our challenge to you the fiscal impact of the kentucky ...the fiscal impact of the kentucky...

OUR CHALLENGE TO YOUOur research adheres to the highest standards of scientific rigor. We

know that one reason the school choice movement has achieved such

great success is because the empirical evidence really does show that

school choice works. More and more people are dropping their oppo-

sition to school choice as they become familiar with the large body

of high-quality scientific studies that supports it. Having racked up a

steady record of success through good science, why would we sabotage

our credibility with junk science?

This is our answer to those who say we can’t produce credible research

because we aren’t neutral about school choice. Some people think that

good science can only be produced by researchers who have no opin-

ions about the things they study. Like robots, these neutral researchers

are supposed to carry out their analyses without actually thinking or

caring about the subjects they study.

But what’s the point of doing science in the first place if we’re never al-

lowed to come to any conclusions? Why would we want to stay neutral

when some policies are solidly proven to work, and others are proven

to fail?

That’s why it’s foolish to dismiss all the studies showing that school

choice works on grounds that they were conducted by researchers who

think that school choice works. If we take that approach, we would

have to dismiss all the studies showing that smoking causes cancer,

because all of them were conducted by researchers who think that

smoking causes cancer. We would end up rejecting all science across

the board.

The sensible approach is to accept studies that follow sound scientific

methods, and reject those that don’t. Science produces reliable empiri-

cal information, not because scientists are devoid of opinions and mo-

tives, but because the rigorous procedural rules of science prevent the

researchers’ opinions and motives from determining their results. If

research adheres to scientific standards, its results can be relied upon

no matter who conducted it. If not, then the biases of the researcher

do become relevant, because lack of scientific rigor opens the door for

those biases to affect the results.

So if you’re skeptical about our research on school choice, this is our

challenge to you: prove us wrong. Judge our work by scientific stan-

dards and see how it measures up. If you can find anything in our work

that doesn’t follow sound empirical methods, by all means say so. We

welcome any and all scientific critique of our work. But if you can’t find

anything scientifically wrong with it, don’t complain that our findings

can’t be true just because we’re not neutral. That may make a good

sound bite, but what lurks behind it is a flat rejection of science.

The Fiscal Impact of the Kentucky Education Tax

Credit Program

Prepared By:

Brian J. GottlobSenior Fellow

Milton and Rose D. Friedman Foundation

June 2006

Executive Summary

IntroductionThe Rise of Individual Tax Credits and Scholarship Tax CreditsThe Kentucky Education Tax Credit Program

Individual Tax Credits for Qualified Education Expenditures

Business Contributions to Scholarship Organizations

Combined Demands for Kentucky Education Tax Credits

Demographics of Kentucky’s School Age ChildrenCharacteristics of Public and Private-School Children in Kentucky

Demand for Scholarships in KentuckyTuition Prices Strongly Influence the Demand for Private SchoolsFamily Income is a Key Determinant of DemandCombining Scholarship Supply and Demand Models to Estimate the Number of ScholarshipsFiscal Consideration of the Payment-in-Full ProvisionEstimated Demand

Fiscal Impact of the Scholarship Program

Conclusions

Endnotes

7

99

10

12

15

16

1718

212122242425

26

28

29

About the Author

About the Milton and Rose D. Friedman FoundationThe Milton and Rose D. Friedman Foundation, dubbed “the nation’s leading voucheradvocates” by the Wall Street Journal, is a non-profit organization established in 1996. The ori-gins of the foundation lie in the Friedmans’ long-standing concern about the serious deficiencies in America’s elementary and secondary public schools. The best way to improve the quality of education, they believe, is to enable all parents with the freedom to choose the schools that their children attend. The Friedman Foundation builds upon this vision, clarifies its meaning to the public and amplifies the national call for true education reform through school choice.

Brian J. Gottlob ([email protected]) is the Principal of PolEcon Research. For 17 years Brian has analyzed economic, demographic, labor market industry and public policy trends for private sector, government and not-for-profit organizations. He has extensive experience in developing econometric models and has completed studies on range of economic, tax policy, energy, education, and health care issues in the States of New Hampshire, Virginia, Ohio, New Mexico, New York, Texas, Oregon, Michigan, Georgia, Mississippi, West Virginia and Illinois. Brian is a Senior Fellow at the Milton and Rose D. Friedman Foundation. He has been an instructor at the Whittemore School of Business and Economics at the University New Hampshire, a member of the Advisory Board of the New England Economic Partnership (NEEP) and a member of the National Association of Business Economics. Prior to founding PolEcon, Brian was a Vice President for Fiscal and Economic Policy at the Business and Industry Association of New Hamp-shire. He has an undergraduate degree in economics from the State University of New York and a graduate degree in public policy analysis from the University of New Hampshire.

Table of Contents

The Fiscal Impact of the Kentucky Education Tax Credit Program

�June 2006

Executive Summary

ThisstudyexaminesthefiscalimpactofKentuckyHouseBill231,introducedinthe2006regularlegislativesession. This billwould establish theKentuckyEducationTaxCreditProgram,whichwould create twonew taxprovisions:ataxcreditforindividualtaxpayers,applicabletotheirfamily’sowneducationalexpensesandworthupto$500;andascholarshiptaxcreditforcorporatetaxpayerswhocontributetoorganizationsthatprovideprivate-schoolscholarships.Bothprogramswouldbelimitedtostudentsfromlow-incomeandmoderate-incomefamilies.Takingtheexperienceofotherstateswithsimilarprogramsasamodel,weuseddataonstudentdemographicsandschoolfinanceinKentuckytopredictthefiscaleffectsoftheseprogramsonthestatebudget.

Keyfindings:

Under the individual taxcredit component, familiescanbeexpected toclaimabout $23.2million in taxcreditsforqualifiededucationalexpenditures.However,becausethetaxcreditwilllowerthecostofprivate-schooltuitionbyupto$500perfamily,itwillinduceasmallpercentageofpublic-schoolstudents(about3,000)tomigratefrompublictoprivateschools.ThismigrationwouldsaveKentuckyabout$11.8millioninstateeducationspending.Thus,thenetcostofthetaxcreditwouldbeabout$11.4million–lessthanhalfthenominaldollarsizeoftheprogram.

Underthescholarshiptaxcreditcomponent,weanticipatethatKentuckybusinesseswillcontributethefull$60millionpermittedduringitsfirstyear,becauseoftheadvantagestodonatingbusinessesandbasedontheexperienceofotherstateswithsimilartaxcreditprograms.However,aswiththeindividualtaxcredit,thefiscalimpactofthescholarshiptaxcreditprogramwillbemitigatedbythenumberofstudentswhomigratefrompublicschooltoprivateschoolasaresultofthescholarships.Althoughthisprogramgivesbusinesses$60millionintaxcredits,theactualnetcostintheprogram’sfirstyearwouldonlybebetween$2to$17million,dependingonfactorssuchasthedollarvalueofthescholarshipsoffered.

Theprogram’sfiscalimpactwillsubstantiallyimproveinfutureyears,astheamountspentperstudentinKentuckypublicschoolsgrowsfasterthanthecostoftax-creditscholarships.Dependingonthesizeofthescholarships,theprogramcouldbegintosavethestatemoney;attheveryleast,itwillcostlesswitheachpassingyear.Inthetenthyearofoperation,theprogram’sfiscalimpactonthestatewouldbebetweenanetsavingsof$14millionandanetcostof$14million.


� June 2006


�June 2006

Introduction

Proposalstoincreaseeducationalopportunitiesandchoicesforstudentsofdifferentbackgrounds,abilities,needsandeconomiccircumstancesareincreasingthroughoutthecountry.Inpart,thisreflectsgrowingsupportamongthepublicfortheconceptofschoolchoice;amajorityofU.S.citizensnowsupportit,accordingtodatareportedbytheU.S.DepartmentofEducation.1Proposalstoestablishcharterschools,vouchers,scholarshipsandtaxcreditsseektoincreasethechoicesparentshavefortheirchildren’seducation.Eachismotivatedbycorebeliefsthatinclude:

Parentalinvolvementiscriticaltotheeducationalachievementofchildren.

Allparents,regardlessofmeans,shouldhaveasayinhowandwheretheirchildrenareeducated.

Parentalchoiceshouldextendbeyondthepublicschoolsbecausepublicschoolscannotrealisticallyprovidethevarietyofeducationalexperiencesneededtomeettheuniqueeducationalneedsofeverychild.

Increasingly,however,school-choiceinitiativesarebeingconsideredinresponsetoconcernsabouttheeconomicsofpubliceducation.Theseinclude:

Educationexpendituresthatarerisingmuchfasterthaninflation.

Measurableacademicoutcomesofpubliceducation thathavenot increaseddespitedramatic increases inexpenditures.

Theabsenceofwidespreadalternativestopubliceducation,broadlyavailabletofamiliesandchildrenofallmeansthatmaybeproducingapubliceducationsystemwithlittleornoincentivetoimproveitsperformanceand/orlimitexpenditureincreases.

Increases in the school-agepopulation in rapidlygrowingregions thatcreate school spaceneedsandaddsignificantcapitalcoststoschooldistrictbudgets.

The Rise of Individual Tax Credits and Scholarship Tax Credits

Individualtaxcreditsandscholarshiptaxcreditsaremethodsofintroducingparentalchoiceineducationthathavearisen,inpart,inresponsetotheconcernsabove.Sixstates–Minnesota,Iowa,Illinois,Florida,PennsylvaniaandArizona–havesomeformoftaxreliefforindividualsorcorporationsthatprovidefundsforchildrentoattendprivateschools.

Individualtaxcreditsandtaxdeductions,offeredinIllinois,IowaandMinnesota,allowparentswhosendtheirchildrentoprivateschools(and,insomeproposals,thosewhohome-schooltheirchildren)todeductaportionoftheirtuitionoreducationalexpensesfromtheirindividualstateincometax.Parentspaytuitiontoprivateschoolsandthenreducetheirstateincometaxliabilitybyanamountequaltothevalueofthetaxcreditordeduction.

Scholarshiptaxcreditsallowtaxpayerstoreceiveataxcreditforcontributionstonon-profitorganizationsthatinturngivescholarshipstostudentstoattendprivateschools.Pennsylvania,ArizonaandFloridahaveestablishedscholarshiptaxcreditprograms.Thispolicyallowsindividualsorbusinesses,orboth,tospecificallydirecttheuseoftheirtaxdollarstoeducationbymakingcontributionstoscholarshiporganizations.Withtheseprograms,thestateisnotinvolvedingivingscholarshipstostudents;ratheritprovidesacreditfordonationstonon-profitscholarshiporganizations.


10 June 2006


11June 2006

The Kentucky Education Tax Credit Program

TheKentuckyEducationTaxCreditProgramproposedbyHouseBill231wouldcreatebothanindividualtaxcredit,applicabletoeachfamily’sowneducationalexpenses,andascholarshiptaxcreditforbusinessesthatcontributetoorganizationsthatgrantprivate-schoolscholarships.Thisanalysiswillconsidertheproposalstogether,assumingthereissomeinteractionbetweenthetwoprogramsasparentsmakechoicesaboutwhereandhowtoeducatetheirchildren.

Businesses inKentuckywouldbealloweda taxcredit forcontributionsmade toorganizations thatprovidescholarshipstofamilieswhowanttoattendaprivateschoolorapublicschooloutsidetheirassignedschooldistrict.Businessescouldclaimacreditagainsttheircorporatetaxesatarateof75percentto90percentforeverydollarcontributed toa scholarship-grantingorganization,up to $200,000or themaximumamountof their tax liability,whicheverislower.Totaltaxcreditsavailabletocorporatecontributionstoscholarshiporganizationswouldbecappedat$60millioninthefirstyearandrise5percentannually.

Theindividualtaxcreditcomponentoftheproposalwouldallowataxcreditofupto$500perfamilyforeducationalexpensessuchastuition,books,supplies,enrichmentandtutoring.Thiscreditcouldbeappliedtoeducationalexpensesregardlessofwhetherthefamilychoosespublic,privateorhomeschooling.

TheKentuckyEducationTaxCreditProgramhasadditionalkeyfeatures:

Bothcomponentswouldbeopentostudentsinallgrades.

Participatingfamilieswouldhavetomeetincome-eligibilityrequirements;theirtotalhouseholdincomecouldnotexceed2.5timestheincomethresholdusedtodetermineeligibilityforthefederalfreeorreduced-priceschoollunchprogram.

Thevalueofscholarshipawardstoaprivateschoolcouldnotexceedtheamountofper-pupilaidprovidedto thestudent’sschooldistrictbythecommonwealth’sschool-fundingformula,calledSupportEducationExcellenceinKentuckyorSEEK.

Aprivateschoolwouldhavetoacceptthescholarshipforaneligiblestudentasfullpaymentfortuitionandnotrequireadditionaltuitionpaymentfromtheeligiblestudent’sfamily.

ThisstudyexaminesthefiscalimpactoftheproposedKentuckyEducationTaxCreditProgram.Theprogram’sfiscalimpactwouldfirstdependonthevolumeofcontributionsandthevalueofthetaxcreditsclaimedbycorporationstofundscholarshiporganizations.Second,itwoulddependonthevolumeofindividualtaxpayercreditsclaimedforqualifiededucationalexpenditures.

Theproposalcallsforamaximumof$60millionincorporatetaxcreditsavailableforbusinesses.Underthiscomponent,businessescouldreducetheirtaxburdenanddirectfundstoorganizationsthatprovidescholarships.Theexperienceofotherstatessuggestsmanybusinesseswillcontributetotheprogram.

Theproposaldoesnotcapthetotalamountofindividualtaxcreditsthatcanbeclaimedstatewide,butitdoesestablishincomerestrictionsonclaimingthem.Underthiscomponent,Kentuckywouldincreaseinvestmentsintheeducationofitslower-incomechildren.Ratherthandecidehowtheadditionaleducationaldollarswillbeallocatedandtowhom,thestatewouldallowlower-incomeparentstodecidehowtoallocateadditionaleducationalexpenditures.Thestate’srolewouldbetosetbroadexpenditureguidelines;toseteligibilitycriteriasothatcreditswereavailable

onlytotaxpayerswhoseannualfamilyincomewasbelow2.5timestheincomethresholdtodetermineeligibilityforfederalfreeandreduced-priceschoollunches;andtoprovidethetaxcreditthatwouldleavemoneyinthehandsoftheselower-incomeparentstouseforeducation.

Sixstatesoffersometypeoftaxcreditordeductiontoassistfamilieswhowanttosendtheirchildrentoprivateschools.Minnesota,IowaandIllinoisofferadirecttaxcreditordeductiontoparentssendingtheirchildrentoprivateschools.Arizona,FloridaandPennsylvaniaoffercreditstoindividualsorcorporationsthatcontributetoorganizationsthatprovidescholarshipstolower-incomestudents.TheexperienceofthesestatesisdirectlyrelevanttotheKentuckyproposal.

InArizona,FloridaandPennsylvania,theopportunitytomakecontributionstoscholarshipprogramsinlieuofpayingtaxeshasproventobeapowerfulincentiveforbusinessestocontribute.Ineachofthetwostates(FloridaandPennsylvania)whereacapwassetonthetotalsizeoftheprogram,theinitialcapswerereachedinthefirstyear.Bothstatessubsequentlyincreasedthetotalallowabletaxcredits.


12 June 2006


13June 2006

Individual Tax Credits for Qualified Education Expenditures

Theindividualtaxpayerportionoftheproposedprogramwouldaffectlower-incometaxpayerswhoearnupto2.5timestheannualincomethresholdforthefreeandreduced-pricedlunchprogram.In2006,afamilyoffourwithanincomeof$37,000orlowerwouldqualifyforfreeorreduced-priceschoollunches.Anincomelimitof2.5timesthatlevelwouldmakeboththescholarshipportionandtheindividualtaxpayerportionoftheproposedtaxcreditprogramavailabletoafamilyoffourwithanannualincomeofupto$92,500.PovertythresholdsandmaximumfamilyincometobeeligiblefortheKentuckytaxcreditprogramarepresentedinTable1.

Table 1

ToestimatethevolumeofindividualtaxcreditsthatwouldbeclaimedweexaminedtheexperienceofotherstatesthatprovideeithertaxcreditsortaxdeductionsforqualifiedK-12educationalexpenditures.Wethenappliedthatinformationtoincome,demographicandtaxdatafromKentucky.Specificallywe:

EstimatedthepercentageoftaxpayerswhowouldclaimataxcreditbasedonthepercentageoftaxpayersinMinnesotawhoclaimedeitherataxcreditortaxdeductionforeducationalexpenditures.WeadjustedtheMinnesotaexperiencetoaccountforprogramdifferences,incomeguidelinesandthecharacteristicsofKentuckyfamiliesandchildren.

DevelopedamodelthatusestheInternalRevenueService’sStatisticsofIncome,U.S.BureauoftheCensusdemographicdata,andtheexperienceofotherstateeducationtaxcreditprogramstoestimatethepercentageofeligiblechildrenandfamiliesandthenumberandvolumeofcreditsthatwouldbeclaimed.

WechoseMinnesotabecausethetaxcreditsofferedinIowaandIllinoisarenotmeans-tested,soparticipation

levelswillnotbeassimilartowhatweshouldexpectfromtheproposedKentuckypolicy,whilethetaxcreditofferedinMinnesotaismeans-tested(althoughMinnesota’staxdeductionisnot).Minnesotahas10years’experiencewithtaxcreditsforeducationanddecadesofexperiencewithtaxdeductions.In2004,

2006 Poverty and Free or Reduced-Price Lunch Income GuidelinesApplied to Kentucky Tax Credit Program Eligibility

People in Family or Household

2

3

4

5

6

$13,200

$16,600

$20,000

$23,400

$26,800

$24,420

$30,710

$37,000

$43,290

$49,580

$61,050

$76,775

$92,500

$108,225

$123,950

Poverty Threshold 48 Contiguous States and

D.C.

Free/Reduced Income

Eligibility at 185% Poverty

Kentucky Scholarship & Tax Credit Income

Eligibilty at 250% Free/Reduced Lunch

Eligibility

Source: Federal Register, Vol. 71, No. 15, & PolEcon Calculations

Fewerthan10percent(220,000)ofalltaxpayersinMinnesotaclaimedataxdeductionforqualifiededucationalexpenditures,butweestimatethatabout28percentoftaxpayerswithchildrenclaimeddeductionsthatreducedrevenuesinMinnesotabyabout$15million.BecausethisdeductionisavailabletotaxpayersofallincomelevelsinMinnesota,weanticipateasmallerpercentageoftaxpayerswillclaimthecreditinKentucky.WeadjusteddownwardthepercentageoflikelytaxpayersinKentuckywhowillclaimacredittoreflectthefactthatlower-incometaxpayersgenerallyclaimfewerdeductionsandforgenerallysmalleramountsthanhigher-incometaxpayers.Inaddition,datafromtheU.S.BureauofLaborStatisticsConsumerExpenditureSurveyrevealthatasmallerpercentageoflower-incometaxpayersreporteducationalexpendituresandatalowerlevelthandohigher-incometaxpayers.Onlyabout58,000or4percentofincome-eligibletaxpayersandabout13percentofeligibletaxpayerswithchildrenclaimedataxcreditforqualifiededucationalexpenditures.In2004,approximately$15millionintaxcreditswereclaimedinMinnesota,astatewithabout30percentmoretaxpayersthanKentucky,andwithaneducationtaxcreditprogramthatallowscreditsupto$1,000foreacheligiblechildinafamily.TheKentuckyproposalwouldcapthecreditat$500totalforafamily.

InKentucky, familieswithchildren inpublic schoolswouldbeallowed toclaimacredit forexpendituresoneducationalenhancementssuchastutors,otherout-of-schoolenrichments,materialsandbooks.Familieswithchildreninprivateschoolscouldclaimataxcreditfortuitionpaymentsupto$500regardlessofthenumberofchildrentheyhaveinprivateschools.Ourbasicprocessforestimatingthevolumeoftaxcreditsclaimedbyindividualsisasfollows:

WeusedU.S.CensusBureauMicrodatafiles toestimate thenumberofKentuckyschoolchildren inbothprivateandpublicschoolsbyhouseholdincome,andbythepercentageofthefederalpovertythresholdthattheirfamilyincomerepresents.

Becausemostfamiliesofprivate-schoolchildreninKentuckyhavesignificanteducationalexpenditures,weassumedthat80percentofallincome-eligiblestudentsenrolledinprivateschoolsinKentuckywouldclaimataxcredit.Thislikelyoverstatesthenumberwhowillclaimthecredit,especiallyamonglower-income,private-schoolstudents.

Weassumedthat17percentoffamilieswithpublic-schoolchildrenwillclaimataxcredit.

Whencombined,ourestimatesof80percentofprivate-schoolfamiliesand17percentofpublic-schoolfamilieswhowillclaimataxcreditproduceanoverallrateofclaimsofabout24percent.Thisseemstobeareasonableestimateasitfallsbetweenourestimateof28percentofclaimantsforMinnesota’staxdeduction(whichisavailabletohigher-incomeresidentsthantheKentuckyproposal)andourestimateof12percentofclaimantsforMinnesota’seducationtaxcredit(whichisopentofamiliesuptoabout200percentofthefederalpovertythreshold).

Weassumeanaveragecreditclaimof$356,basedonadjustments to theMinnesota taxcreditexperience.Familiespayingtuitionlikelywillclaimthemaximumamountof$500,butalargerpercentageofclaimswillcomefromfamiliesofpublic-schoolchildren,who,basedonConsumerExpenditureSurveydata,willnotclaimtheentirevalueofthecredit.

Finally,becausefamilieswouldbeabletoclaimamaximumof$500incredits,andthemajorityoffamilieswithchildrenhavemorethanonechildinschool,weassumethat,onaverage,eachhouseholdwithachildwillhavetwochildren.Theeffectofthisassumptionistohalvethenumberofchildreneligibleforthe$500taxcredit,eventhoughthenumberofeligiblefamiliesdoesnotchange.


14 June 2006


15June 2006

TheseproceduresresultinestimatedtaxcreditsthatarepresentedinTable2.Thetableshowsthat,if24percentoffamiliesclaimthecredit,asweestimated,totalcostofcreditswouldbeapproximately$23.2million.Thetablealsoshowsthenumberofeligiblechildrenatvariouspovertythresholds;anestimateofthepercentageoffamiliesclaimingcreditsateachlevel;andthetotalestimatedcostofcreditsateachlevel.Thetableindicatesthat,asthepovertythresholdforeligibilityisincreased,thenumberoffamilieseligibleobviouslygrows,butthepercentageofeligiblefamiliesclaimingcreditsalsorises.Asincomecapsincrease,moreprivate-schoolstudentsbecomeeligible.Weestimatethat80percentofthosefamilieswouldclaimacreditcomparedtothe17percentofpublic-schoolfamilies.

TheshadedareainTable2highlightsestimatesundercurrentprovisionsoftheproposedtaxcredit.AlthoughTable2presentsour“bestestimate”ofcredituseandcosts,inrealitythereisarangeoflikelyoutcomesfortheproposedcreditwithacostthatlikelyfallsbetween$15millionand$30million.

Table 2

Theestimateof$23.2millioninfamilyeducationtaxcreditsrepresentsareductionoflessthan1percentinKentucky’stotalindividualincometaxcollectionsof$2.79billionin2004.

Inadditiontobeingusedtooffsetthecostofeducationalenrichments,servicesandmaterials,theproposedtaxcreditcanbeusedtolowerthepriceofprivate-schooltuitionby$500.Thiscouldbeexpectedtoinduceasmallnumber

ofpublic-schoolstudentstomigratetoprivateschools.Laterinthisreport,weconsidertheimpactthatscholarshipsofvariousdollarvalueswouldhaveonthedemandforprivateschoolsinKentucky.The$500taxcredit,althoughnotascholarship,hasthesameneteffectofloweringthepriceofprivate-schooltuitionforparents.Alargertaxcreditoralargerdollar-valuescholarshipthatlowersthepriceofprivate-schooltuitionsignificantlycouldbeexpectedtoinducemanyfamiliestomigratetheirchildrenfromthepublictoprivateschools.

Basedonthedemandmodelpresentedlaterinthisstudy,weestimatethatonlyabout3,053ofthe549,486taxcredit-eligiblepublic-schoolstudentsinKentuckywouldmigratetoaprivateschoolinresponsetothelowerpriceoftuitionresultingfroma$500taxcredit.Althoughthisisasmallnumberofstudents,itrepresentsasavingstoKentuckyof$11.75millioninstateeducationaid,basedonaprojectedaverageperpupilSEEKpaymentof$3,849.

Business Contributions to Scholarship Organizations

Theexperienceofotherstatesindicatesthatbusinessescanbeexpectedtocontributeuptothemaximumamountallowedbythecap,$60millioninthefirstyear,increasingby5percentannuallythereafter.FloridaandPennsylvaniabusinesseseachmadecontributions that reached the total cappedamountof taxcredits in thefirstyearof theirprogramsandeachhassubsequentlyincreasedthecaps.InFlorida,just19corporationsusedthestate’stotalallowabletaxcreditsthatfirstyear;thatstrongdemandpromptedthestatetoraisethecap.

AccordingtoInternalRevenueServicedata,67,572Kentuckycompaniesfiledcorporateincometaxreturnsin2003.AsimilarnumberofbusinesstaxpayersaresubjecttotheKentuckycorporateincometax,buttheirfederalcorporatetaxfilingoriginatesinanotherstate(thatis,theyhaveoperationsoranexusinKentuckythatrequiresaKentuckycorporate income taxfiling in addition to their federal tax returnfiled fromanother state).Also, 29,261 businesspartnershiptaxreturnswerefiledinKentuckyin2003.

BusinessesinKentuckycanbeexpectedtobehavesimilarlytobusinessesinotherstatesforseveralreasons:

Innationwidesurveys,nearlyhalf(48percent)ofallbusinessesindicatedthateducationwastheirtoppriorityfortheirphilanthropicandcivicactivities.2

Ingeneral,businessesarerewardedbyowners,shareholders,equityanalystsandfinancial institutions forminimizingthepercentageofincomegoingtotaxes.Alowertaxburdenisassociatedwithsoundfinancialmanagement.

Unliketaxpayments,contributionstoaprogramsuchastheKentuckyEducationTaxCreditProgramlikelywouldgeneratecivicandpublicrelationsbenefitsforthedonorcorporation.

Estimated Education Tax Credits by Individual Taxpayers

AnnualIncome

% of Poverty

<50%

50-100%

100-150%

150-175%

175-200%

200-250%

250-300%

300-463%

500+%

Average Children Per Family: 2% Public-School Families Taking Credit: 17%% Private-School Families Taking Creidts: 80%Average Dollar Value of Credit: $356

# Public School

Children

CumulativePublicSchool

Children

Cost ofPublicSchoolCredits

# Private School

Children

CumulativePrivateSchool

Children

Cost ofPrivateSchoolCredits

TotalCost of Credits

# of all Families ClaimingCredits

58,654

81,443

82,815

36,999

29,802

64,545

63,138

132,256

110,796

58,654

140,096

222,912

259,911

289,713

354,259

417,396

549,652

660,448

$1,774,856

$4,239,312

$6,745,309

$7,864,912

$8,766,730

$10,719,866

$12,630,409

$16,632,475

$19,985,156

2,337

4,297

4,426

4,183

2,353

5,629

6,667

16,537

26,390

2,337

6,634

11,060

15,243

17,596

23,225

29,892

46,429

72,819

$332,771

$944,674

$1,574,917

$2,170,614

$2,505,646

$3,307,237

$4,256,558

$6,611,459

$10,369,426

$2,107,628

$5,183,986

$8,320,226

$10,035,525

$11,272,376

$14,027,103

$16,886,967

$23,243,934

$30,354,582

20.2%

20.8%

20.9%

21.6%

21.8%

22.1%

22.5%

23.5%

25.2%

Considering the total impacts of the individual education expense tax credits, we estimate the net cost of the credit to be about $11.5 million:

Credits Claimed $23,243,934(-) State Education Aid Savings $11,750,772

= Net Cost of Credit $11,493,162


16 June 2006


1�June 2006

Combined Demand for Kentucky Education Tax Credits

Figure 1

Figure1presentsourestimatesofthetotalamount(corporateandindividual)ofclaimsundertheproposedKentuckyEducationTaxCreditProgramtotheyear2015.Weassumethatcorporationswillclaimthemaximumavailabletaxcredits,astheydidinFloridaandPennsylvania,andthatallowablecreditswillincreaseby5percentayear.Taxcreditstofamiliesareassumedtoincreaseby2percentayear.Thesefiguresdonotreflectthenetfiscalimpactoftheprogramforthestatetreasury;theyaresimplythenominaldollarvalueofthetaxcreditsclaimed.

Family Tuition Credit

Corporate Scholarship Credit

Expected Demand for Education Tax Credits

Tax C

redit

s ($

Million

s)

$140

$120

$108

$80

$60

$40

$20

$23$24

$24$25

$25$26

$26$27

$27$28

$60 $63 $66 $69 $73 $77 $80 $84 $89 $93

Year

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Demographics of Kentucky’s School Age Children

TheKentuckyEducationTaxCreditProgramwouldapplytochildrenfromfamilieswithannualincomesatorbelow2.5timestheincomethresholdforthefederalfreeandreduced-pricelunchprogram,or$92,500forafamilyoffour.Usingthiseligibilitycriterion,weexaminedthedemographicsofchildreneligiblefortheproposedprogram,aswellastheoverallpopulationofschoolchildreninKentucky.Inaddition,weexaminedkeydemographicdistinctionsbetweenchildreninpublicandprivateschools.

Figure 2

The2004-2005Superintendent’sAnnualEnrollmentandAttendanceReportsfromtheKentuckyDepartmentofEducationshowthatabout546,000ofKentucky’s656,000public-schoolchildrenwouldhavebeeneligibleforscholarshipsortaxcredits.Ourestimateforthe2006-2007schoolyearisthatabout549,652public-schoolchildrenandanother48,585private-schoolchildrenwouldbeeligible(Figure2).

Public Schools

Private Schools

Cumulative Number of Children Age 5-17

Ninety Percent of Eligible Kentucky Students are in Public Schools

Fam

ily I

nco

me

as

a %

of

Pov

erty

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000

>463%

300-463%

250-300%

200-250%

175-200%

150-175%

100-150%

50-100%

<50%

Source: PolEcon Estimates Using Kentucky Dept. of Education and US Census Public Use Projections and Microdata Files

Eligiblefor the

Program


1� June 2006


1�June 2006

Figure 4

Figure4showsthattheaverageincomeofchildrenattendingpublicschoolsinKentuckyisabouthalfthatoftheincomeofchildrenattendingprivateschools,andFigure5showsthedramaticdifferencesintheincomedistributionoffamilieswithchildreninpublicversusprivateschools.

Characteristics of Public and Private-School Children in Kentucky

AccordingtoU.S.CensusBureaudata,slightlymorethan12percentofschoolchildrenage5-17inKentuckyeitherattendaprivateschoolorarehome-schooled.3Thecharacteristicsofpublicandprivate-schoolstudentsvaryinimportantways,including:

ThepercentageofchildreninprivateschoolsishighestamongwhitechildrenandlowestamongAfrican-Americanchildren.WhitechildreninurbanJeffersonCountyarethemostlikelytoattendaprivateschool.African-AmericanchildreninJeffersonCountydonothaveahigherrateofprivate-schoolenrollmentthandoAfrican-AmericanchildrenthroughoutKentucky(Figure3).

Figure 3

Theaveragefamilyincomeofchildreninprivateschoolsissignificantlyhigherthantheaverageforpublicschools(Figure4),andamuchhigherpercentageoflowerincomechildrenattendpublicschools(Figure5).

Private School Attendance by Race (Statewide and in Jefferson County)

Source: PolEcon Analysis of US Census 2000, Public Use Microdata Files (PUMS 1% Sample)

Kentucky

Jefferson County

40%

35%

30%

25%

20%

15%

10%

5%

0%

29.1%

13.4%

2.7% 2.4%

8.9%“Other Non-White”for Jefferson County Not Available

White African-American Other Non-White

Average Income of Kentucky Children in Public and Private Schools

Source: PolEcon Analysis of US Census 2000, Public Use Microdata Files

PrivateSchools

Public Schools

$100,000

$80,000

$60,000

$40,000

$20,000

$0

$88,755

$48,721

Family Income Household Income

$88,982

$49,773


20 June 2006


21June 2006

Figure 5

AsFigure5shows,almostathirdofchildreninKentuckypublicschoolscomefromfamilieswithannualincomebelow$25,000,comparedto13percentofstudentsinprivateschools.Italsoshowsthattherearesubstantialopportunitiesforlower-andlower-middle-incomefamiliestoattendprivateschools,asaboutaquarterofprivate-schoolstudentswouldqualifyfortheproposedprogrambasedon2.5timestheincomethresholdeligibilityforthefederalfreeandreduced-pricelunchprogram.

Together,thesedatasuggest:

TherearesubstantialeconomicandracialdifferencesinthecompositionofpublicversusprivateschoolsinKentucky.

ThereisespeciallystrongdemandforprivateschoolinginJeffersonCounty.Highratesofprivate-schoolenrollment in the district and a relatively high percentage of lower-income students in private schoolssuggestthatevenforfamiliesoflimitedmeansprivateschoolsappeartobeadesirableoptionforeducatingchildren.

Thehigherratesofprivate-schoolenrollmentamongchildrenfromupper-middle-andhigher-incomefamilies,andamongwhitechildrenofallincomes,suggestthatforwhitefamiliesand/orfamilieswithlower-middletohigherincomes,alargepercentageviewprivateschoolsasamoreattractiveoptionforeducatingtheirchildren.

Income Distribution of Students in Kentucky Public and Private Schools

Source: PolEcon Analysis of US Census data

Public Schools

Private Schools

40%

35%

30%

25%

20%

15%

10%

5%

0%

31%

Per

centa

ge

of

Ken

tuck

y S

tuden

ts

<25 25-35 35-50 50-75 75-100 100-150 150+

13% 13%

9%

17%15%

21%20%

10%

15%

5%

15%

3%

13%

Income ($Thousands)

Demand for Scholarships in KentuckyDuringthe2005-2006schoolyear,Kentuckystategovernmentspending(asdistinctfromfederalandlocalspending)

was$3,755perstudentonaverage.4Eachstudentwholeavespublicschoolforprivateschoolthusgeneratesanaveragesavingstothestategovernmentof$3,755.Thusthenetfiscaleffectofthetaxcreditprogramdependsonthenumberofstudentswhomigratefrompublictoprivateschoolscomparedtothecostofthetaxcredits.

ForecastingthenetfiscalimpactsofKentucky’sproposedtaxcreditprogram,then,requiresthatwepredictthe

actionsofparentsinresponsetotheavailabilityofscholarships.Toestimatethenumberofstudentswhowillreceivescholarshipsandattendprivateschools,weexaminedthesizeoftheschool-agepopulationinpublicandprivateschools;thecharacteristicsanddifferencesofthepopulationofschoolchildreninpublicandprivateschools;andthewaythosedifferenceswouldaffectdemandforscholarships.Weanalyzedtheinteractiveeffectsamongthevolumeofscholarshipfundsavailable;theaveragedollarvalueofindividualscholarshipawards;andtheimpactthatthemigrationofpublic-schoolstudentstoprivateschoolswillhaveonpublic-schoolenrollmentsinKentucky.

Tuition Prices Strongly Influence the Demand for Private Schools

To determine the fiscal impact of corporate contributions to scholarships, we consider several factors: Howwillfamiliesofchildreninpublicschoolsrespondtotheincreasedavailabilityofscholarships?Whatpercentageofscholarshipswillgotochildrenmigratingfrompublictoprivateschools,andwhatpercentagewouldgotostudentsalreadyenrolledinprivateschools?

Wedevelopedamodel to forecastdemandforprivateschoolingbasedonareviewofrelevant literature; theexperiencesofotherstateswithscholarshiptaxcreditprograms;andourownexperiencemodelingprivate-schooldemandinotherstates.5Weemployedthefollowingassumptions:

Only85percentofcorporatecontributionswillbeusedtograntscholarshipstoprivateschools.Theremaining15 percent will be used, as permitted under the proposed program, to provide students with stipends foreducationalactivitiesrelatedtoart,music,danceanddrama,andalsoforadministrativecostsofscholarshiporganizations.Thispercentageisimportantforcalculatingnetfiscalimpactbecausecontributionsthatdonotfundscholarshipsalsodonotreducestateeducationspendingbyinducingpublic-schoolstudentstoattendprivateschools.

Weassumethatscholarshipswillbedividedbetweenchildreninpublicandprivateschoolsaccordingtothepercentageofdemandfromeachgroup.Currentprivate-schoolstudentswhoqualifyforascholarshipbasedonincomestandardsnumberabout46,429.Weassumethatnearlyallofthesestudents,becausetheyarelower-incomeprivate-schoolstudents,willapplyforscholarships.Weassumethat20percentalreadyreceivesometypeofscholarshipandwouldnotapply.

Becauseprivateschoolswouldhavetoacceptatax-credit-fundedscholarshipaspaymentinfullfortuition,weassumethatlow-valuescholarships(below$2,000)willnotbegranted.

Our models show that, as the value of scholarships increase, the demand for scholarships among public-schoolchildrenincreases(whiledemandfromcurrentprivate-schoolstudentsisconstantandinelastic).Thismeansthat,astheaveragevalueofscholarshipawardsincreases,thepercentageoftheoveralldemandforscholarshipsbypublic-schoolfamiliesincreases.Atthesametime,however,thetotalnumberofscholarshipsavailabledeclines.


22 June 2006


23June 2006

Anumberofstudieshaveestimatedtheincreaseindemandforprivateschoolingasaresultofchangesinthepriceoftheschools,orthe“priceelasticity”ofdemand.Themostwidelycitedstudiesindicatethatthedemandforprivateschoolsincreasesasthepricedeclines,aso-called“negativepriceelasticity.”However,thesestudiesprojectawiderangeofestimatesofthepriceelasticityofdemandforprivateschooling.ChiswickandKoutroumanesestimateapriceelasticityofabout-0.50,suggestingthata10percentdeclineinthepriceofprivateschoolswouldleadtoa5percentincreaseindemand,whileGwarnteyandStroupestimatepriceelasticityof-1.1,suggestingthata10percentdeclineinthepriceofprivateschoolswouldleadtoanincreaseindemandof11percent.6Studieslessoftencitedandlesswell-documentedhavefoundpriceelasticitiesashighas-2.88.

Family Income is a Key Determinant of Demand

Althoughmanystudieshaveproducedestimatesofthepriceelasticityofdemandforprivateschooling,thereisnodirectevidenceofhowchangesinpricewillaffectthedecisionsofparentsinKentucky.Analternativetoindirectestimatesoftheimpactofpriceondemandistoconsidertaxcreditscholarshipsashavingan“incomeeffect”onthedemandforprivateschooling.Scholarshipsaretreatedasanincreaseintheincomeoftherecipientfamilies,spendableonlyonaprivate-schooleducation.Evidenceof the incomeeffectondemandforprivateschooling isavailableusingdetaileddatafromthe2000Census.

Figure 6

Kentucky Private School Attendance by Income

Source: PolEcon Analysis of US Census data Files (PUMS 1% Sample)

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%<25

6%

10%

12%

18%

30%

42%

11%

25-35 35-50 50-75 75-100 100-150 150+

Income ($Thousands)

AsFigure6demonstrates,thedemandforprivateschoolinginKentuckyincreasessignificantlywithincreasesinfamilyincome.“Incomeelasticity”referstothechangeindemandforprivateschoolthatoccursforeachpercentage-pointchangeinfamilyincome.Forexample,anelasticityof0.5wouldindicatethatiftheincomeoffamiliesinKentuckydoubled(a100percentincrease)therewouldbeacorrespondingincreaseinprivateschoolattendanceof50percent.Figure 6 suggestsan incomeelasticityofabout 1.0as incomemoves frompoverty status to lower-middle income($35,000-$50,000)andaveryhighelasticity(muchgreaterthan1.0)asincomemovesfrommiddletoupper-middleandhighincome.Whileonly5.5percentofKentucky’sschool-age(5-17)childreninfamilieswithlessthan$25,000inannualincomeareinprivateschools,thepercentagegrowsto11percentforchildreninfamilieswithannualincomesbetween$50,000and$75,000.Atanincomelevelbetween$100,000and$150,000,thepercentageofschool-agechildreninprivateschoolsincreasesto30percent,and42percentofschool-agechildreninfamilieswithincomesabove$150,000areinprivateschools.ThesedatasuggestthatthedemandforprivateschoolsisquiteelasticinKentuckyandthatevenamonglower-incomefamilies,scholarshipsarelikelytoresultinanincreaseinthedemandforprivateschooling.

Theimpactscholarshipshaveonthedemandforprivateschoolswilldependonthedollarvalueofscholarships,soourmodelusesaveragescholarshipvaluesrangingfrom$2,000to$4,250(forcomparison,theaverageprivate-schooltuitionin2006isabout$4,500).Wecalculatedthereductioninpricethatscholarshipsofeachdollarvaluewouldhaveonourforecastoftheaveragepriceoftuitionto2015andappliedthreeseparateestimatesofelasticity:-0.50(low),-1.0(medium)and-1.25(high)toprojectionsofthenumberofpublic-schoolstudentsin2015toestimatetheincreaseindemandforprivateschoolsthatwouldoccuramongeligiblepublic-schoolstudents.Becausetheproposedprogramwouldrequirethatscholarshipsbepaymentinfullfortuition,thescholarshipwouldfunctionlikea100percentreductioninthepriceoftuitionand,asaresult,weusedanestimatedpriceelasticityofdemandof-1.0.

Figure 7

Scholarship Supply and Demand by Dollar Value

Stu

den

ts

60,000

40,000

20,000

0

Average Dollar Value of Scholarship

$2,000 $2,250 $2,500 $2,750 $3,000 $3,250 $3,500 $3,750 $4,000 $4,250

Demand by Public School FamiliesSupply of ScholarshipsDemand by Public School Families (with Payment-In-Full)Demand by Private School Families


24 June 2006


25June 2006

Combining Scholarship Supply and Demand Models to Estimate the Number of Scholarships

Theexperienceofotherstatessuggeststhatthenumberofapplicantsfortax-creditscholarships(ordemand)willbegreaterthantheavailablenumberofscholarships.InKentucky,thesupplyofscholarshipmoneywouldbelimitedandfixedinanyoneyear,anditmaynotbesufficienttoawardscholarshipstoallapplicants.Inaddition,becauseincome-qualifiedstudentsalreadyenrolledinprivateschoolswouldbeeligible,theamountofscholarshipmoneyavailabletomeetthedemandfrompublic-schoolstudentswantingtomigratetoprivateschoolswouldbemorelimited.Forexample,assumingamoderateelasticityof-1.0andanaveragescholarshipvalueof$4,000,wecalculatedthatin2008thescholarshipsshouldincreasethedemandforprivateschoolsamongeligiblefamiliesbyabout46,081childreninKentucky.Atthesametime,weprojectedthatscholarshipfundsofabout$56.2millionwouldbeavailable;meaningthatonly14,057scholarships–or30.5percentofthedemand–wouldbeavailable.7Inaddition,weassumedthat,atscholarshipvaluesof$4,000,about37percentofscholarshipswouldgotostudentsalreadyenrolledinprivateschools, leavingonly8,842scholarshipsforpublic-schoolstudents.Thusonlyabout20percentofdemandamongpublic-schoolstudentsforscholarshipsof$4,000islikelytobemet.

Figure7highlightstherelationshipbetweenthedemandforscholarshipsandtheirsupplyatanaveragevalue

ofscholarshipsbetween$2,000and$4,250.Thechartpresentstwoestimatesofdemand.Thesolidlinereflectsonlytheeffectoftraditionalpriceelasticity–demandincreasesasthevalueofscholarshipsrisesmakesprivateschoolsmoreaffordable.Thedashedlinealsotakesaccountoftheprogramrequirementthatprivateschoolsmustacceptscholarshipsaspaymentinfull.Thismeansthatascholarshipofanyvaluewillbea100percentreductioninthepriceoftuition,sothatthedemandatanyscholarshipvalueshouldbethesame.Thebroaderimpactthisprovisionmayhaveisnotclear.Itcouldreducethenumberofparticipatingprivateschools,whichwouldreducethesupplyofprivateschoolingavailabletoscholarshipstudents.Alternately,itcouldresultinahigher-valuescholarship,highenoughtopromptprivateschoolstoincreasetheirspacetoaccommodatethenumberofscholarshipstudents.Inthisscenario,theactualnumberofscholarshipsawardedlikelywouldbequitesimilartothenumberofscholarshipsthatwouldhavebeenawardedifthepayment-in-fullprovisionwerenotincludedintheproposal.Figure7alsopresentsourestimateofdemandamongeligibleprivate-schoolstudents.ThemostimportantinformationtobegleanedfromFigure7includes:

Anaveragescholarshipvalueofabout$2,000wouldmaximizethenumberofpublic-schoolmigrants.Makingmiddle-incomefamilieseligibleforscholarshipswouldresultingreatermigrationtoprivateschoolsataloweraveragescholarshipvalue.Itisnotclearhowthepayment-in-fullprovisionoftheproposalwouldaffectthesephenomena.

Scholarshipdemandfromcurrentprivate-schoolstudentswouldnotchangeaccordingtotheaveragedollarvalueofscholarshipsbecauseeligiblefamilieshavealreadymadethedecisiontoattendaprivateschool.Scholarshipswilleliminatethepricelow-incomefamiliespaybutnotinfluencetheirdecisiontoattendprivateschools.

Fiscal Considerations of the Payment-in-Full Provision

Theprogram’spayment-in-fullprovision,describedabove,willhaveanimpactonitsexpectedfiscaleffect.Thereareseveralimportantconsiderationsindesigningaschool-choicepolicyandthefollowinganalysisdoesnotexamineallfactorsthatmightsupportoropposethepayment-in-fullprovision;itlooksonlyattheprovision’sfiscalimpact.

Dependingonthedollaramountofthescholarships,thepayment-in-fullprovisionmightresultinfewerprivateschoolsacceptingtaxcredit-fundedscholarshipsandthusfewerslotsforstudents;thelevelsimplymaybetoolowfortheschoolstojustifyacceptingscholarshipstudents.If,ontheotherhand,theaveragevalueofscholarshipsis

atorneartheaveragecostoftuitionatprivateschools,fewerscholarshipscanbeprovided,alsoreducingthenumberofstudentswhocanmigratefrompublictoprivateschools.

Withfewerstudentsremovedfrompublicschools,theoverallcostoftheprogramforKentuckywouldincrease.Thestatewouldrealizethelargestfiscalbenefitiftheaveragescholarshipvalueisaslowaspossible,butstillhighenoughtoinducesufficientmigrationfrompublictoprivateschoolstooffsetthecostofthetaxcredits.Withoutthepayment-in-fullprovision,asignificantnumberoffamilieswouldmovetheirchildrenfrompublictoprivateschoolsatscholarshipvaluesof,say,$1,500to$2,500,eveniftheyhavetopayacertainamountoftuitionoutoftheirownpockets.Withthepayment-in-fullprovision,however,privateschoolslikelywouldrequireahigher-valuescholarshiptoparticipateintheprogram.Theresultlikelywouldbeahigheraveragedollarvalueforscholarships,approachingthemaximumallowablevalueofapproximately$3,750.Underthatscenario,mostofthepublic-schoolmigrationthatwouldoccuratrelativelylowscholarshipvalueswouldbeeliminatedbecausefewerscholarshipsofhighervaluewouldbeavailable.Anotherwayoflookingattheprovisionisthatitwillincreasethecostofeachmigratingpublic-schoolstudent,reducingthepotentialforsavings.

Table 3

Estimated Demand

Table3presentsourestimateofthedemandforscholarshipsamongpublicandprivate-schoolfamiliesinthefirstfullyearthattheprogramgenerates$60millionintaxcredits.Weestimatedthat$51millionwouldbeavailableforscholarships.Wealsoestimated theavailablesupplyof scholarships,according to theiraveragevalue.Wedidnotconsideraveragescholarshipvaluesbelow$2,000because it isunlikely thatsuchvalueswouldbeacceptedaspaymentinfullbymostprivateschools.Thetableshowsthat,asthedollarvalueofscholarshipsincreases,demandforscholarshipsbypublic-schoolfamiliesincreases(evenwhilethedemandbyeligibleprivate-schoolfamiliesremains

Components of Scholarship Demand in 2006 by Average Value of Scholarship

Average Scholarship

Value

$2,000

$2,250

$2,500

$2,750

$3,000

$3,250

$3,500

$3,750

$4,000

Demand From

Private School

Families

Demand From Public School

Families

Total Demand

Public School % of

Demand

# Available Scholarships

# to Public School

Migrants

# to PrivateSchool

Families

% of Total

Demand Met

27,857

27,857

27,857

27,857

27,857

27,857

27,857

27,857

27,857

24,429

27,483

30,536

33,590

36,643

39,697

42,751

45,804

48,858

52,286

55,340

58,394

61,447

64,501

67,554

70,608

73,662

76,715

46.7%

49.7%

52.3%

54.7%

56.8%

58.8%

60.5%

62.5%

63.7%

25,500

22,667

20,400

18,545

17,000

15,692

14,571

13,600

12,750

11,914

11,257

10,668

10,138

9,658

9,221

8,823

8,457

8,120

13,586

11,410

9,732

8,408

7,342

6,471

5,749

5,143

4,630

48.8%

41.0%

34.9%

30.2%

26.4%

23.2%

20.6%

18.5%

16.6%

Net FiscalImpact

($2,143,843)

($4,674,160)

($6,939,836)

($8,980,327)

($10,827,613)

($12,507,896)

($14,042,843)

($15,450,528)

($16,746,148)


26 June 2006


2�June 2006

privateschools;foreverystudentwhomigrates,thestatesavesthatmuchinstateaidtolocalschooldistricts.Forthe2004-2005schoolyear(themostrecentyearforwhichdataareavailable),Kentuckypaidabout$3,755perpupilinstateeducationaidforeverypublic-schoolstudent.Weprojectedthatthisspendinglevelwouldbe$3,811for2006-2007.

Table4presentsourestimateofthenumberofpublic-schoolstudentswhowillmigrateasaresultofthescholarshiptaxcreditprogram.ThetablereflectstheprogramdesignelementsasoutlinedinKentuckyHouseBill231.Inaddition,thetableincorporatesthefollowingassumptions:

85percentoftaxcreditcontributionswillgotoscholarshipsforstudentstoattendprivateschools.

Thepercentageofscholarshipsawardedtopublic-schoolfamiliesrangesfrom46percentatanaveragescholarshipvalueof$2,000to63percentatanaveragescholarshipvalueof$4,000.Notethattheproposalwouldallowforamaximumscholarshipvalueequaltotheamountofstateper-studentaidinthestudent’sschooldistrict.In2006-2007thatamountisexpectedtoaverageapproximately$3,800.

Table 5Table5showsthenetannualfiscalimpactsofa$60millionscholarshiptaxcreditprogram(increasingannuallyby

5percent)from2006through2015.Thetableshowsthatasstructured,theprogramwouldmostlikelycostthestatefrom$2millionto$17millioninthefirstyear,orlessthanonethirdofthenominal$60millionsizeoftheprogram.Lossesarereducedeachyearandchangetonetfiscalgainsastheaveragevalueofscholarshipsisreduced,ifscholarshipvaluesremainhighenoughtoinducesignificantpublicschoolmigrationbutlowenoughtoallowmorescholarshipstobegranted.

constant).Thismeansthat,athigherscholarshipvalues,public-schoolstudentswilldemandahigherpercentageofavailablescholarships.Weassumedthatscholarshipswouldbesplitbetweenexistingprivate-schoolstudentsandpublic-schoolstudentslookingtomigratetoprivateschoolsinroughlythepercentageoftotaldemandrepresentedbyeachgroup.

Fiscal Impact of the Scholarship Program

Thecostofthescholarshiptaxcreditcomponentisdeterminedbyarangeofvariablesthataredifficulttopinpoint.However,arangeofcostscanbepredictedbasedontheminimumandmaximumvaluesofthevariables.Thenetimpactofscholarshiptaxcreditsonstatebudgetsisdeterminedby:

Thecorporatetaxrevenueforegoneasaresultoftaxcreditsforcontributionstoscholarshiporganizations.

Thepercentageoftaxcreditcontributionsallocatedforscholarships.

Thenumberofscholarshipsawardedtopublic-schoolstudentswhomigratetoprivateschools.

Thereductioninper-pupilstateeducationaidasaresultofthemigrationofstudentsfrompublictoprivateschools.

Table 4Thenetfiscalimpactoftheprogramdependsonthenumberofstudentswhomigratefrompublicschoolsto

Projected Public-School Migration by Average Size of Scholarship

Avg.Scholarship

$2,00

$2,250

$2,500

$2,750

$3,00

$3,250

$3,500

$3,750

$4,000

Based on $60 Million in Tax Credits with 85% Going to Scholarships and 60% of Scholarships Going to Public-School Families

2006 2007 2008 2009 2010 2011 2012 2013

11,914

11,257

10,668

10,138

9,658

9,221

8,823

8,457

8,120

12,510

11,819

11,201

10,645

10,141

9,682

9,264

8,880

8,526

13,135

12,410

11,761

11,177

10,648

10,166

9,727

9,324

8,952

13,792

13,031

12,349

11,736

11,180

10,675

10,213

9,790

9,400

14,482

13,682

12,967

12,323

11,739

11,209

10,724

10,279

9,870

15,206

14,367

13,615

12,939

12,326

11,769

11,260

10,793

10,364

15,966

15,085

14,296

13,586

12,942

12,357

11,823

11,333

10,882

16,764

15,839

15,011

14,265

13,590

12,975

12,414

11,900

11,426

Net Fiscal Impact of $60 Million Scholarship Program(Assumes 80% Tax Credit and 46% to 60% Go to Public-School Families)

Average Scholarship

Value

$2,000

$2,250

$2,500

$2,750

$3,000

$3,250

$3,500

$3,750

$4,000

2006 2007 2008 2009 2010 2011 2012 2013

($2.1)

($4.7)

($6.9)

($9.0)

($10.8)

($12.5)

($14.0)

($15.5)

($16.7)

2014 2015

($1.0)

($3.8)

($6.2)

($8.4)

($10.4)

($12.2)

($13.9)

($15.4)

($16.8)

$0.2

($2.7)

($5.4)

($7.7)

($9.9)

($11.8)

($13.6)

($15.2)

($16.7)

$1.6

($1.6)

($4.4)

($6.9)

($9.2)

($11.3)

($13.2)

($15.0)

($16.6)

$3.2

($0.2)

($3.3)

($6.0)

($8.5)

($10.7)

($12.8)

($14.7)

($16.4)

$5.0

$1.3

($2.0)

($4.9)

($7.6)

($10.0)

($12.2)

($14.3)

($16.1)

$6.9

$3.0

($0.5)

($3.7)

($6.6)

($9.2)

($11.6)

($13.7)

($15.8)

$9.2

$4.9

$1.1

($2.3)

($5.4)

($8.2)

($10.7)

($13.1)

($15.3)

$11.6

$7.1

$3.0

($0.7)

($4.0)

($7.0)

($9.8)

($12.3)

($14.7)

$14.4

$9.5

$5.1

$1.1

($2.4)

($5.7)

($8.7)

($11.4)

($13.9)


2� June 2006


2�June 2006

1 A national poll conducted by Harris Interactive in August 2005 found that 60 percent of Americans favor “allowing students and parents to choose any school, public or private, to attend using public funds.” See: http://www.friedmanfoundation.org/news/2005-08-23.html. Other national poll results confirming this finding are reviewed in the Friedman Foundation’s publication ABCs of School Choice.

2 “The State of Corporate Citizenship: A View From Inside,” The Center for Corporate Citizenship at Boston College, 2004.

3 The Census Bureau does not survey for home-schooling. According to the Kentucky Department of Education, an estimated 12,000 children are home-schooled children in Kentucky.

4 Kentucky Department of Education; see: http://www.education.ky.gov/NR/rdonlyres/ernssrj4qovh63teoyeigs2o4yuydu2wmogdbdy62rst4zq4en4acis2hqv4z3tx55ew7m5ddtbhejfanmtcduk3oef/200506SEEKFinalSummaryPerPupil.xls.

5 Specifically, PolEcon has modeled the price and income elasticity of demand for private schooling in New Mexico, Missouri and New Hampshire.

6 B. R. Chiswick and S. Koutroumanes, “An Econometric Estimate of the Demand for Private Schooling,” Research in Labor Economics 15:209-237, 1996; and J. D. Gwartney and R. L. Stroup, Economics: Private and Public Choice (8th edition), South-Western College Press, 1997.

7 The amount of potential scholarship money is $66.15 million in 2008. Administrative costs and money awarded for uses other than scholarship purposes will be 15 percent of contributions or about $10.4 million, leaving $56.2 million for scholarships.

EndnotesConclusions

Ouranalysisanticipatesthattherewillbeagreatdealofparticipationandinterestinboththeindividualtaxcreditprogramavailabletofamiliesforeducationalexpendituresandthebusinessscholarshiptaxcreditprogram.

Weestimatedthatabout$23.5millioninindividualtaxcreditswillbeclaimedbyfamiliesforqualifiededucationalexpenditures,butthatasmallnumber(about3,000)ofstudentswillmigratefrompublictoprivateschoolsasaresultofthistaxcredit,savingthestateabout$3,811eachinpublicschoolspending.ThenetimpactoftheindividualtaxcreditcomponentwillbeacosttothecommonwealthofKentuckyofonlyabout$11.4million,orlessthanhalfthenominalsizeoftheprogram.

Basedontheexperienceofotherstates,weexpectthatcorporationsinKentuckywillmakefulluseofallavailabletaxcreditsforcontributionstoscholarshiporganizations.Weconcludedthat,asproposed,theprogramwillcostthecommonwealthofKentuckyonlybetween$2millionand$17millioninitsfirstfullyear,orlessthanonethirdofthenominalsizeoftheprogram.Costswillbefurtherreducedeachyearthereafter.


30 June 2006


31June 2006

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liberty and choice into our education system. Giving parents

the freedom to choose the school that works best for their chil-

dren is our goal, and with your help we can make it happen.

THE MILTON AND ROSE D. FRIEDMAN FOUNDATION

WELCOMES YOUR SUPPORT

School Choice for Kentucky:Many agree with the concept. Some disagree. And some simply want more information. As the public debate continues to grow louder about how best to provide a quality education to all Kentucky children, it is critical to know the facts about school choice, and to have an understanding of how school choice programs have had an impact on communities, parents and students around the country. All of this analysis is done with one goal in mind: The best possible education for all of Kentucky’s children.

The Fiscal Impact of the Kentucky Education Tax

Credit Program

Prepared By:

Brian J. GottlobSenior Fellow

Milton and Rose D. Friedman Foundation

June 2006

One American Square, Suite 2420

Indianapolis, IN 46282

Phone: 317-681-0745 Fax: 317-681-0945

www.FriedmanFoundation.org

One American Square, Suite 2420

Indianapolis, IN 46282

ADDRESS SERVICE REQUESTED

our challenge to you the fiscal impact of the kentucky ...the fiscal impact of the kentucky...

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