The voices of Urban Institute's researchers and staff
March 9, 2017

School choice advocates should be worried about federalizing school choice

The White House’s plan to give students and parents more choice might increase the federal government’s role in education at the expense of state and local control.

The Trump administration, which has promised to increase school choice programs that allow students to use public tax dollars to attend private schools, is considering a tax credit scholarship program that would direct federal tax revenues to organizations that provide private school scholarships. Tax credit scholarship programs allow people or corporations to receive a tax credit for contributing to nonprofit scholarship-granting organizations (SGOs). The SGOs provide scholarships for eligible students—generally those from low-income families, those with disabilities, or those who attend low-performing public schools—to attend private schools.

Seventeen states have tax credit scholarship programs, but the programs have never been federally administered.

Who would manage the money?

Under state-level tax credit scholarship programs, SGOs receive donations from taxpayers and then distribute the money to eligible students and schools. Creating a federal program would require Congress to specify which organizations can serve this role, either for the nation or individual states. It would be impossible to provide federal tax credits for contributions to SGOs without defining what such a thing is for federal tax purposes.

One option is for Congress to create a process by which the federal government recognizes one or more national SGOs. These SGOs would accept contributions, process student applications, and pay tuition scholarships to schools. This national approach would expand private school choice in all 50 states. But it would require the federal government to set national standards for student and school eligibility.

An alternative is to have states designate SGOs. States would then decide which schools and students are eligible and could adopt regulations based on their context and preferences. The primary downside to this approach is that states may decline to participate, as many Republican governors refused additional Medicaid funding under the Affordable Care Act.

Hybrid approaches include creating both state-based and national SGOs or creating a national SGO that distributes shares equitably to state-level SGOs, which in turn set eligibility requirements and process applications. But these would involve even more administrative complexity and require creating quasi-governmental national charities.

How would donations be capped?

A federal tax credit would have to be capped so that aggregate credits do not exceed a specified amount (e.g., $20 billion a year). Most states limit their tax credit program by requiring donors to reserve their tax credits in advance. To implement a cap, Congress could authorize a reservation process so the Internal Revenue Service can credit each donation in the order it was received, either directly to donors or through SGOs, and let potential donors know when the cap has been reached.

Under a purely federal program, Congress could implement a single aggregate cap for the nation. Under a state-level or hybrid system, lawmakers would need to designate state-specific caps to ensure an equitable distribution across states. They should also specify whether and how unused dollars from states that don’t hit their cap can be used in other states. Regardless of the model, determining and enforcing a cap would require significant federal involvement.

How would a federal program interact with current state programs?

Depending on its design, a federal program would likely either replace current state funding for school choice with federal money or unfairly penalize states that already have programs.

Policymakers will need to decide whether to allow federal tax credits to replace current state dollars or to avoid this through a “supplement not supplant” provision. The former strategy may crowd out dollars already going to state-led programs and discourage creating new programs, whereas the latter may seem unfair to states that already have large choice programs or may lead them to find ways to spend more than necessary on the program (e.g., combining state and federal money to increase payments to private schools).

The right choice for school choice?

A national tax credit scholarship program has obvious appeal to advocates who have pushed these programs at the state level. But that enthusiasm may wane as policymakers build, from scratch, a donation-based system that distributes funds to private schools equitably across the nation, allows states to retain some autonomy in determining eligibility, and interacts with the many current state school choice policies. Choice advocates should reconsider whether a federal tax credit is the best vehicle for their goals or one that could create more problems than it solves.

In this Feb. 23, 2017 photo, Justin Beckles works on a project in his third-grade classroom at the Martin Luther King Jr. Elementary School in Hartford, Connecticut. Photo by Elise Amendola/AP

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