School Choice Tax Credits: What Oklahoma Can Learn from Pennsylvania

June 01, 2006

As a general rule, business people have well-deserved reputations as no-nonsense, bottom- line-oriented individuals who make investments with an eye on both short-term and long-term returns. Business owners also have a keen understanding of the role that market forces and competitive pressures play in consistently improving the products and services they offer customers - for they know that those customers can easily take their business elsewhere if such improvements are not forthcoming. Similarly, they recognize that investors can find other destinations for their capital.

One area, however, in which business owners have been "investing" for decades (with their tax dollars and their philanthropic dollars), with very little positive return, is public education. Not so coincidentally, public education is an enterprise in which little competitive pressure currently exists and in which those in charge have shown little interest in pleasing either their "investors" (taxpayers) or their "customers" (parents and children).

In Oklahoma, the situation is so serious that a recent statewide poll of registered voters conducted for OCPA found that more than half of all survey respondents with children at home would remove their children from the state's public schools if they were financially able to do so.

Business leaders regularly lament the fact that public school systems, in Oklahoma and elsewhere, are failing to produce enough graduates who have the requisite skills to succeed in today's workplace. They are more than willing to spend the money needed to get qualified workers - as an investment in their companies' future growth and profitability - but are weary of subsidizing programs that do not produce tangible results.

So what can Oklahoma policy-makers do to improve businesses' return on their educational investments? One promising alternative is currently operating in Pennsylvania, where for nearly five years businesses in the Keystone State have been utilizing a program called the Educational Improvement Tax Credit (EITC) to contribute to approved scholarship programs, through which parents can choose the school - public, private, or religious - that they believe best meets the needs of their children. In this manner, Pennsylvania businesses are realizing both the short-term benefit of tax relief and the long-term benefits that come with creating a deeper future pool of skilled workers.

History and Origins of the EITC
Since the early 1990s, Pennsylvanians interested in enacting school choice sought to organize their efforts to promote it at the legislative level. In 1991, the REACH (Road to Educational Achievement Through Choice) Foundation and its sister organization, the REACH Alliance - a group that today includes "businesses, ethnic and religious organizations, parents and taxpayer groups" - were founded to spearhead the school choice movement in Pennsylvania. Four years later, the election of Republican Gov. Tom Ridge, an ardent supporter of school choice, seemed to signal that choice's time had finally arrived in Pennsylvania.

But despite three attempts to pass school voucher plans during the Ridge Administration, Pennsylvania choice advocates were unsuccessful. Then, in 2001, school choice supporters decided to pursue a new strategy, embracing tax credits rather than vouchers as a vehicle. The REACH Alliance developed a plan for a program through which businesses could receive credits against several different state taxes for donations to approved scholarship programs. The value of the credit program was capped initially at $20 million, and lawmakers added an additional $10 million credit package for donations to "educational improvement organizations" (EIOs), which are defined as entities that promote "innovative programs in public schools."

On May 7, 2001, the EITC was approved by an overwhelming bi-partisan majority of the Pennsylvania General Assembly and was subsequently signed into law by Gov. Ridge. The program was designed to allow Pennsylvania businesses that made a one-time donation to a non-profit scholarship program or educational improvement organization to receive a tax credit equal to 75 percent of the donation. Companies agreeing to make the same donation for two consecutive years would receive a 90 percent credit. The maximum tax credit available to an individual Pennsylvania business was originally set at $100,000.

The EITC was an immediate hit with Pennsylvania businesses, so much so that by 2003, under Democrat Gov. Ed Rendell, the credit program was expanded by $10 million, the maximum credit that a business could receive for EITC donations was raised to $200,000, and a separate, $5 million pre-kindergarten (pre-K) EITC was added. In July 2005, the EITC was again increased, this time from $40 million to $44 million (with $29.3 million for scholarships and $14.7 million for EIOs), and basic reporting requirements were added in order to ensure fiscal accountability on the part of participating organizations.

For the 2005-06 school year, the EITC program provided funding for more than 27,000 scholarships, and more than 100,000 scholarships have been funded since it was enacted, as Pennsylvania businesses have donated more than $200 million over that time period. Republican gubernatorial nominee Lynn Swann, noting the remarkable success of the EITC at providing educational options for Pennsylvania's families with children, has proposed doubling the amount of credits available, from the current level of $49 million ($44 million for the EITC and $5 million for the pre-K EITC) to $98 million.

Mechanics of the EITC
How does the Pennsylvania EITC program work? First of all, it is important to note that tax credits can be more advantageous to businesses than conventional charitable donations, in that while deductions for charitable donations reduce taxable business income, tax credits reduce the actual tax liability faced by businesses, dollar for dollar, because the credits are utilized after that liability is established. The EITC is available to businesses on a first-come, first-served basis, and it can be used to offset the following Pennsylvania business taxes:

• Corporate Net Income Tax
• Capital Stock and Franchise Tax
• Bank and Trust Company Shares Tax
• Title Insurance Company Shares Tax
• Insurance Premiums Tax
• Mutual Thrift Institutions Tax

To receive the EITC, interested businesses must apply to the Pennsylvania Department of Community and Economic Development (DCED), which administers the program, by filling out a one-page form. DCED then verifies that money is available for the credit and that the business requesting it does not owe back taxes. If those questions are answered satisfactorily, the credit is approved. Businesses then have 60 days to make their donation and 90 days to provide DCED with documentation of the donation. Donations can be made to more than one EITC-eligible organization at a time, and those donations can go to both scholarship organizations and EIOs.

In order to receive EITC donations, scholarship organizations must be non-profits registered as 501(c)(3) tax-exempt organizations and also be registered with DCED, which maintains a list of eligible organizations. Scholarship programs must provide tuition (the definition of which includes fees) to eligible students to attend a Pennsylvania public, private, or religious school that meets applicable state and federal criteria. In addition, scholarship organizations are required to keep detailed records of the donations they receive from businesses and account for how those donations are spent.

To be eligible for a scholarship backed by the EITC, a Pennsylvania family must have an annual income of less than $50,000 with a $10,000 allowance per child - meaning that a family of four can earn as much as $70,000 per year and still qualify for a scholarship. Organizations providing scholarships are required to use at least 80 percent of their funds annually for those scholarships, with the remaining 20 percent available for payment of administrative costs (a feature that has allowed many groups the opportunity to access scholarship funds by relieving them of the need to raise additional money to pay for operating costs). At the same time, EIOs were able to use EITC donations to fund "innovative programs" such as before- and after-school programs and wireless computer labs.

Pennsylvania businesses' demand for the EITC continues to outstrip the supply. For example, during the 2004-05 school year, more than 100 businesses that wanted to participate in the program were turned away because the EITC cap had already been reached. All told, Pennsylvania currently has more than 160 scholarship organizations, 240 EIOs, and 50 pre-kindergarten scholarship programs receiving donations from participating businesses.

Conclusion: EITC is a Win-Win Program
The EITC has allowed Pennsylvania to realize the best of all worlds. Businesses have the opportunity to use tax dollars they would otherwise have sent to the education bureaucrats in Harrisburg to instead give some parents the opportunity to emancipate their children from sub-standard public schools or to allow others to keep their children in non-public schools. And at the same time, despite claims from school choice opponents that programs like the EITC "drain funds from public schools," Pennsylvania taxpayers actually benefit each time a child takes advantage of an EITC-backed scholarship, due to the fact that the public school system is no longer responsible for the cost of educating that child.

In the words of Robert Enlow, executive director of the Milton and Rose Friedman Foundation, "Pennsylvania's EITC program comes closer than most programs in realizing the vision set forth by Milton Friedman. It gives a broad number of parents broad purchasing power to make a true choice in their children's education."

Oklahoma policymakers can provide similar benefits to their state by following Pennsylvania's example and developing an EITC of their own.

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