Organizations
Theexperienceofotherstatesindicatesthatbusinessescanbeexpectedtocontributeuptothemaximumamountallowedbythecap,$60millioninthefirstyear,increasingby5percentannuallythereafter.FloridaandPennsylvaniabusinesseseachmadecontributions that reached the total cappedamountof taxcredits in thefirstyearof theirprogramsandeachhassubsequentlyincreasedthecaps.InFlorida,just19corporationsusedthestate’stotalallowabletaxcreditsthatfirstyear;thatstrongdemandpromptedthestatetoraisethecap.
AccordingtoInternalRevenueServicedata,67,572Kentuckycompaniesfiledcorporateincometaxreturnsin2003.AsimilarnumberofbusinesstaxpayersaresubjecttotheKentuckycorporateincometax,buttheirfederalcorporatetaxfilingoriginatesinanotherstate(thatis,theyhaveoperationsoranexusinKentuckythatrequiresaKentuckycorporate income taxfiling in addition to their federal tax returnfiled fromanother state).Also, 29,261 businesspartnershiptaxreturnswerefiledinKentuckyin2003.
BusinessesinKentuckycanbeexpectedtobehavesimilarlytobusinessesinotherstatesforseveralreasons:
Innationwidesurveys,nearlyhalf(48percent)ofallbusinessesindicatedthateducationwastheirtoppriorityfortheirphilanthropicandcivicactivities.2
Ingeneral,businessesarerewardedbyowners,shareholders,equityanalystsandfinancial institutions forminimizingthepercentageofincomegoingtotaxes.Alowertaxburdenisassociatedwithsoundfinancialmanagement.
Unliketaxpayments,contributionstoaprogramsuchastheKentuckyEducationTaxCreditProgramlikelywouldgeneratecivicandpublicrelationsbenefitsforthedonorcorporation.
Estimated Education Tax Credits by Individual Taxpayers
AnnualIncome
% of Poverty
<50%
50-100%
100-150%
150-175%
175-200%
200-250%
250-300%
300-463%
500+%
Average Children Per Family: 2% Public-School Families Taking Credit: 17%% Private-School Families Taking Creidts: 80%Average Dollar Value of Credit: $356
# Public School
Children
CumulativePublicSchool
Children
Cost ofPublicSchoolCredits
# Private School
Children
CumulativePrivateSchool
Children
Cost ofPrivateSchoolCredits
TotalCost of Credits
# of all Families ClaimingCredits
58,654
81,443
82,815
36,999
29,802
64,545
63,138
132,256
110,796
58,654
140,096
222,912
259,911
289,713
354,259
417,396
549,652
660,448
$1,774,856
$4,239,312
$6,745,309
$7,864,912
$8,766,730
$10,719,866
$12,630,409
$16,632,475
$19,985,156
2,337
4,297
4,426
4,183
2,353
5,629
6,667
16,537
26,390
2,337
6,634
11,060
15,243
17,596
23,225
29,892
46,429
72,819
$332,771
$944,674
$1,574,917
$2,170,614
$2,505,646
$3,307,237
$4,256,558
$6,611,459
$10,369,426
$2,107,628
$5,183,986
$8,320,226
$10,035,525
$11,272,376
$14,027,103
$16,886,967
$23,243,934
$30,354,582
20.2%
20.8%
20.9%
21.6%
21.8%
22.1%
22.5%
23.5%
25.2%
Considering the total impacts of the individual education expense tax credits, we estimate the net cost of the credit to be about $11.5 million:
Credits Claimed $23,243,934(-) State Education Aid Savings $11,750,772
= Net Cost of Credit $11,493,162
The Fiscal Impact of the Kentucky Education Tax Credit Program
16 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
1�June 2006
Combined Demand for Kentucky Education Tax Credits
Figure 1
Figure1presentsourestimatesofthetotalamount(corporateandindividual)ofclaimsundertheproposedKentuckyEducationTaxCreditProgramtotheyear2015.Weassumethatcorporationswillclaimthemaximumavailabletaxcredits,astheydidinFloridaandPennsylvania,andthatallowablecreditswillincreaseby5percentayear.Taxcreditstofamiliesareassumedtoincreaseby2percentayear.Thesefiguresdonotreflectthenetfiscalimpactoftheprogramforthestatetreasury;theyaresimplythenominaldollarvalueofthetaxcreditsclaimed.
Family Tuition Credit
Corporate Scholarship Credit
Expected Demand for Education Tax Credits
Tax C
redit
s ($
Million
s)
$140
$120
$108
$80
$60
$40
$20
$23$24
$24$25
$25$26
$26$27
$27$28
$60 $63 $66 $69 $73 $77 $80 $84 $89 $93
Year
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Demographics of Kentucky’s School Age Children
TheKentuckyEducationTaxCreditProgramwouldapplytochildrenfromfamilieswithannualincomesatorbelow2.5timestheincomethresholdforthefederalfreeandreduced-pricelunchprogram,or$92,500forafamilyoffour.Usingthiseligibilitycriterion,weexaminedthedemographicsofchildreneligiblefortheproposedprogram,aswellastheoverallpopulationofschoolchildreninKentucky.Inaddition,weexaminedkeydemographicdistinctionsbetweenchildreninpublicandprivateschools.
Figure 2
The2004-2005Superintendent’sAnnualEnrollmentandAttendanceReportsfromtheKentuckyDepartmentofEducationshowthatabout546,000ofKentucky’s656,000public-schoolchildrenwouldhavebeeneligibleforscholarshipsortaxcredits.Ourestimateforthe2006-2007schoolyearisthatabout549,652public-schoolchildrenandanother48,585private-schoolchildrenwouldbeeligible(Figure2).
Public Schools
Private Schools
Cumulative Number of Children Age 5-17
Ninety Percent of Eligible Kentucky Students are in Public Schools
Fam
ily I
nco
me
as
a %
of
Pov
erty
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000
>463%
300-463%
250-300%
200-250%
175-200%
150-175%
100-150%
50-100%
<50%
Source: PolEcon Estimates Using Kentucky Dept. of Education and US Census Public Use Projections and Microdata Files
Eligiblefor the
Program
The Fiscal Impact of the Kentucky Education Tax Credit Program
1� June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
1�June 2006
Figure 4
Figure4showsthattheaverageincomeofchildrenattendingpublicschoolsinKentuckyisabouthalfthatoftheincomeofchildrenattendingprivateschools,andFigure5showsthedramaticdifferencesintheincomedistributionoffamilieswithchildreninpublicversusprivateschools.
Characteristics of Public and Private-School Children in Kentucky
AccordingtoU.S.CensusBureaudata,slightlymorethan12percentofschoolchildrenage5-17inKentuckyeitherattendaprivateschoolorarehome-schooled.3Thecharacteristicsofpublicandprivate-schoolstudentsvaryinimportantways,including:
ThepercentageofchildreninprivateschoolsishighestamongwhitechildrenandlowestamongAfrican-Americanchildren.WhitechildreninurbanJeffersonCountyarethemostlikelytoattendaprivateschool.African-AmericanchildreninJeffersonCountydonothaveahigherrateofprivate-schoolenrollmentthandoAfrican-AmericanchildrenthroughoutKentucky(Figure3).
Figure 3
Theaveragefamilyincomeofchildreninprivateschoolsissignificantlyhigherthantheaverageforpublicschools(Figure4),andamuchhigherpercentageoflowerincomechildrenattendpublicschools(Figure5).
Private School Attendance by Race (Statewide and in Jefferson County)
Source: PolEcon Analysis of US Census 2000, Public Use Microdata Files (PUMS 1% Sample)
Kentucky
Jefferson County
40%
35%
30%
25%
20%
15%
10%
5%
0%
29.1%
13.4%
2.7% 2.4%
8.9%“Other Non-White”for Jefferson County Not Available
White African-American Other Non-White
Average Income of Kentucky Children in Public and Private Schools
Source: PolEcon Analysis of US Census 2000, Public Use Microdata Files
PrivateSchools
Public Schools
$100,000
$80,000
$60,000
$40,000
$20,000
$0
$88,755
$48,721
Family Income Household Income
$88,982
$49,773
The Fiscal Impact of the Kentucky Education Tax Credit Program
20 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
21June 2006
Figure 5
AsFigure5shows,almostathirdofchildreninKentuckypublicschoolscomefromfamilieswithannualincomebelow$25,000,comparedto13percentofstudentsinprivateschools.Italsoshowsthattherearesubstantialopportunitiesforlower-andlower-middle-incomefamiliestoattendprivateschools,asaboutaquarterofprivate-schoolstudentswouldqualifyfortheproposedprogrambasedon2.5timestheincomethresholdeligibilityforthefederalfreeandreduced-pricelunchprogram.
Together,thesedatasuggest:
TherearesubstantialeconomicandracialdifferencesinthecompositionofpublicversusprivateschoolsinKentucky.
ThereisespeciallystrongdemandforprivateschoolinginJeffersonCounty.Highratesofprivate-schoolenrollment in the district and a relatively high percentage of lower-income students in private schoolssuggestthatevenforfamiliesoflimitedmeansprivateschoolsappeartobeadesirableoptionforeducatingchildren.
Thehigherratesofprivate-schoolenrollmentamongchildrenfromupper-middle-andhigher-incomefamilies,andamongwhitechildrenofallincomes,suggestthatforwhitefamiliesand/orfamilieswithlower-middletohigherincomes,alargepercentageviewprivateschoolsasamoreattractiveoptionforeducatingtheirchildren.
Income Distribution of Students in Kentucky Public and Private Schools
Source: PolEcon Analysis of US Census data
Public Schools
Private Schools
40%
35%
30%
25%
20%
15%
10%
5%
0%
31%
Per
centa
ge
of
Ken
tuck
y S
tuden
ts
<25 25-35 35-50 50-75 75-100 100-150 150+
13% 13%
9%
17%15%
21%20%
10%
15%
5%
15%
3%
13%
Income ($Thousands)
Demand for Scholarships in KentuckyDuringthe2005-2006schoolyear,Kentuckystategovernmentspending(asdistinctfromfederalandlocalspending)
was$3,755perstudentonaverage.4Eachstudentwholeavespublicschoolforprivateschoolthusgeneratesanaveragesavingstothestategovernmentof$3,755.Thusthenetfiscaleffectofthetaxcreditprogramdependsonthenumberofstudentswhomigratefrompublictoprivateschoolscomparedtothecostofthetaxcredits.
ForecastingthenetfiscalimpactsofKentucky’sproposedtaxcreditprogram,then,requiresthatwepredictthe
actionsofparentsinresponsetotheavailabilityofscholarships.Toestimatethenumberofstudentswhowillreceivescholarshipsandattendprivateschools,weexaminedthesizeoftheschool-agepopulationinpublicandprivateschools;thecharacteristicsanddifferencesofthepopulationofschoolchildreninpublicandprivateschools;andthewaythosedifferenceswouldaffectdemandforscholarships.Weanalyzedtheinteractiveeffectsamongthevolumeofscholarshipfundsavailable;theaveragedollarvalueofindividualscholarshipawards;andtheimpactthatthemigrationofpublic-schoolstudentstoprivateschoolswillhaveonpublic-schoolenrollmentsinKentucky.
Tuition Prices Strongly Influence the Demand for Private Schools
To determine the fiscal impact of corporate contributions to scholarships, we consider several factors: Howwillfamiliesofchildreninpublicschoolsrespondtotheincreasedavailabilityofscholarships?Whatpercentageofscholarshipswillgotochildrenmigratingfrompublictoprivateschools,andwhatpercentagewouldgotostudentsalreadyenrolledinprivateschools?
Wedevelopedamodel to forecastdemandforprivateschoolingbasedonareviewofrelevant literature; theexperiencesofotherstateswithscholarshiptaxcreditprograms;andourownexperiencemodelingprivate-schooldemandinotherstates.5Weemployedthefollowingassumptions:
Only85percentofcorporatecontributionswillbeusedtograntscholarshipstoprivateschools.Theremaining15 percent will be used, as permitted under the proposed program, to provide students with stipends foreducationalactivitiesrelatedtoart,music,danceanddrama,andalsoforadministrativecostsofscholarshiporganizations.Thispercentageisimportantforcalculatingnetfiscalimpactbecausecontributionsthatdonotfundscholarshipsalsodonotreducestateeducationspendingbyinducingpublic-schoolstudentstoattendprivateschools.
Weassumethatscholarshipswillbedividedbetweenchildreninpublicandprivateschoolsaccordingtothepercentageofdemandfromeachgroup.Currentprivate-schoolstudentswhoqualifyforascholarshipbasedonincomestandardsnumberabout46,429.Weassumethatnearlyallofthesestudents,becausetheyarelower-incomeprivate-schoolstudents,willapplyforscholarships.Weassumethat20percentalreadyreceivesometypeofscholarshipandwouldnotapply.
Becauseprivateschoolswouldhavetoacceptatax-credit-fundedscholarshipaspaymentinfullfortuition,weassumethatlow-valuescholarships(below$2,000)willnotbegranted.
Our models show that, as the value of scholarships increase, the demand for scholarships among public-schoolchildrenincreases(whiledemandfromcurrentprivate-schoolstudentsisconstantandinelastic).Thismeansthat,astheaveragevalueofscholarshipawardsincreases,thepercentageoftheoveralldemandforscholarshipsbypublic-schoolfamiliesincreases.Atthesametime,however,thetotalnumberofscholarshipsavailabledeclines.
The Fiscal Impact of the Kentucky Education Tax Credit Program
22 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
23June 2006
Anumberofstudieshaveestimatedtheincreaseindemandforprivateschoolingasaresultofchangesinthepriceoftheschools,orthe“priceelasticity”ofdemand.Themostwidelycitedstudiesindicatethatthedemandforprivateschoolsincreasesasthepricedeclines,aso-called“negativepriceelasticity.”However,thesestudiesprojectawiderangeofestimatesofthepriceelasticityofdemandforprivateschooling.ChiswickandKoutroumanesestimateapriceelasticityofabout-0.50,suggestingthata10percentdeclineinthepriceofprivateschoolswouldleadtoa5percentincreaseindemand,whileGwarnteyandStroupestimatepriceelasticityof-1.1,suggestingthata10percentdeclineinthepriceofprivateschoolswouldleadtoanincreaseindemandof11percent.6Studieslessoftencitedandlesswell-documentedhavefoundpriceelasticitiesashighas-2.88.
Family Income is a Key Determinant of Demand
Althoughmanystudieshaveproducedestimatesofthepriceelasticityofdemandforprivateschooling,thereisnodirectevidenceofhowchangesinpricewillaffectthedecisionsofparentsinKentucky.Analternativetoindirectestimatesoftheimpactofpriceondemandistoconsidertaxcreditscholarshipsashavingan“incomeeffect”onthedemandforprivateschooling.Scholarshipsaretreatedasanincreaseintheincomeoftherecipientfamilies,spendableonlyonaprivate-schooleducation.Evidenceof the incomeeffectondemandforprivateschooling isavailableusingdetaileddatafromthe2000Census.
Figure 6
Kentucky Private School Attendance by Income
Source: PolEcon Analysis of US Census data Files (PUMS 1% Sample)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%<25
6%
10%
12%
18%
30%
42%
11%
25-35 35-50 50-75 75-100 100-150 150+
Income ($Thousands)
AsFigure6demonstrates,thedemandforprivateschoolinginKentuckyincreasessignificantlywithincreasesinfamilyincome.“Incomeelasticity”referstothechangeindemandforprivateschoolthatoccursforeachpercentage-pointchangeinfamilyincome.Forexample,anelasticityof0.5wouldindicatethatiftheincomeoffamiliesinKentuckydoubled(a100percentincrease)therewouldbeacorrespondingincreaseinprivateschoolattendanceof50percent.Figure 6 suggestsan incomeelasticityofabout 1.0as incomemoves frompoverty status to lower-middle income($35,000-$50,000)andaveryhighelasticity(muchgreaterthan1.0)asincomemovesfrommiddletoupper-middleandhighincome.Whileonly5.5percentofKentucky’sschool-age(5-17)childreninfamilieswithlessthan$25,000inannualincomeareinprivateschools,thepercentagegrowsto11percentforchildreninfamilieswithannualincomesbetween$50,000and$75,000.Atanincomelevelbetween$100,000and$150,000,thepercentageofschool-agechildreninprivateschoolsincreasesto30percent,and42percentofschool-agechildreninfamilieswithincomesabove$150,000areinprivateschools.ThesedatasuggestthatthedemandforprivateschoolsisquiteelasticinKentuckyandthatevenamonglower-incomefamilies,scholarshipsarelikelytoresultinanincreaseinthedemandforprivateschooling.
Theimpactscholarshipshaveonthedemandforprivateschoolswilldependonthedollarvalueofscholarships,soourmodelusesaveragescholarshipvaluesrangingfrom$2,000to$4,250(forcomparison,theaverageprivate-schooltuitionin2006isabout$4,500).Wecalculatedthereductioninpricethatscholarshipsofeachdollarvaluewouldhaveonourforecastoftheaveragepriceoftuitionto2015andappliedthreeseparateestimatesofelasticity:-0.50(low),-1.0(medium)and-1.25(high)toprojectionsofthenumberofpublic-schoolstudentsin2015toestimatetheincreaseindemandforprivateschoolsthatwouldoccuramongeligiblepublic-schoolstudents.Becausetheproposedprogramwouldrequirethatscholarshipsbepaymentinfullfortuition,thescholarshipwouldfunctionlikea100percentreductioninthepriceoftuitionand,asaresult,weusedanestimatedpriceelasticityofdemandof-1.0.
Figure 7
Scholarship Supply and Demand by Dollar Value
Stu
den
ts
60,000
40,000
20,000
0
Average Dollar Value of Scholarship
$2,000 $2,250 $2,500 $2,750 $3,000 $3,250 $3,500 $3,750 $4,000 $4,250
Demand by Public School FamiliesSupply of ScholarshipsDemand by Public School Families (with Payment-In-Full)Demand by Private School Families
The Fiscal Impact of the Kentucky Education Tax Credit Program
24 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
25June 2006
Combining Scholarship Supply and Demand Models to Estimate the Number of Scholarships
Theexperienceofotherstatessuggeststhatthenumberofapplicantsfortax-creditscholarships(ordemand)willbegreaterthantheavailablenumberofscholarships.InKentucky,thesupplyofscholarshipmoneywouldbelimitedandfixedinanyoneyear,anditmaynotbesufficienttoawardscholarshipstoallapplicants.Inaddition,becauseincome-qualifiedstudentsalreadyenrolledinprivateschoolswouldbeeligible,theamountofscholarshipmoneyavailabletomeetthedemandfrompublic-schoolstudentswantingtomigratetoprivateschoolswouldbemorelimited.Forexample,assumingamoderateelasticityof-1.0andanaveragescholarshipvalueof$4,000,wecalculatedthatin2008thescholarshipsshouldincreasethedemandforprivateschoolsamongeligiblefamiliesbyabout46,081childreninKentucky.Atthesametime,weprojectedthatscholarshipfundsofabout$56.2millionwouldbeavailable;meaningthatonly14,057scholarships–or30.5percentofthedemand–wouldbeavailable.7Inaddition,weassumedthat,atscholarshipvaluesof$4,000,about37percentofscholarshipswouldgotostudentsalreadyenrolledinprivateschools, leavingonly8,842scholarshipsforpublic-schoolstudents.Thusonlyabout20percentofdemandamongpublic-schoolstudentsforscholarshipsof$4,000islikelytobemet.
Figure7highlightstherelationshipbetweenthedemandforscholarshipsandtheirsupplyatanaveragevalue
ofscholarshipsbetween$2,000and$4,250.Thechartpresentstwoestimatesofdemand.Thesolidlinereflectsonlytheeffectoftraditionalpriceelasticity–demandincreasesasthevalueofscholarshipsrisesmakesprivateschoolsmoreaffordable.Thedashedlinealsotakesaccountoftheprogramrequirementthatprivateschoolsmustacceptscholarshipsaspaymentinfull.Thismeansthatascholarshipofanyvaluewillbea100percentreductioninthepriceoftuition,sothatthedemandatanyscholarshipvalueshouldbethesame.Thebroaderimpactthisprovisionmayhaveisnotclear.Itcouldreducethenumberofparticipatingprivateschools,whichwouldreducethesupplyofprivateschoolingavailabletoscholarshipstudents.Alternately,itcouldresultinahigher-valuescholarship,highenoughtopromptprivateschoolstoincreasetheirspacetoaccommodatethenumberofscholarshipstudents.Inthisscenario,theactualnumberofscholarshipsawardedlikelywouldbequitesimilartothenumberofscholarshipsthatwouldhavebeenawardedifthepayment-in-fullprovisionwerenotincludedintheproposal.Figure7alsopresentsourestimateofdemandamongeligibleprivate-schoolstudents.ThemostimportantinformationtobegleanedfromFigure7includes:
Anaveragescholarshipvalueofabout$2,000wouldmaximizethenumberofpublic-schoolmigrants.Makingmiddle-incomefamilieseligibleforscholarshipswouldresultingreatermigrationtoprivateschoolsataloweraveragescholarshipvalue.Itisnotclearhowthepayment-in-fullprovisionoftheproposalwouldaffectthesephenomena.
Scholarshipdemandfromcurrentprivate-schoolstudentswouldnotchangeaccordingtotheaveragedollarvalueofscholarshipsbecauseeligiblefamilieshavealreadymadethedecisiontoattendaprivateschool.Scholarshipswilleliminatethepricelow-incomefamiliespaybutnotinfluencetheirdecisiontoattendprivateschools.
Fiscal Considerations of the Payment-in-Full Provision
Theprogram’spayment-in-fullprovision,describedabove,willhaveanimpactonitsexpectedfiscaleffect.Thereareseveralimportantconsiderationsindesigningaschool-choicepolicyandthefollowinganalysisdoesnotexamineallfactorsthatmightsupportoropposethepayment-in-fullprovision;itlooksonlyattheprovision’sfiscalimpact.
Dependingonthedollaramountofthescholarships,thepayment-in-fullprovisionmightresultinfewerprivateschoolsacceptingtaxcredit-fundedscholarshipsandthusfewerslotsforstudents;thelevelsimplymaybetoolowfortheschoolstojustifyacceptingscholarshipstudents.If,ontheotherhand,theaveragevalueofscholarshipsis
atorneartheaveragecostoftuitionatprivateschools,fewerscholarshipscanbeprovided,alsoreducingthenumberofstudentswhocanmigratefrompublictoprivateschools.
Withfewerstudentsremovedfrompublicschools,theoverallcostoftheprogramforKentuckywouldincrease.Thestatewouldrealizethelargestfiscalbenefitiftheaveragescholarshipvalueisaslowaspossible,butstillhighenoughtoinducesufficientmigrationfrompublictoprivateschoolstooffsetthecostofthetaxcredits.Withoutthepayment-in-fullprovision,asignificantnumberoffamilieswouldmovetheirchildrenfrompublictoprivateschoolsatscholarshipvaluesof,say,$1,500to$2,500,eveniftheyhavetopayacertainamountoftuitionoutoftheirownpockets.Withthepayment-in-fullprovision,however,privateschoolslikelywouldrequireahigher-valuescholarshiptoparticipateintheprogram.Theresultlikelywouldbeahigheraveragedollarvalueforscholarships,approachingthemaximumallowablevalueofapproximately$3,750.Underthatscenario,mostofthepublic-schoolmigrationthatwouldoccuratrelativelylowscholarshipvalueswouldbeeliminatedbecausefewerscholarshipsofhighervaluewouldbeavailable.Anotherwayoflookingattheprovisionisthatitwillincreasethecostofeachmigratingpublic-schoolstudent,reducingthepotentialforsavings.
Table 3
Estimated Demand
Table3presentsourestimateofthedemandforscholarshipsamongpublicandprivate-schoolfamiliesinthefirstfullyearthattheprogramgenerates$60millionintaxcredits.Weestimatedthat$51millionwouldbeavailableforscholarships.Wealsoestimated theavailablesupplyof scholarships,according to theiraveragevalue.Wedidnotconsideraveragescholarshipvaluesbelow$2,000because it isunlikely thatsuchvalueswouldbeacceptedaspaymentinfullbymostprivateschools.Thetableshowsthat,asthedollarvalueofscholarshipsincreases,demandforscholarshipsbypublic-schoolfamiliesincreases(evenwhilethedemandbyeligibleprivate-schoolfamiliesremains
Components of Scholarship Demand in 2006 by Average Value of Scholarship
Average Scholarship
Value
$2,000
$2,250
$2,500
$2,750
$3,000
$3,250
$3,500
$3,750
$4,000
Demand From
Private School
Families
Demand From Public School
Families
Total Demand
Public School % of
Demand
# Available Scholarships
# to Public School
Migrants
# to PrivateSchool
Families
% of Total
Demand Met
27,857
27,857
27,857
27,857
27,857
27,857
27,857
27,857
27,857
24,429
27,483
30,536
33,590
36,643
39,697
42,751
45,804
48,858
52,286
55,340
58,394
61,447
64,501
67,554
70,608
73,662
76,715
46.7%
49.7%
52.3%
54.7%
56.8%
58.8%
60.5%
62.5%
63.7%
25,500
22,667
20,400
18,545
17,000
15,692
14,571
13,600
12,750
11,914
11,257
10,668
10,138
9,658
9,221
8,823
8,457
8,120
13,586
11,410
9,732
8,408
7,342
6,471
5,749
5,143
4,630
48.8%
41.0%
34.9%
30.2%
26.4%
23.2%
20.6%
18.5%
16.6%
Net FiscalImpact
($2,143,843)
($4,674,160)
($6,939,836)
($8,980,327)
($10,827,613)
($12,507,896)
($14,042,843)
($15,450,528)
($16,746,148)
The Fiscal Impact of the Kentucky Education Tax Credit Program
26 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
2�June 2006
privateschools;foreverystudentwhomigrates,thestatesavesthatmuchinstateaidtolocalschooldistricts.Forthe2004-2005schoolyear(themostrecentyearforwhichdataareavailable),Kentuckypaidabout$3,755perpupilinstateeducationaidforeverypublic-schoolstudent.Weprojectedthatthisspendinglevelwouldbe$3,811for2006-2007.
Table4presentsourestimateofthenumberofpublic-schoolstudentswhowillmigrateasaresultofthescholarshiptaxcreditprogram.ThetablereflectstheprogramdesignelementsasoutlinedinKentuckyHouseBill231.Inaddition,thetableincorporatesthefollowingassumptions:
85percentoftaxcreditcontributionswillgotoscholarshipsforstudentstoattendprivateschools.
Thepercentageofscholarshipsawardedtopublic-schoolfamiliesrangesfrom46percentatanaveragescholarshipvalueof$2,000to63percentatanaveragescholarshipvalueof$4,000.Notethattheproposalwouldallowforamaximumscholarshipvalueequaltotheamountofstateper-studentaidinthestudent’sschooldistrict.In2006-2007thatamountisexpectedtoaverageapproximately$3,800.
Table 5Table5showsthenetannualfiscalimpactsofa$60millionscholarshiptaxcreditprogram(increasingannuallyby
5percent)from2006through2015.Thetableshowsthatasstructured,theprogramwouldmostlikelycostthestatefrom$2millionto$17millioninthefirstyear,orlessthanonethirdofthenominal$60millionsizeoftheprogram.Lossesarereducedeachyearandchangetonetfiscalgainsastheaveragevalueofscholarshipsisreduced,ifscholarshipvaluesremainhighenoughtoinducesignificantpublicschoolmigrationbutlowenoughtoallowmorescholarshipstobegranted.
constant).Thismeansthat,athigherscholarshipvalues,public-schoolstudentswilldemandahigherpercentageofavailablescholarships.Weassumedthatscholarshipswouldbesplitbetweenexistingprivate-schoolstudentsandpublic-schoolstudentslookingtomigratetoprivateschoolsinroughlythepercentageoftotaldemandrepresentedbyeachgroup.
Fiscal Impact of the Scholarship Program
Thecostofthescholarshiptaxcreditcomponentisdeterminedbyarangeofvariablesthataredifficulttopinpoint.However,arangeofcostscanbepredictedbasedontheminimumandmaximumvaluesofthevariables.Thenetimpactofscholarshiptaxcreditsonstatebudgetsisdeterminedby:
Thecorporatetaxrevenueforegoneasaresultoftaxcreditsforcontributionstoscholarshiporganizations.
Thepercentageoftaxcreditcontributionsallocatedforscholarships.
Thenumberofscholarshipsawardedtopublic-schoolstudentswhomigratetoprivateschools.
Thereductioninper-pupilstateeducationaidasaresultofthemigrationofstudentsfrompublictoprivateschools.
Table 4Thenetfiscalimpactoftheprogramdependsonthenumberofstudentswhomigratefrompublicschoolsto
Projected Public-School Migration by Average Size of Scholarship
Avg.Scholarship
$2,00
$2,250
$2,500
$2,750
$3,00
$3,250
$3,500
$3,750
$4,000
Based on $60 Million in Tax Credits with 85% Going to Scholarships and 60% of Scholarships Going to Public-School Families
2006 2007 2008 2009 2010 2011 2012 2013
11,914
11,257
10,668
10,138
9,658
9,221
8,823
8,457
8,120
12,510
11,819
11,201
10,645
10,141
9,682
9,264
8,880
8,526
13,135
12,410
11,761
11,177
10,648
10,166
9,727
9,324
8,952
13,792
13,031
12,349
11,736
11,180
10,675
10,213
9,790
9,400
14,482
13,682
12,967
12,323
11,739
11,209
10,724
10,279
9,870
15,206
14,367
13,615
12,939
12,326
11,769
11,260
10,793
10,364
15,966
15,085
14,296
13,586
12,942
12,357
11,823
11,333
10,882
16,764
15,839
15,011
14,265
13,590
12,975
12,414
11,900
11,426
Net Fiscal Impact of $60 Million Scholarship Program(Assumes 80% Tax Credit and 46% to 60% Go to Public-School Families)
Average Scholarship
Value
$2,000
$2,250
$2,500
$2,750
$3,000
$3,250
$3,500
$3,750
$4,000
2006 2007 2008 2009 2010 2011 2012 2013
($2.1)
($4.7)
($6.9)
($9.0)
($10.8)
($12.5)
($14.0)
($15.5)
($16.7)
2014 2015
($1.0)
($3.8)
($6.2)
($8.4)
($10.4)
($12.2)
($13.9)
($15.4)
($16.8)
$0.2
($2.7)
($5.4)
($7.7)
($9.9)
($11.8)
($13.6)
($15.2)
($16.7)
$1.6
($1.6)
($4.4)
($6.9)
($9.2)
($11.3)
($13.2)
($15.0)
($16.6)
$3.2
($0.2)
($3.3)
($6.0)
($8.5)
($10.7)
($12.8)
($14.7)
($16.4)
$5.0
$1.3
($2.0)
($4.9)
($7.6)
($10.0)
($12.2)
($14.3)
($16.1)
$6.9
$3.0
($0.5)
($3.7)
($6.6)
($9.2)
($11.6)
($13.7)
($15.8)
$9.2
$4.9
$1.1
($2.3)
($5.4)
($8.2)
($10.7)
($13.1)
($15.3)
$11.6
$7.1
$3.0
($0.7)
($4.0)
($7.0)
($9.8)
($12.3)
($14.7)
$14.4
$9.5
$5.1
$1.1
($2.4)
($5.7)
($8.7)
($11.4)
($13.9)
The Fiscal Impact of the Kentucky Education Tax Credit Program
2� June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
2�June 2006
1 A national poll conducted by Harris Interactive in August 2005 found that 60 percent of Americans favor “allowing students and parents to choose any school, public or private, to attend using public funds.” See: http://www.friedmanfoundation.org/news/2005-08-23.html. Other national poll results confirming this finding are reviewed in the Friedman Foundation’s publication ABCs of School Choice.
2 “The State of Corporate Citizenship: A View From Inside,” The Center for Corporate Citizenship at Boston College, 2004.
3 The Census Bureau does not survey for home-schooling. According to the Kentucky Department of Education, an estimated 12,000 children are home-schooled children in Kentucky.
4 Kentucky Department of Education; see: http://www.education.ky.gov/NR/rdonlyres/ernssrj4qovh63teoyeigs2o4yuydu2wmogdbdy62rst4zq4en4acis2hqv4z3tx55ew7m5ddtbhejfanmtcduk3oef/200506SEEKFinalSummaryPerPupil.xls.
5 Specifically, PolEcon has modeled the price and income elasticity of demand for private schooling in New Mexico, Missouri and New Hampshire.
6 B. R. Chiswick and S. Koutroumanes, “An Econometric Estimate of the Demand for Private Schooling,” Research in Labor Economics 15:209-237, 1996; and J. D. Gwartney and R. L. Stroup, Economics: Private and Public Choice (8th edition), South-Western College Press, 1997.
7 The amount of potential scholarship money is $66.15 million in 2008. Administrative costs and money awarded for uses other than scholarship purposes will be 15 percent of contributions or about $10.4 million, leaving $56.2 million for scholarships.
EndnotesConclusions
Ouranalysisanticipatesthattherewillbeagreatdealofparticipationandinterestinboththeindividualtaxcreditprogramavailabletofamiliesforeducationalexpendituresandthebusinessscholarshiptaxcreditprogram.
Weestimatedthatabout$23.5millioninindividualtaxcreditswillbeclaimedbyfamiliesforqualifiededucationalexpenditures,butthatasmallnumber(about3,000)ofstudentswillmigratefrompublictoprivateschoolsasaresultofthistaxcredit,savingthestateabout$3,811eachinpublicschoolspending.ThenetimpactoftheindividualtaxcreditcomponentwillbeacosttothecommonwealthofKentuckyofonlyabout$11.4million,orlessthanhalfthenominalsizeoftheprogram.
Basedontheexperienceofotherstates,weexpectthatcorporationsinKentuckywillmakefulluseofallavailabletaxcreditsforcontributionstoscholarshiporganizations.Weconcludedthat,asproposed,theprogramwillcostthecommonwealthofKentuckyonlybetween$2millionand$17millioninitsfirstfullyear,orlessthanonethirdofthenominalsizeoftheprogram.Costswillbefurtherreducedeachyearthereafter.
The Fiscal Impact of the Kentucky Education Tax Credit Program
30 June 2006
The Fiscal Impact of the Kentucky Education Tax Credit Program
31June 2006
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The Fiscal Impact of the Kentucky Education Tax
Credit Program
Prepared By:
Brian J. GottlobSenior Fellow
Milton and Rose D. Friedman Foundation
June 2006
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