Fiscal Analysis of a $500 Federal Education Tax Credit to Help Millions, Save Billions, Cato Institute

Over the past few months, federal policymakers have grappled with both education and taxes. Americans want both improved education and tax relief, but some say these dual priorities are in conflict. That need not be so, according to the Cato Institute. In a new report analyzing the effect of education tax credits, Cato researchers Darcy Ann Olsen, Carrie Lips and Dan Lips bring good news to those who'd like to have our cake and eat it too. The study assesses the fiscal impact of a two-pronged education tax credit on state and federal budgets. The plan would contain a "parental choice credit," which would offer a dollar-for-dollar reduction in federal income tax liability of up to $500 per child for money spent on tuition. It would also include a "scholarship credit," which would provide an additional $500 tax credit for donations to a nonprofit scholarship clearinghouse for low-income children. Cato researchers conclude that the plan would cost $9.2 billion in federal revenues but would save $14 billion in state education spending. Most importantly, it would allow 2 million new students to attend private schools. The report's conclusions flow from a (less than universally accepted) theory that students who transfer to private schools decrease state education expenses and that tax credits (and scholarships) will increase the number of students who transfer. The report also estimates the 'savings' for individual states; of course, savings are largest in states where demand for private schooling is greatest and where public-school per-pupil expenditures are highest. To find out more, obtain an electronic copy of the report at http://www.cato.org/pubs/pas/pa-398es.html, or call the Cato Institue at (202) 842-0200.

More By Author