Chairman Parrish and Members of the Committee, and
Chairman Orrock and Members of the Subcommittee:
One of the most appealing features of federalism is that each state is a laboratory of change and all states may learn from how an innovation fares in a particular state. Certainly other states have learned much from Virginia’s development of content-rich Standards of Learning (SOL) and a linked accountability system.
As a result of bipartisan support for the SOL, Virginia’s public schools have made encouraging progress toward their pupils’ mastering the essential knowledge and skills necessary to meet the accreditation standards. While only 2 percent of the schools initially made a passing mark, now almost two-thirds of them do. However, even amid continuing progress, this system is exposing pockets of underachievement that are stubbornly resistant to change and where the needs of children are great.
It is at this point that Virginia can look to several of its sister states and learn about a promising new way to address unmet needs in education: scholarship tax credits.
The bill you have before you this Session would give Virginia a significant taste of how tax credits can help children at risk. It is basically a pilot project, which is a prudent approach at this time of fiscal worry and general uncertainty. But it is also possible to look at the other states where scholarship tax credits are being implemented and consider them as experiments from the laboratory of federalism, with results that can be evaluated.
From my research as a fellow at the Lexington Institute in Arlington, I would like to offer Members of this Committee the latest on three states’ pioneering ventures in scholarship tax credits:
Beginning in 1997, Arizona has allowed individual state taxpayers to take a dollar-for-dollar tax credit of up to $500 for charitable donations to recognized nonprofit organizations awarding scholarships to worthy students. Married couples filing jointly can receive a credit of up to $625. According to the Goldwater Institute, this program over the past four years has generated more than $56 million, which funds some 36,000 scholarships enabling students to afford private school tuition. Scholarship organizations can award aid on the basis of academic merit, financial need, or other criteria, but about four of every five scholarships are awarded on the basis of financial need.
In the past year, two additional states have begun to implement scholarship tax credits. Unlike Arizona, which currently allows the credit only for individual taxpayers, both of these states provide the credit against corporate taxes, as the bill before you would do:
(2) Pennsylvania: The Educational Improvement Tax Credit was enacted in the spring of 2001 and last fall the first 10,000 students were benefiting from the resulting scholarships. Pennsylvania corporations can receive up to a 75 percent tax credit the first year, rising to 90 percent in the second year if they make a two-year commitment. The credit is capped at $100,000 per business. Contributors may direct their money to private school scholarship organizations, specific children in need, or particular public or private schools. As of last fall, $20 million in credits had gone to corporations supporting private scholarships, while $10 million had gone to those wishing to support innovative public school programs.
(3) Florida: Also enacted in the spring of 2001, the Corporate Income Tax Credit for Scholarships allows businesses to take a dollar-for-dollar credit of up to 75 percent of their tax liability for donations to non-profit Scholarship Funding Organizations (SFOs), with a program cap of $50 million. The SFOs grant scholarships to low-income children for tuition at a private school or for transportation to an out-of-district public school chosen by parents. All funds must go to children who meet federal poverty guidelines. In its first year of existence, the Florida program already is generating K-12 scholarships for 15,000 needy children.
Three additional states – Illinois, Iowa, and Minnesota – offer general tax credits or deductions for parents documenting that they have paid certain educational expenses. However, the trend appears to be running toward a corporate credit as a cost-effective way to raise large amounts of scholarship aid targeted especially at children in need.
In brief, these are some of the good things that scholarship tax credits can achieve:
1. Saving taxpayer money. Savings can be realized as a result of students transferring from higher-cost public schools to lower-cost private ones. For instance, FloridaChild, a major SFO, points out because the maximum scholarship per-child is $3,500 and the per-pupil expenditure in Florida public schools is almost double that, the state saves money and also alleviates overcrowding as a result of each transfer. Critics counter that the savings would be eliminated and the program would be a drain on state resources as a result of scholarships going to students already attending private schools. However, tax-credit programs like Florida’s are tightly targeted to at-risk children whose families are unable to gain access to opportunities in private schools. The program currently limits participants to families eligible for the USDA Free or Reduced Price Lunch Program. Furthermore, grades 2-12 students entering the school-choice program must have gone to public school the previous year. A Cato Institute fiscal analysis of the impact of Arizona’s scholarship program found that it was revenue-neutral to the state in its first years and projects that by 2015 it would be raising $58 million a year, funding up to 61,000 scholarships a year, and yielding a net savings to the state.
2. Providing broader choice for students stuck in chronically failing public schools than is currently being realized under the federal No Child Left Behind Act. The new law calls for children to be able to transfer from a substandard public school to a better-performing one, but in many school districts, administrators contend that space for transferring students does not exist within the jurisdiction. Private scholarships can expand the range of choice for at-risk students whose needs are not being met in their assigned public schools.
3. Increasing equity in educational opportunity: Affluent families are able to choose the school they believe to be best for their children. Carefully designed tax credits can help give low-income families equivalent opportunity.
4. Reducing the burden on public schools. As private scholarships become available, the exodus of a number of children can help reduce class size in overcrowded public schools.
5. Stimulating healthy competition. As tax-credit programs generate increasing numbers of scholarships for students who have not previously attended private school, public schools may respond to the competition by improving their services and responsiveness to their patrons.
The plan being discussed here today is carefully targeted to low-income families (income limitation of $40,000 for a household of four), and to students at risk in Virginia public schools – that is, those assigned to a school not rated “Fully Accredited,” classified as “learning disabled,” or finding they have failed one or mor…
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