Tax Credit-Funded Scholarships Can (and Do) Save Money

Momentum is building here in Missouri for a private school choice program. This is great news, as families in Missouri deserve more and better options as to where to send their children. At the same time, there are budget concerns in the state, and fears that new programs might exacerbate those concerns.

Here is where a tax credit–funded scholarship (or education savings account) program can help. In such a program (like we see in 16 other states) individuals or corporations can donate to nonprofit scholarship-granting organizations and claim their donations as credits when they file their taxes. So, for example, if I owe the state $1,000 in taxes this year and choose to donate $1,000 to the Little Lebowski Urban Achievers Scholarship Fund, I would end up owing the state $0 in taxes.

If you’re a fiscal hawk, you might be getting nervous. Wait a second; if the state were to give $50 or $100 million in tax credits, wouldn’t that mean a big hit to the state budget?

The loss of revenue is only half of the equation. Yes, the program might start in the hole, but for every student who decides to take advantage of it, that is one fewer student that the state pays to educate. This summer, Marty Leuken and I estimated that the state spends about $4,775 per student per year, meaning that for every student who chooses to leave the public school system the state saves $4,775.

With $50 million in tax credits, the state breaks even when at least 10,472 students participate in the program. With a $100 million tax credit program, the state breaks even when 20,943 do.

(Marty has also written an in-depth analysis of all of the tax credit scholarship programs in the country, and shows how they have saved the states that offer them billions of dollars.)

We can run these numbers at the district level as well. The amount of money raised per child at the local level across varies widely all of the school districts in the state, but the basic truth remains that for every child who leaves to take advantage of a tax credit scholarship or ESA, that is one fewer child the district has to educate. On average, Missouri districts raise more money locally than they receive from the state—money that would stay in their schools even if children leave.

Fiscally, tax credit scholarships can be a win–win–win: a win for families who get financial support to choose the best option for their child’s education; a win for the state, which can provide these options at an extremely reasonable cost; and a win for local districts who can have more resources to devote to the children who choose to stay in their local public school.